S-4/A 1 d106155ds4a.htm S-4/A S-4/A
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As filed with the Securities and Exchange Commission on January 27, 2016.

Registration No. 333-209014

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Amendment No. 1

to

FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

COUNTY BANCORP, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Wisconsin   6022   39-1850431

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

860 North Rapids Road

Manitowoc, Wisconsin 54221

(920) 686-9998

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Timothy J. Schneider

President

860 North Rapids Road

Manitowoc, Wisconsin 54221

(920) 686-9998 (Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Robert M. Fleetwood

Emily N. Henkel

Barack Ferrazzano Kirschbaum &

Nagelberg LLP

200 West Madison Street, Suite 3900

Chicago, Illinois 60606

(312) 984-3100

 

Mark A. Miller

Secretary

860 North Rapids Road

Manitowoc, Wisconsin 54221

(920) 686-9998

 

John Knight

Boardman & Clark LLP

1 S. Pinckney Street, Suite 410

Madison, Wisconsin 53701

(608) 257-9521

 

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As soon as reasonably practicable after the Registration Statement becomes effective and after the conditions to the completion of the proposed transaction described in the proxy statement/prospectus have been satisfied or waived.

 

 

If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ¨

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

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

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

 

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Amount

to be
Registered(1)

  Proposed
Maximum
Offering Price
Per Unit(2)
 

Proposed
Maximum
Aggregate

Offering Price(2)

 

Amount of

Registration  Fee(2)(3)

Common Stock, $0.01 par value per share

  912,824  

N/A

 

$9,796,512

  $987

 

 

(1) The number of shares to be registered represents the maximum number of shares of County Bancorp, Inc. common stock estimated to be issuable in connection with the merger described in the proxy statement/prospectus.
(2) Pursuant to Rule 457(f) under the Securities Act of 1933, as amended, and solely for the purpose of calculating the registration fee, the proposed maximum aggregate offering price is the difference between (a) the book value of the shares of Fox River Valley Bancorp, Inc. common stock computed as of December 31, 2015, of $14.84 per share for 1,633,862 outstanding shares, for an aggregate value of $24,246,512, and (b) the aggregate amount of cash to be paid by County Bancorp, Inc. for the outstanding shares of Fox River Valley Bancorp, Inc. common stock, pursuant to the merger described in the proxy statement/prospectus, of $14,450,000.
(3) Previously paid.

 

 

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

 

 

 


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The information in this proxy statement/prospectus is not complete and may be changed. We may not offer or sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary proxy statement/prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY COPY—SUBJECT TO COMPLETION, DATED JANUARY 27, 2016

 

Fox River Valley Bancorp, Inc.    County Bancorp, Inc.

 

 

PROXY STATEMENT OF FOX RIVER VALLEY BANCORP, INC.

 

 

PROSPECTUS OF COUNTY BANCORP, INC.

 

 

Merger Proposal—Your Vote Is Important

DEAR FOX RIVER VALLEY BANCORP, INC. SHAREHOLDERS:

You are cordially invited to attend a special meeting of shareholders of Fox River Valley Bancorp, Inc., which we refer to as Fox River Valley, to be held on March 17, 2016, at 5:00 p.m., local time, at North Shore Golf Club, N8421 North Shore Road, Menasha, Wisconsin 54952.    

At the meeting, you will be asked to approve a merger agreement between Fox River Valley and County Bancorp, Inc., which we refer to as County, that provides for County’s acquisition of Fox River Valley through the merger of Fox River Valley with and into County Acquisition LLC, a wholly-owned subsidiary of County. County is expected to dissolve County Acquisition LLC shortly after the merger and The Business Bank, currently a wholly-owned subsidiary of Fox River Valley, will then be a wholly-owned subsidiary of County. At the completion of the merger, each share of Fox River Valley common stock that you own will be converted into a right to receive a portion of the merger consideration.

You may elect to convert each share of common stock of Fox River Valley, $1.00 par value per share, which we refer to as Fox River Valley common stock, that you own into cash, shares of common stock of County, $0.01 par value per share, which we refer to as County common stock, or a combination of cash and shares of County common stock. All elections for cash consideration, stock consideration or the combination of cash and stock consideration are subject to proration and adjustment as described in this proxy statement/prospectus.

Subject to possible downward adjustment as described in this proxy statement/prospectus and assuming that the reference price of County common stock as described below is between $15.83 and $21.41 at closing, the aggregate merger consideration paid by County to Fox River Valley shareholders is expected to be $28,900,000, which County expects to pay approximately 50% in cash and 50% in shares of County common stock. The merger consideration is subject to downward adjustment, dollar for dollar, if Fox River Valley’s adjusted shareholders’ equity is less than $23,000,000. Assuming no proration of or adjustment to the merger consideration and that County does not waive the maximum number of shares of County common stock that may be issued, we estimate that County may issue up to 912,824 shares of County common stock to Fox River Valley shareholders as contemplated by the merger agreement.

The exchange ratio used to determine the number of shares of County common stock that you will be entitled to receive for each share of Fox River Valley common stock for which you elect to receive shares of County common stock will be determined based on the volume weighted average closing price of County common stock as reported on the NASDAQ Global Market, which we refer to as NASDAQ, during the 10 trading day period ending on the second trading day prior to completion of the merger, which we refer to as the reference price of County common stock, subject to a minimum and maximum reference price of County common stock equal to $15.83 and $21.41, respectively. The merger consideration is subject to proration and downward adjustment as described in this proxy statement/prospectus, and the exchange ratio will not be determined until after the date of the special meeting. Therefore, at the time of the special meeting, you will not know the precise value of the merger consideration you may receive on the date the merger is completed.

County common stock is traded on the NASDAQ Global Market, under the symbol “ICBK.” The closing price of County common stock on January 26, 2016 was $19.57 per share.


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Assuming the presence of a quorum, approval of the merger agreement requires the affirmative vote of at least a majority of all the votes entitled to be cast. Your board of directors, with the exception of one director who abstained because he may not be considered “disinterested” for purposes of the vote, has unanimously adopted the merger agreement and recommends that you vote “FOR” the adoption of the merger agreement at the special meeting. Your board of directors also unanimously recommends that you vote “FOR” the approval to adjourn the special meeting to permit further solicitation in the event that an insufficient number of votes are cast to approve the merger agreement and the transactions it contemplates and “FOR” the authorization of the proxies named in the proxy card to vote on such other matters as may properly come before the special meeting or any adjournment or postponement thereof.

Additional information regarding the merger, the merger agreement, Fox River Valley and County is set forth in the attached proxy statement/prospectus. This document also serves as the prospectus for up to 912,824 shares of County common stock that may be issued by County in connection with the merger. We urge you to read this entire document carefully, including the section entitled “Risk Factors” beginning on page 17.

Sincerely,

 

LOGO

William C. Hodgkiss

President and Chief Executive Officer

Fox River Valley Bancorp, Inc.

Neither the Securities and Exchange Commission nor any state securities regulatory body has approved or disapproved of the securities to be issued under this proxy statement/prospectus or determined if this proxy statement/prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The securities to be issued in connection with the merger are not savings or deposit accounts or other obligations of any bank or nonbank subsidiary of any of the parties, and they are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.

This proxy statement/prospectus is dated January 27, 2016, and is first being mailed to Fox River Valley shareholders on or about February 5, 2016.

 

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REFERENCES TO ADDITIONAL INFORMATION

As permitted by the rules of the Securities and Exchange Commission, which we refer to as the SEC, this proxy statement/prospectus incorporates important business and financial information about County from other documents that are not included in or delivered with this proxy statement/prospectus. These documents are available to you without charge upon your written or oral request. You can obtain documents incorporated by reference in this proxy statement/prospectus through the SEC’s website at www.sec.gov or by requesting them in writing or by telephone at the following address and telephone number:

County Bancorp, Inc.

860 North Rapids Road

Manitowoc, Wisconsin 54221

Attention: Mark A. Miller

Secretary

(920) 686-9998

In order to ensure timely delivery of these documents, you should make your request by February 25, 2016 to receive them before the special meeting.

See “Where You Can Find More Information” beginning on page 182.

VOTING BY MAIL

Fox River Valley shareholders of record may submit their proxies by mail. You may do so by signing and dating each proxy card you receive, indicating your voting preference on each proposal and returning each proxy card in the prepaid envelope which accompanied that proxy card.


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FOX RIVER VALLEY BANCORP, INC.

5643 Waterford Lane

Appleton, Wisconsin 54913

(920) 739-2660

 

 

Notice of Special Meeting of Shareholders

Date: March 17, 2016

Time: 5:00 p.m., local time

Place: North Shore Golf Club, N8421 North Shore Road, Menasha, Wisconsin 54952

TO FOX RIVER VALLEY BANCORP, INC. SHAREHOLDERS:

NOTICE IS HEREBY GIVEN that Fox River Valley Bancorp, Inc. will hold a special meeting of shareholders on March 17, 2016 at 5:00 p.m., local time, at North Shore Golf Club, N8421 North Shore Road, Menasha, Wisconsin 54952. The purpose of the meeting is to consider and vote on the following matters:

 

    a proposal to approve the Agreement and Plan of Merger, dated as of November 19, 2015, by and among County Bancorp, Inc., County Acquisition LLC and Fox River Valley Bancorp, Inc., and thereby the transactions contemplated in the Agreement and Plan of Merger. A copy of the merger agreement is included as Annex A to the proxy statement/prospectus accompanying this notice;

 

    the approval to adjourn the special meeting to permit further solicitation in the event that an insufficient number of votes are cast to approve the merger agreement and the transactions it contemplates; and

 

    to transact any other business that properly comes before the special meeting, or any adjournments or postponements thereof.

Holders of record of Fox River Valley common stock at the close of business on January 26, 2016 are entitled to receive this notice and to vote at the special meeting and any adjournments or postponements thereof. Approval of the merger agreement requires the affirmative vote of at least a majority of all the votes entitled to be cast. Approval of the proposal to adjourn the special meeting, if necessary, requires that the votes cast for the proposal exceed the votes cast against the proposal, if a quorum is present. In the absence of a quorum, the holders of a majority of the shares of Fox River Valley common stock present in person or by proxy may adjourn the special meeting.

The board of directors of Fox River Valley unanimously recommends that you vote “FOR” approval of the merger agreement. Your board of directors also unanimously recommends that you vote “FOR” approval to adjourn the special meeting to permit further solicitation in the event that an insufficient number of votes are cast to approve the merger agreement and the transactions it contemplates and “FOR” the authorization of the proxies named in the proxy card to vote on such other matters as may properly come before the special meeting or any adjournment or postponement thereof.

Your vote is important. To ensure that your shares are voted at the special meeting, please promptly complete, sign and return the proxy form in the enclosed prepaid envelope whether or not you plan to attend the meeting in person. Shareholders who attend the special meeting may revoke their proxies and vote in person, if they so desire.

To make a timely election of closing merger consideration, please complete, sign and return the election form in the enclosed prepaid envelope. To be considered timely, election forms must be received by 5:00 p.m., central time, on the fifth business day before the effective time of the merger.

 

Appleton, Wisconsin

January 27, 2016

   By Order of the Board of Directors


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TABLE OF CONTENTS

 

     PAGE  

QUESTIONS AND ANSWERS ABOUT THE MERGER

     1   

SUMMARY

     6   

Information about County and Fox River Valley

     6   

The merger and the merger agreement

     7   

What Fox River Valley shareholders will receive

     7   

Merger consideration election

     8   

Material U.S. federal income tax consequences of the merger

     9   

Reasons for the merger

     9   

Board recommendation to Fox River Valley’s shareholders

     11   

Interests of officers and directors of Fox River Valley in the merger may be different from, or in addition to, yours

     11   

Fox River Valley shareholders will have dissenters’ rights in connection with the merger

     11   

The merger and the performance of the combined company are subject to a number of risks

     11   

Fox River Valley shareholder approval will be required to complete the merger and approve the other proposals set forth in the notice

     12   

Fox River Valley special meeting

     12   

Record date for the special meeting; revocability of proxies

     12   

Completion of the merger is subject to regulatory approvals

     12   

Conditions to the merger

     12   

How the merger agreement may be terminated by County and Fox River Valley

     14   

Termination fees and expenses may be payable under some circumstances

     14   

Voting and support agreement

     15   

Accounting treatment of the merger

     15   

Certain differences in County shareholder rights and Fox River Valley shareholder rights

     15   

County shares to be issued will be listed on NASDAQ

     15   

Per share market price and dividend information

     15   

Unaudited comparative per share data

     16   

RISK FACTORS

     17   

Risks relating to the merger

     17   

Risks relating to the businesses of County and the combined company

     18   

Risks related to an investment in County common stock

     27   

Risks related to County’s industry

     31   

SPECIAL NOTES CONCERNING FORWARD-LOOKING STATEMENTS

     34   

UNAUDITED SELECTED PRO FORMA CONDENSED FINANCIAL INFORMATION

     35   

INFORMATION ABOUT THE SPECIAL MEETING OF FOX RIVER VALLEY SHAREHOLDERS

     40   

Date, time and place of the special meeting

     40   

Purpose of the special meeting

     40   

Record date and voting rights for the special meeting

     40   

Quorum

     40   

Vote required

     40   

Shares held by Fox River Valley directors; voting and support agreement

     41   

How to vote

     41   

Revocability of proxies

     41   

Proxy solicitation

     41   

Other business; adjournments

     41   

 

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     PAGE  

INFORMATION ABOUT COUNTY

     42   

Information About County’s Business

     42   

Information About County’s Properties

     62   

County Legal Proceedings

     62   

County Management’s Discussion and Analysis of Financial Condition and Results of Operations—September 30, 2015

     63   

County Management’s Discussion and Analysis of Financial Condition and Results of Operations—December 31, 2014

     76   

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     99   

Dividends

     99   

Directors and Executive Officers

     100   

Executive Compensation

     105   

Certain Relationships and Related Party Transactions

     113   

INFORMATION ABOUT FOX RIVER VALLEY

     114   

Information About Fox River Valley’s and The Business Bank’s Business

     114   

Fox River Valley Management’s Discussion and Analysis of Financial Condition and Results of Operations

     123   

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     133   

THE MERGER

     134   

General

     134   

The companies

     134   

Fox River Valley’s proposals

     135   

Background of the merger

     135   

Fox River Valley’s reasons for the merger and recommendation of the board of directors

     138   

County’s reasons for the merger

     140   

Accounting treatment of the merger

     141   

Material U.S. federal income tax consequences of the merger

     141   

Regulatory approvals

     144   

Interests of certain persons in the merger

     144   

Voting and support agreement

     145   

Confidentiality, Non-Solicitation and Non-Competition Agreements

     146   

Restrictions on resale of County common stock

     146   

Fox River Valley shareholder dissenters’ rights

     146   

DESCRIPTION OF THE MERGER AGREEMENT

     149   

General

     149   

Closing and effective time

     149   

Consideration to be received in the merger

     149   

Fractional shares

     152   

Exchange of certificates

     152   

Conduct of business pending the merger and certain covenants

     152   

No solicitation of or discussions relating to an acquisition proposal

     154   

Representations and warranties

     155   

Conditions to completion of the merger

     156   

Termination

     157   

Termination fee

     158   

Management of County and Fox River Valley after the merger

     158   

Employee benefit matters

     158   

Expenses

     159   

 

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     PAGE  

NASDAQ stock listing

     159   

Amendment

     159   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF COUNTY AND FOX RIVER VALLEY

     160   

Security Ownership and Certain Beneficial Ownership of County

     160   

Security Ownership and Certain Beneficial Ownership of Fox River Valley

     161   

COMPARISON OF RIGHTS OF COUNTY SHAREHOLDERS AND FOX RIVER VALLEY SHAREHOLDERS

     163   

DESCRIPTION OF COUNTY CAPITAL STOCK

     172   

General

     172   

Common stock

     172   

Series A Preferred Stock

     172   

Series B Nonvoting Noncumulative Perpetual Preferred Stock

     173   

Series C Noncumulative Perpetual Preferred Stock

     174   

Preferred Stock—Not Classified

     177   

Exchange agent and registrar

     177   

NASDAQ Global Market

     177   

Anti-Takeover Effect of Governing Documents and Applicable Law

     177   

LEGAL MATTERS

     182   

EXPERTS

     182   

WHERE YOU CAN FIND MORE INFORMATION

     182   

INDEX TO FINANCIAL STATEMENTS OF COUNTY AND FOX RIVER VALLEY

     183   

Unaudited Condensed Consolidated Financial Statements of County Bancorp, Inc.—September 30, 2015

     183   

Audited Consolidated Financial Statements of County Bancorp, Inc.—December 31, 2014

     183   

Unaudited Consolidated Financial Statements of Fox River Valley Bancorp, Inc.—September 30, 2015

     183   

Unaudited Consolidated Financial Statements of Fox River Valley Bancorp, Inc.—December 31, 2014

     183   

Annex A: Agreement and Plan of Merger

     A-1   

Annex B: Subchapter XIII of the Wisconsin Business Corporation Law

     B-1   

Annex C: Voting and Support Agreement

     C-1   

 

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QUESTIONS AND ANSWERS ABOUT THE MERGER

 

Q: What am I being asked to vote on? What is the proposed transaction?

 

A: You are being asked to vote on the approval of a merger agreement that provides for County’s acquisition of Fox River Valley through the merger of Fox River Valley with and into County Acquisition LLC, a wholly-owned subsidiary of County, which we refer to as Merger Sub, and thereby to approve the merger. Following the transaction, County will dissolve Merger Sub and The Business Bank, Fox River Valley’s wholly-owned subsidiary, will become a wholly-owned subsidiary of County. At the effective time of the merger, the separate corporate existence of Fox River Valley will cease, and your shares of Fox River Valley common stock will solely evidence the right to the per share merger consideration.

 

Q: What will Fox River Valley shareholders be entitled to receive in the merger?

 

A: If the merger is completed, the shares of Fox River Valley common stock that you own immediately before the completion of the merger will be converted into the right to receive cash, shares of County common stock, or a combination of cash and shares of County common stock (in each case subject to possible proration and adjustment). Subject to possible downward adjustment and assuming that the reference price of County common stock is between $15.83 and $21.41 at closing, the aggregate merger consideration paid by County to Fox River Valley shareholders is expected to be $28,900,000. Subject to possible waiver of proration, County expects to pay 50% of the aggregate merger consideration in cash and 50% in shares of County common stock.

For each of your shares of Fox River Valley common stock, you will receive the per share merger consideration to be calculated as set forth in the merger agreement. The exchange ratio used to determine the number of shares of County common stock that you will be entitled to receive for each share of Fox River Valley common stock for which you elect to receive shares of County common stock will be determined based on the volume weighted average closing price of County common stock as reported on NASDAQ during the 10 trading day period ending on the second trading day prior to completion of the merger, subject to a minimum and maximum reference price of County common stock equal to $15.83 and $21.41, respectively.

Assuming no proration of or adjustment to the merger consideration and that the currently outstanding 1,633,862 shares of Fox River Valley common stock outstanding remain unchanged at the closing, based on a reference price of County common stock of $19.57, which is equal to the reference price of County common stock if it were calculated as if the closing date was January 26, 2016, the latest practicable date prior to the date of this proxy statement/prospectus, the merger consideration that a Fox River Valley shareholder would be entitled to receive for each share of Fox River Valley common stock, which we refer to as the per share merger consideration, would be $17.69 in cash for each share of Fox River Valley common stock for which a shareholder elects to receive all merger consideration in cash, which we refer to as a cash election. Based on the same assumptions, the per share merger consideration would be 0.9038 shares of County common stock for each share of Fox River Valley common stock for which a shareholder elects to receive all merger consideration in stock, which we refer to as a stock election. Based on the same assumptions, the per share merger consideration would be $8.84 in cash and 0.4519 shares of County common stock for each share of Fox River Valley common stock for which a shareholder elects to receive merger consideration half in cash and half in stock, which we refer to as a combination election. Assuming no proration of or adjustment to the merger consideration, if the reference price of County common stock were equal to (i) the minimum of $15.83, each share of Fox River Valley common stock for which a stock election is made would instead be entitled to 1.1174 shares of County common stock, and (ii) the maximum of $21.41, each share of Fox River Valley common stock for which a stock election is made would be entitled to 0.8262 shares of County common stock. For a description of how the per share merger consideration will be calculated, see “Description of the Merger Agreement—Consideration to be received in the merger.”

The foregoing merger consideration could be subject to downward adjustment if, at the time of closing, Fox River Valley’s total adjusted shareholders’ equity is less than $23,000,000. In such an event, there will be a

 

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dollar-for-dollar downward adjustment to the aggregate merger consideration equal to the amount of the shortfall, allocated equally to the cash and stock portions of the merger consideration. This adjustment is described more fully in this proxy statement/prospectus.

 

Q: Will I get the form of consideration that I specify on my merger consideration election form?

 

A: There can be no assurances that you will receive the merger consideration in exactly the form you specify on your election form. The merger agreement provides that all elections for cash consideration, stock consideration or the combination of cash and stock consideration are subject to proration. For example, if you elect to receive all cash consideration, depending on the elections made by other Fox River Valley shareholders, it is possible that you will receive a portion of the merger consideration in cash and a portion in stock. The same might be true if you elect to receive all stock consideration. Subject in each case to possible downward adjustment and assuming the reference price of County common stock is between $15.83 and $21.41, the cash portion of the merger consideration may not exceed approximately $14,450,000 and the stock portion of the merger consideration may not exceed the number of shares of County common stock with an aggregate value equal to approximately $14,450,000, in each case unless County waives such requirement. For a description of the possible proration of elections, see “Description of the Merger Agreement—Consideration to be received in the merger—Proration of Merger Consideration” on page 151.

 

Q: How do I make an election for the merger consideration?

 

A: You have been provided with an election form to select whether you desire to receive merger consideration in the form of cash, County common stock or a combination of cash and County common stock. The election form is separate from the proxy form and should be returned to the exchange agent for the merger, Computershare Trust Company, N.A., in the enclosed prepaid return envelope. Depending on the results of all shareholders’ elections, the amount of stock or cash you receive may be prorated under certain circumstances. The completed election form must be received by Computershare Trust Company, N.A. on or before 5:00 p.m., central time, on the fifth business day before the effective time of the merger, which we refer to as the election deadline. You should send in your stock certificates with your election form. The election form also serves as a letter of transmittal, so you should send the election form and letter of transmittal and your stock certificates to Computershare prior to the election deadline.

Note that each registered shareholder must complete and return a separate election form. This means that if you are a beneficial owner of shares held by various shareholders of record (for example, if you hold shares individually, and you also hold shares in your grantor trust or IRA), you must submit an election form for each of the shareholders of record holding your shares.

 

Q: What if I fail to make an election specifying how I desire to receive the merger consideration?

 

A: If you do not submit a properly completed election form by the fifth business day before the effective time of the merger, you will be deemed to have elected to receive the merger consideration in a combination of cash and County common stock for your shares of Fox River Valley common stock, subject to proration and adjustment.

 

Q: Why do Fox River Valley and County want to engage in the merger?

 

A: Fox River Valley believes that the merger will provide Fox River Valley shareholders with substantial benefits, and County believes that the merger will further its strategic growth plans. As a larger company, County can provide greater capital and resources and efficiencies from integrating the operations of The Business Bank into County’s existing operations and allow The Business Bank, subsequently operating as Investors Community Bank, to offer a broader array of products and services to better serve its banking customers. To review the reasons for the merger in more detail, see “The Merger—County’s reasons for the merger” on page 140 and “The Merger—Fox River Valley’s reasons for the merger and recommendation of the board of directors” on page 138.

 

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Q: What does the Fox River Valley board of directors recommend?

 

A: Fox River Valley’s board of directors unanimously recommends that you vote “FOR” the approval of the merger agreement, “FOR” the approval to adjourn the special meeting to permit further solicitation in the event that an insufficient number of votes are cast to approve the merger agreement and the transactions it contemplates and “FOR” the authorization of the proxies named in the proxy card to vote on such other matters as may properly come before the special meeting or any adjournment or postponement thereof. Fox River Valley’s board of directors has determined that the merger agreement and the merger are in the best interests of Fox River Valley and its shareholders. To review the background and reasons for the merger in greater detail, see pages 135 to 138.

 

Q: What vote is required to approve the merger agreement?

 

A: Approval of the merger agreement requires the affirmative vote of at least a majority of all the votes entitled to be cast. Abstentions and broker non-votes have the effect of votes against the approval of the merger agreement. On November 19, 2015, all of Fox River Valley’s directors agreed through a formal voting agreement to vote their shares of Fox River Valley common stock in favor of the merger at the special meeting. These shareholders and their affiliates owned approximately 33% of Fox River Valley’s common stock outstanding as of January 26, 2016. County’s shareholders will not be voting on the merger agreement. See “The Merger—Interests of certain persons in the merger” on page 144 and “The Merger—Voting and support agreement” on page 145.

 

Q: What vote is required to approve the proposal to adjourn the special meeting to permit further solicitation in the event that an insufficient number of votes are cast to approve the merger agreement and the transactions it contemplates?

 

A: The proposal to adjourn the special meeting, if necessary or appropriate to solicit additional proxies, requires that the votes cast for the proposal exceed the votes cast against the proposal. In the absence of a quorum, holders of a majority of the shares of Fox River Valley common stock present in person or by proxy at the special meeting may adjourn the special meeting. Abstentions and broker non-votes have no effect on the proposal.

 

Q: Why is my vote important?

 

A: Fox River Valley shareholders are being asked to approve the merger agreement and thereby approve the merger. If you do not submit your proxy by mail or vote in person at the special meeting, it will be more difficult for Fox River Valley to obtain the necessary quorum to hold the special meeting. In addition, your failure to submit your proxy or attend the special meeting will make it more difficult to achieve a quorum for the meeting and, if a quorum is present, could have the same effect as a vote against the merger agreement and make it more difficult to obtain approval of the merger agreement.

 

Q: What do I need to do now? How do I vote?

 

A: You may vote at the special meeting if you own shares of Fox River Valley common stock of record at the close of business on the record date for the special meeting, January 26, 2016. After you have carefully read and considered the information contained in this proxy statement/prospectus, please complete, sign, date and mail your proxy form in the enclosed prepaid return envelope as soon as possible. This will enable your shares to be represented at the special meeting. You may also vote in person at the special meeting. If you do not return a properly executed proxy form and do not vote at the special meeting, this will make it more difficult to achieve a quorum for the meeting.

You should not turn in your completed election form prior to the special meeting. The completed election form must be received by Computershare Trust Company, N.A. on or before 5:00 p.m., central time, on the fifth business day before the effective time of the merger.

 

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Q: How will my proxy be voted?

 

A: If you complete, sign, date and mail your proxy form, your proxy will be voted in accordance with your instructions. If you sign, date and send in your proxy form, but you do not indicate how you want to vote, your proxy will be voted FOR approval of the merger agreement and the other proposals in the notice.

 

Q: Can I revoke my proxy and change my vote?

 

A: You may change your vote or revoke your proxy prior to the special meeting by filing with the secretary of Fox River Valley a duly executed revocation of proxy or submitting a new proxy form with a later date. You may also revoke a prior proxy by attending the special meeting and voting in person by written ballot after giving written notice to the acting secretary of the special meeting or oral notice to the presiding officer during the special meeting. Voting in person at the special meeting alone will not revoke your prior proxy.

 

Q: What if I oppose the merger? Do I have dissenters’ rights?

 

A: Fox River Valley shareholders who do not vote in favor of approval of the merger agreement and otherwise comply with all of the procedures of Subchapter XIII of the Wisconsin Business Corporation Law, which we refer to as the WBCL, will be entitled to receive payment in cash of the fair value of their shares of Fox River Valley common stock as ultimately determined under the statutory process. A copy of this section of the WBCL is attached as Annex B to this document. This “fair value” could be more than the merger consideration but could also be less.

 

Q: What are the tax consequences of the merger to me?

The merger will constitute a reorganization within the meaning of section 368(a) of the Internal Revenue Code of 1986, as amended. As a qualified reorganization, the conversion of your shares of Fox River Valley common stock into County common stock in the merger will generally be tax-free for United States federal income tax purposes; however, you generally will recognize capital gain (but not loss) in an amount equal to the lessor of (i) the amount by which the fair market value of stock and cash received in the merger exceeds your tax basis in Fox River Valley common stock and (ii) the amount of cash you receive in the merger (excluding cash received in lieu of fractional shares). Additionally, you generally will recognize capital gain or loss on any cash that you receive in lieu of fractional shares of County’s common stock. You should consult with your tax adviser for the specific tax consequences of the merger to you. See “The Merger—Material U.S. federal income tax consequences of the merger” on page 141.

 

Q: When and where is the special meeting?

 

A: The Fox River Valley special meeting will take place on March 17, 2016, at 5:00 p.m., local time, at North Shore Golf Club, N8421 North Shore Road, Menasha, Wisconsin 54952.

 

Q: Who may attend the meeting?

Only Fox River Valley shareholders on the record date may attend the special meeting. The record date for the special meeting is January 26, 2016. If you are a shareholder of record, you will need to present the proxy card that you received or another proof of identification in order to be admitted into the meeting.

 

Q: Should I send in my stock certificates now?

 

A: Yes. You should complete the election form and letter of transmittal that you receive to exchange your Fox River Valley stock certificates for the merger consideration. Please send the election form and letter of transmittal and your stock certificates to the exchange agent for the merger, Computershare Trust Company, N.A., in the envelope provided.

 

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Q: When is the merger expected to be completed?

 

A: We will try to complete the merger as soon as reasonably possible. Before that happens, the merger agreement must be approved by Fox River Valley’s shareholders, and we must obtain the necessary regulatory approvals. Assuming Fox River Valley shareholders vote to approve the merger and adopt the merger agreement and we obtain the other necessary approvals and satisfaction or waiver of the other conditions to the closing described in the merger agreement, we expect to complete the merger in the second quarter of 2016. See “Description of the Merger Agreement—Conditions to completion of the merger” on page 156.

 

Q: Is completion of the merger subject to any conditions besides shareholder approval?

 

A: Yes. The transaction must receive the required regulatory approvals, and there are other closing conditions that must be satisfied. See “Description of the Merger Agreement—Conditions to completion of the merger” on page 156

 

Q: Are there risks I should consider in deciding to vote on the approval of the merger agreement?

 

A: Yes, in evaluating the merger agreement, you should read this proxy statement/prospectus carefully, including the factors discussed in the section titled “Risk Factors” beginning on page 17.

 

Q: Who can answer my other questions?

 

A: If you have more questions about the merger or how to submit your proxy, or if you need additional copies of this proxy statement/prospectus or the enclosed proxy form, you should contact William C. Hodgkiss, Fox River Valley’s President and Chief Executive Officer, at (920) 739-2660.

 

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SUMMARY

This summary highlights selected information in this proxy statement/prospectus and may not contain all of the information that is important to you. To understand the merger more fully, you should read this entire proxy statement/prospectus carefully, including the annexes and the documents referred to or incorporated in this proxy statement/prospectus. A copy of the merger agreement is attached as Annex A to this proxy statement/prospectus and is incorporated by reference herein. See “Where You Can Find More Information” beginning on page 182.

Information about County and Fox River Valley (See pages 134 and 135)

County Bancorp, Inc.

860 North Rapids Road

P.O. Box 700

Manitowoc, Wisconsin 54221

(920) 686-9998

County Bancorp, Inc., a Wisconsin corporation and registered bank holding company founded in May 1996, and its wholly-owned subsidiary Investors Community Bank, a Wisconsin-chartered bank, are headquartered in Manitowoc, Wisconsin. The state of Wisconsin is often referred to as “America’s Dairyland,” and one of the niches County has developed is providing financial services to agricultural businesses statewide, with a primary focus on dairy-related lending. County also serves business and retail customers throughout Wisconsin, with a focus on northeastern and central Wisconsin. County’s customers are served from its full-service locations in Manitowoc and Stevens Point, and its loan production offices in Darlington, Eau Claire and Fond du Lac.

As of September 30, 2015, County had total assets of approximately $844.8 million, total loans and leases of approximately $704.0 million, total deposits of approximately $636.2 million and total shareholders’ equity of approximately $104.4 million.

County common stock is traded on the NASDAQ Global Market under the ticker symbol “ICBK.”

County Acquisition LLC

c/o County Bancorp, Inc.

860 North Rapids Road

P.O. Box 700

Manitowoc, Wisconsin 54221

(920) 686-9998

County Acquisition LLC, a Wisconsin limited liability corporation, is a wholly-owned subsidiary of County and was formed solely for the purpose of consummating the merger. Merger Sub has not carried on any activities to date, except for activities incidental to its formation and activities undertaken in connection with the merger.

Fox River Valley Bancorp, Inc.

5643 Waterford Lane

Appleton, Wisconsin 54913

(920) 739-2660

Fox River Valley Bancorp, Inc. is a single bank holding company that owns 100% of The Business Bank, Appleton, Wisconsin, with two banking locations in Appleton and Green Bay, Wisconsin. The Business Bank commenced its operations in 1999.

 



 

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The Business Bank, Fox River Valley’s subsidiary bank, is a Wisconsin chartered bank and is regulated by the Wisconsin Department of Financial Institutions, which we refer to as the WDFI, and has deposit insurance through the Federal Deposit Insurance Corporation, or the FDIC. The bank provides traditional banking, trust and asset management services in its local market areas.

As of September 30, 2015, Fox River Valley had consolidated total assets of approximately $255.2 million, total loans and leases of approximately $152.3 million, total deposits of approximately $218.6 million and total shareholders’ equity of approximately $24.5 million. Fox River Valley is not a public company and, accordingly, there is no established trading market for Fox River Valley’s common stock.

The merger and the merger agreement (See page 149)

County’s acquisition of Fox River Valley is governed by a merger agreement. The merger agreement provides that, if all of the conditions set forth in the merger agreement are satisfied or waived, Fox River Valley will be merged with and into Merger Sub and will cease to exist. After the consummation of the merger, County intends to dissolve Merger Sub, and The Business Bank will be a wholly-owned subsidiary of County. The merger agreement is included as Annex A to this proxy statement/prospectus and is incorporated by reference herein. We urge you to read the merger agreement carefully and fully, as it is the legal document that governs the merger.

What Fox River Valley shareholders will receive (See page 149)

If the merger is completed, the shares of Fox River Valley common stock that you own immediately before the completion of the merger will be converted into the right to receive cash, shares of County common stock, or a combination of cash and shares of County common stock (in each case subject to possible proration and adjustment). Subject to possible downward adjustment and assuming that the reference price of County common stock is between $15.83 and $21.41 at closing, the aggregate merger consideration paid by County to Fox River Valley shareholders is expected to be $28,900,000. Subject to possible waiver of proration, County expects to pay 50% of the aggregate merger consideration in cash and 50% in shares of County common stock.

For each of your shares of Fox River Valley common stock, you will receive the per share merger consideration to be calculated as set forth in the merger agreement. The exchange ratio used to determine the number of shares of County common stock that you will be entitled to receive for each share of Fox River Valley common stock for which you elect to receive shares of County common stock will be determined based on the volume weighted average closing price of County common stock as reported on NASDAQ during the 10 trading day period ending on the second trading day prior to completion of the merger, subject to a minimum and maximum reference price of County common stock equal to $15.83 and $21.41, respectively. Assuming no proration of or adjustment to the merger consideration and that the currently outstanding 1,633,862 shares of Fox River Valley common stock remain unchanged at the closing, based on a reference price of County common stock of $19.57, which is equal to the reference price of County common stock if it were calculated as if the closing date was January 26, 2016, the latest practicable date prior to the date of this proxy statement/prospectus, the merger consideration that a Fox River Valley shareholder would be entitled to receive for each share of Fox River Valley common stock would be $17.69 in cash for each share of Fox River Valley common stock for which a shareholder elects the cash election. Based on the same assumptions, the per share merger consideration would be 0.9038 shares of County common stock for each share of Fox River Valley common stock for which a shareholder elects the stock election. Based on the same assumptions, the per share merger consideration would be $8.84 in cash and 0.4519 shares of County common stock for each share of Fox River Valley common stock for which a shareholder elects the combination election. Assuming no proration of or adjustment to the merger consideration, if the reference price of County common stock were equal to (i) the minimum of $15.83, each share of Fox River Valley common stock for which a stock election is made would instead be entitled to 1.1174 shares of County common stock, and (ii) the maximum of $21.41, each share of Fox River Valley common stock

 



 

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for which a stock election is made would be entitled to 0.8262 shares of County common stock. For a description of how the per share merger consideration will be calculated, see “Description of the Merger Agreement—Consideration to be received in the merger.”

Fox River Valley may terminate the merger agreement if the reference price of County common stock as of the 15th business day prior to the closing date of the merger, which we refer to as the determination date, is less than $14.90 and, between the date of the merger agreement and the determination date, County common stock underperforms the SNL U.S. Bank Index by more than 20%, and County does not, within five business days of notice of such termination, notify Fox River Valley of its election to increase the cash portion of the merger consideration by the aggregate share amount (as defined in this proxy statement/prospectus) times the difference between the reference price of County common stock as of the determination date and either (i) $14.90, or (ii) the price reflective of County common stock underperforming the SNL U.S. Bank Index by 19.99%.

The foregoing merger consideration could be subject to downward adjustment if Fox River Valley’s total adjusted shareholders’ equity is less than $23,000,000 as of the closing date, as provided in the merger agreement. If Fox River Valley’s adjusted shareholders’ equity is less than that amount, then there will be a dollar-for-dollar downward adjustment to the merger consideration, allocated equally to the cash and stock portions of the merger consideration. For example, if Fox River Valley’s total adjusted shareholders’ equity at closing is $22,000,000, which is $1.0 million below the threshold, then the aggregate merger consideration will be reduced by $1.0 million to $27.9 million, which will be paid 50% in cash and 50% in shares of County common stock, which will reduce on a pro rata basis the amount of merger consideration paid to the shareholders. For a more detailed description of Fox River Valley’s adjusted shareholders’ equity, see “Description of the Merger Agreement—Consideration to be received in the merger—Potential Downward Adjustment to the Merger Consideration.”

As of the date of this proxy statement/prospectus, based on Fox River Valley’s internal projections and expected transaction expenses related to the merger, Fox River Valley’s management believes that Fox River Valley’s total adjusted shareholders’ equity at closing will exceed the $23,000,000 threshold. However, because projections are inherently uncertain and merger transaction expenses could be greater than originally anticipated, a risk exists that a downward adjustment to the merger consideration could be required.

There can be no assurances that you will receive the merger consideration in exactly the form you specify on your election form. The merger agreement provides that all elections for cash consideration, stock consideration or the combination of cash and stock consideration are subject to proration. For example, if you elect to receive all cash consideration, depending on the elections made by other Fox River Valley shareholders, it is possible that you will receive a portion of the merger consideration in cash and a portion in stock. The same might be true if you elect to receive all stock consideration. Subject in each case to possible downward adjustment and assuming the reference price of County common stock is between $15.83 and $21.41, the cash portion of the merger consideration may not exceed approximately $14,450,000, and the stock portion of the merger consideration may not exceed the number of shares of County common stock with an aggregate value equal to approximately $14,450,000, in each case unless County waives such requirement. For a description of the possible proration of elections, see “Description of the Merger Agreement—Consideration to be received in the merger—Proration of Merger Consideration.”

Fox River Valley shareholders will not receive fractional shares of County common stock. Instead, they will receive a cash payment for any fractional shares based on the reference price of County common stock.

Merger consideration election (See page 152)

With this proxy statement/prospectus, you have been provided with an election form in order to select whether you will receive merger consideration consisting of cash, County common stock or a combination of cash and shares of County common stock (in each case subject to possible proration and adjustment as described

 



 

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in this proxy statement/prospectus). The completed election form and letter of transmittal, along with Fox River Valley stock certificates, should be returned in the enclosed prepaid envelope and must be received by the exchange agent for the merger, Computershare Trust Company, N.A., by 5:00 p.m., central time, on the fifth business day before the effective time of the merger. Once made, elections are irrevocable. If your election form is not received by this deadline, you will be deemed to have elected to receive the combination of cash and County common stock.

Although the merger agreement provides that a separate letter of transmittal will be mailed to Fox River Valley shareholders after the completion of the merger for such shareholders to exchange their stock certificates for merger consideration, Fox River Valley and County have subsequently agreed to combine the election form with the letter of transmittal, which should be returned to Computershare by the election deadline. Fox River Valley shareholders who do not return their stock certificates with their election form and letter of transmittal prior to the election deadline will receive transmittal materials and instructions from the exchange agent after the merger is complete.

Material U.S. federal income tax consequences of the merger (See page 141)

The merger will constitute a reorganization within the meaning of section 368(a) of the Internal Revenue Code of 1986, as amended. As a qualified reorganization, your receipt of shares of County common stock as part of the merger consideration generally will be tax free for United States federal income tax purposes; however, you generally will recognize capital gain (but not loss) in an amount equal to the lessor of (i) the amount by which the fair market value of stock and cash received in the merger exceeds your tax basis in Fox River Valley common stock and (ii) the amount of cash you receive in the merger (excluding cash received in lieu of fractional shares). Additionally, you generally will recognize capital gain or loss on any cash that you receive in lieu of fractional shares of County’s common stock. You are urged to consult your tax adviser for a full understanding of the federal, state, local and foreign tax consequences of the merger to you.

Reasons for the merger (See page 138)

Fox River Valley’s board of directors believes that the merger is in the best interests of Fox River Valley and its shareholders, has unanimously adopted the merger agreement, with the exception of one director who abstained because he may not be considered “disinterested” for purposes of the vote, and unanimously recommends that its shareholders vote “FOR” approval of the merger agreement.

In its deliberations and in making its determination, Fox River Valley’s board of directors considered numerous factors, including the following:

 

    information with respect to the businesses, earnings, operations, financial condition, prospects, capital levels and asset quality of Fox River Valley and County and their subsidiary banks, both individually and as a combined company;

 

    the perceived risks and uncertainties attendant to The Business Bank’s operation as an independent banking organization, including the risks and uncertainties related to the continuing low-interest rate environment, competition in The Business Bank’s market area, increased regulatory costs, increased marketing costs, increased technology costs, and increased capital requirements;

 

    the aggregate merger consideration was priced at 118% of common book value as of September 30, 2015, which was within the price range determined to be appropriate by the board after discussions with representatives of Piper Jaffray & Co., which we refer to as Piper Jaffray;

 

    Fox River Valley shareholders’ expressed interest to receive liquidity from their shares of common stock, and the lack of a market for Fox River Valley common stock;

 

    the value to be received by Fox River Valley’s shareholders in the merger as compared to shareholder value projected for Fox River Valley as an independent entity;

 



 

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    the market value of County common stock prior to the execution of the merger agreement;

 

    the fact that Fox River Valley, with the assistance of Piper Jaffray, conducted an extensive sale process, including communicating with 10 prospective bidders, executing confidentiality agreements with 6 prospective bidders, receiving formal bids from two of the prospective bidders and an informal bid from a third, and receiving two formal final bids for consideration, and the Fox River Valley board’s view that County’s proposal was more favorable than the alternatives available to Fox River Valley, including the other acquisition proposals submitted for and the alternative of continuing to operate as an independent, operating business;

 

    County’s strategy to seek profitable future expansion in Fox River Valley’s trade area, leading to continued growth in overall shareholder value;

 

    the fact that County, although publicly traded, maintains a community banking philosophy, and that Investors Community Bank is known to individuals and businesses in The Business Bank’s trade area, along with the fact that County indicated an intention to keep operational The Business Bank’s two current offices;

 

    the fact that County is publicly held and the merger would provide access to a public trading market for Fox River Valley’s shareholders whose investments currently are in a privately held company, as well as enhanced access to capital markets to finance the combined company’s capital requirements;

 

    the fact that Investors Community Bank is able to offer a wider array of retail and commercial products, which is expected to include mobile banking in the future, as well as investment management solutions to The Business Bank customers, and a larger lending limit to compete for more sizable transactions; and

 

    the likelihood that the merger will be approved by the relevant bank regulatory authorities without undue burden and in a timely manner.

County’s board of directors concluded that the merger is in the best interests of County and its shareholders. In deciding to approve the merger, County’s board of directors considered a number of factors, including:

 

    management’s view that the acquisition of Fox River Valley provides an attractive opportunity to expand into desirable markets, including Appleton and Green Bay, Wisconsin;

 

    Fox River Valley’s complementary relationship-oriented community banking model, and its compatibility with County and its subsidiaries;

 

    a review of the demographic, economic and financial characteristics of the markets in which Fox River Valley operates, including existing and potential competition and history of the market areas with respect to financial institutions;

 

    management’s desire to diversify County’s portfolio and increase the aggregate amount of its loans by adding more commercial loans to allow County to continue to make and retain more agricultural loans without encroaching on its internal concentration limit;

 

    management’s review of Fox River Valley’s business, operations, earnings and financial condition, including its management, capital levels and strong asset quality;

 

    anticipated efficiencies to come from integrating certain of Fox River Valley’s operations into County’s existing operations; and

 

    the likelihood that the merger will be approved by the relevant bank regulatory authorities without undue burden and in a timely manner.

 



 

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Board recommendation to Fox River Valley’s shareholders (See page 138)

Fox River Valley’s board of directors believes that the merger of Fox River Valley with County is in the best interests of Fox River Valley and its shareholders. Fox River Valley’s board of directors unanimously recommends that you vote “FOR” the merger.

Interests of officers and directors of Fox River Valley in the merger may be different from, or in addition to, yours (See page 144)

When you consider the Fox River Valley board of directors’ recommendation to vote in favor of approval of the merger agreement, you should be aware that some of Fox River Valley’s or The Business Bank’s directors and officers may have interests in the merger that are different from, or in addition to, your interests as shareholders. Fox River Valley’s board of directors was aware of these interests and took them into account in approving the merger. For example, County intends to enter into an employment agreement or employment arrangement, which will be effective only upon the consummation of the merger, with each of William Hodgkiss, Matthew Kasdorf and David Kohlmeyer, pursuant to which they will be employed by Investors Community Bank upon the effective time of the merger. County has not yet entered into such employment agreements, so the terms of the employment agreements are not known at the time of this proxy statement/prospectus. Mr. Hodgkiss has agreed to assume the position of leader of business banking of Investors Community Bank, and Mr. Kasdorf has agreed to assume a senior credit position at Investors Community Bank. Additionally, Messrs. Hodgkiss, Kasdorf and Kohlmeyer and certain of Fox River Valley’s directors will be fully vested and paid out under The Business Bank’s Stock Appreciation Incentive Compensation Plan. The participants will be fully vested and cashed-out, and the plan terminated, prior to the merger, with anticipated payments to the officers and directors of Fox River Valley of an aggregate of approximately $1,458,243.

In addition, Messrs. Hodgkiss, Kasdorf and Kohlmeyer have previously entered into change in control agreements with The Business Bank. Immediately prior to the merger, Fox River Valley will terminate the change in control agreements and pay, or provide for the payment of, the change in control benefits currently expected to total approximately $912,462.

County has also agreed to indemnify and hold harmless the current and former directors and officers of Fox River Valley and its subsidiaries for all actions taken by them prior to the effective time of the merger, to the same extent as the indemnification currently provided by Fox River Valley and its subsidiaries under their respective organizational documents, and to provide such directors and officers with directors’ and officers’ liability insurance, subject to limits on availability and cost, for up to six years.

Fox River Valley shareholders will have dissenters’ rights in connection with the merger (See page 146)

Fox River Valley shareholders may assert dissenters’ rights in connection with the merger and, upon complying with the requirements of the WBCL, receive cash in the amount of the fair value of their shares instead of the merger consideration. This “fair value” could be more than the merger consideration but could also be less.

A copy of the section of the WBCL pertaining to dissenters’ rights is attached as Annex B to this proxy statement/prospectus. You should read the statute carefully and consult with your legal counsel if you intend to exercise these rights.

The merger and the performance of the combined company are subject to a number of risks (See page 17)

There are a number of risks relating to the merger and to the businesses of County, Fox River Valley and the combined company following the merger. See the “Risk Factors” beginning on page 17 of this proxy statement/prospectus for a discussion of these and other risks.

 



 

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Fox River Valley shareholder approval will be required to complete the merger and approve the other proposals set forth in the notice (See page 40)

Assuming the presence of a quorum, approval of the merger agreement requires the affirmative vote of at least a majority of all the votes entitled to be cast. Approval of the proposal to adjourn the special meeting, if necessary, requires that the votes cast for the proposal exceed the votes cast against the proposal, if a quorum is present. In the absence of a quorum, the holders of a majority of the shares of Fox River Valley common stock present in person or by proxy may adjourn the special meeting. To satisfy the quorum requirements set forth in Fox River Valley’s bylaws, shareholders holding at least a majority of the voting power of the outstanding shares of Fox River Valley common stock entitled to vote at the special meeting must be present in person or by proxy at the special meeting. Shareholders may vote their shares in person at the special meeting or by signing and returning the enclosed proxy form.

On November 19, 2015, all of Fox River Valley’s directors committed through a formal voting agreement to vote their shares of Fox River Valley common stock in favor of the merger. As of January 26, 2016, these shareholders and their affiliates controlled 541,500 shares, constituting approximately 33% of the shares then outstanding. See “The Merger—Voting and support agreement” on page 145. Additionally, as of January 26, 2016, Fox River Valley’s directors, executive officers and their affiliates collectively controlled 552,575 shares, constituting approximately 34% of the shares then outstanding.

Fox River Valley special meeting (See page 40)

The special meeting of shareholders will be held at North Shore Golf Club, N8421 North Shore Road, Menasha, Wisconsin 54952 on March 17, 2016 at 5:00 p.m., local time. Fox River Valley’s board of directors is soliciting proxies for use at the special meeting. At the special meeting, Fox River Valley shareholders will be asked to vote on a proposal to approve the merger agreement.

Record date for the special meeting; revocability of proxies (See pages 40 and 41)

You may vote at the special meeting if you own shares of Fox River Valley common stock of record at the close of business on January 26, 2016. You will have one vote for each share of Fox River Valley common stock you owned on that date. You may change your vote or revoke your proxy prior to the special meeting by filing with the secretary of Fox River Valley a duly executed revocation of proxy or submitting a new proxy form with a later date. You may also revoke your proxy by attending the special meeting and voting in person by written ballot after giving written notice to the acting secretary of the special meeting or oral notice to the presiding officer during the special meeting. Voting in person at the special meeting alone will not revoke your prior proxy.

Completion of the merger is subject to regulatory approvals (See page 144)

The merger cannot be completed until County receives the necessary regulatory approval of the Board of Governors of the Federal Reserve System, or the Federal Reserve, and the WDFI. County intends to submit applications with each of the Federal Reserve Bank of Chicago and the WDFI as promptly as possible.

Conditions to the merger (See page 156)

Closing Conditions for the Benefit of County. County’s obligations to close the merger are subject to fulfillment of certain conditions, including:

 

    accuracy of representations and warranties of Fox River Valley in the merger agreement as of the closing date, except as otherwise set forth in the merger agreement;

 

    performance by Fox River Valley in all material respects of its agreements under the merger agreement;

 



 

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    approval of the merger agreement at the meeting of Fox River Valley shareholders, with holders of less than 7.5% of shares of Fox River Valley common stock exercising dissenter’s rights;

 

    no commenced or threatened litigation: (i) involving a challenge to, or seeking relief in connection with, the transactions contemplated by the merger agreement, or (ii) that may have the effect of preventing or delaying any of the transactions contemplated by the merger agreement;

 

    receipt of all necessary regulatory approvals;

 

    the registration statement, of which this proxy statement/prospectus is a part, concerning County common stock issuable pursuant to the merger agreement having been declared effective by the SEC and continuing to be effective as of the effective time of the merger;

 

    receipt of an opinion from Fox River Valley’s special counsel regarding the valid existence and the valid issuance of the capital stock of Fox River Valley, its authority to enter into the merger agreement and the due execution and delivery of the merger agreement by Fox River Valley, among other things;

 

    receipt of a tax opinion from Barack Ferrazzano Kirschbaum & Nagelberg LLP that the merger constitutes a “reorganization” within the meaning of Section 368(a) of the Code;

 

    receipt of an assignment and assumption agreement or supplemental indenture to effectuate the assignment by Fox River Valley of the assets, liabilities and obligations of Fox River Valley in connection with the trust preferred securities issued by a trust controlled by Fox River Valley;

 

    no material adverse change in Fox River Valley since November 19, 2015;

 

    receipt of all written consents required under any material contracts of Fox River Valley and all other written consents required to effect the transactions contemplated by the merger agreement;

 

    approval of the listing of the shares of County common stock issuable pursuant to the merger agreement on NASDAQ;

 

    receipt of other customary documents, certificates and instruments, including good standing certificates, certificates of regulatory authorities and secretary certificates;

 

    receipt of a balance sheet of Fox River Valley, adjusted to reflect certain adjustments, specifications and charges, as set forth in the merger agreement; and

 

    adjustment of the merger consideration, as applicable, as set forth in “Description of the Merger Agreement—Consideration to be received in the merger.”

Closing Conditions for the Benefit of Fox River Valley. Fox River Valley’s obligations to close the merger are subject to fulfillment of certain conditions, including:

 

    accuracy of representations and warranties of County and Merger Sub in the merger agreement as of the closing date, except as otherwise set forth in the merger agreement;

 

    performance by County and Merger Sub in all material respects of their agreements under the merger agreement;

 

    the registration statement, of which this proxy statement/prospectus is a part, concerning County common stock issuable pursuant to the merger agreement having been declared effective by the SEC and continuing to be effective as of the effective time of the merger;

 

    approval of the merger agreement at the meeting of Fox River Valley shareholders;

 

    no commenced or threatened litigation: (i) involving a challenge to, or seeking relief in connection with, the transactions contemplated by the merger agreement, or (ii) that may have the effect of preventing or delaying any of the transactions contemplated by the merger agreement, in either case that would have a material adverse effect on County;

 



 

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    receipt of other customary documents, certificates and instruments, including good standing certificates, certificates of regulatory authorities and secretary certificates;

 

    receipt of a tax opinion from Boardman & Clark LLP that the merger constitutes a “reorganization” within the meaning of Section 368(a) of the Code;

 

    receipt of an assignment and assumption agreement or supplemental indenture to effectuate the assumption by County of the assets, liabilities and obligations of Fox River Valley in connection with the trust preferred securities issued by a trust controlled by Fox River Valley; and

 

    approval of the listing of the shares of County common stock issuable pursuant to the merger agreement on NASDAQ.

How the merger agreement may be terminated by County and Fox River Valley (See page 157)

County and Fox River Valley may mutually agree to terminate the merger agreement and abandon the merger at any time. Subject to conditions and circumstances described in the merger agreement, County or Fox River Valley, as the case may be, may terminate the merger agreement as follows:

 

    by either party if the other party has breached or failed to perform its obligations under the merger agreement, which breach or failure to perform would result in the failure of any of the closing conditions, provided its inability to satisfy the condition was not caused by the non-breaching party’s failure to meet any of its obligations under the merger agreement;

 

    by either party if any regulatory authority has denied approval of any of the transactions contemplated by the merger agreement or any application for a necessary regulatory approval has been withdrawn at the request of a regulatory authority;

 

    by either party if the merger is not completed (other than through the failure of any party seeking to terminate the agreement to comply fully with its material obligations under the merger agreement) by June 30, 2016;

 

    by either party if a court or regulatory authority has enjoined or prohibited any of the transactions contemplated in the merger agreement;

 

    by County if Fox River Valley materially breaches any of its obligations with respect to soliciting alternative acquisition proposals or holding a meeting of its shareholders to approve the merger agreement;

 

    by Fox River Valley in order to enter into an agreement with respect to an unsolicited superior proposal from a third party;

 

    by County or Fox River Valley if, after the identification or confirmation of the presence of certain environmental conditions related to certain real property, the aggregate cost of remedying such conditions exceeds $500,000; or

 

    Fox River Valley may terminate during the five business day period commencing on the determination date, if: (i) the volume weighted average closing price of County’s common stock for the ten consecutive trading days prior to the determination date is less than $14.90 per share; and (ii) the performance of County’s common stock underperforms the SNL U.S. Bank Index by more than 20%; provided, that County may offer to increase the cash portion of the merger consideration in such circumstance to prevent such a termination.

Termination fees and expenses may be payable under some circumstances (See page 158)

Generally, if the merger agreement is terminated by either Fox River Valley or County because the other party has committed a breach, subject to certain limitations, the breaching party will be required to pay the non-breaching party a termination fee of $750,000.

 



 

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Under certain circumstances described in the merger agreement, including: (i) the breach by Fox River Valley of its agreement not to solicit alternative acquisition proposals or its covenant to hold a shareholder meeting to approve the merger agreement; (ii) the termination of the merger agreement by Fox River Valley in order to enter into an agreement with respect to an unsolicited superior proposal; or (iii) if the merger agreement is terminated because Fox River Valley has willfully breached or failed to perform its obligations under the merger agreement, and Fox River Valley enters into an agreement with a third party to acquire Fox River Valley within twelve months of such termination; County may be owed a $1.15 million termination fee from Fox River Valley. See “Description of the Merger Agreement—Termination fee.”

Voting and support agreement (See page 145)

On November 19, 2015, all of the directors of Fox River Valley agreed to vote all of their shares of Fox River Valley common stock in favor of the merger agreement at the special meeting. The voting and support agreement covers approximately 33% of Fox River Valley’s outstanding shares of common stock as of January 26, 2016. This voting and support agreement terminates if the merger agreement is terminated in accordance with its terms. A copy of the form of voting and support agreement is attached to this proxy statement/prospectus as Annex C.

Accounting treatment of the merger (See page 141)

The merger will be accounted for as a purchase transaction in accordance with accounting principles generally accepted in the United States.

Certain differences in County shareholder rights and Fox River Valley shareholder rights (See page 163)

County and Fox River Valley are both Wisconsin corporations. However, County’s amended and restated articles of incorporation and its amended and restated bylaws contain provisions that are different from Fox River Valley’s articles of incorporation and bylaws as currently in effect. Certain of these differences are described in detail in the section entitled “Comparison of Rights of County Shareholders and Fox River Valley Shareholders” beginning on page 163. After completion of the merger, Fox River Valley shareholders who receive shares of County common stock in exchange for their shares of Fox River Valley common stock will become County shareholders, and their rights will be governed by County’s amended and restated articles of incorporation and amended and restated bylaws, in addition to laws and requirements that apply to public companies.

County shares to be issued will be listed on NASDAQ (See page 159)

The shares of County common stock to be issued pursuant to the merger will be listed, as are currently issued shares of County common stock, on NASDAQ under the symbol “ICBK.”

Per share market price and dividend information

County common stock is listed on NASDAQ under the symbol “ICBK.” The table below shows, for the quarters indicated, based on published financial sources, the reported high and low sales prices of County’s common stock during the periods indicated, beginning on January 16, 2015, the first date of trading on NASDAQ, and the cash dividends paid per share of County common stock.

 

     High      Low      Dividends
Paid
 

Year Ended December 31, 2016 (through January 26, 2016)

        

First Quarter

   $ 19.89       $ 19.00       $ —     

Year Ended December 31, 2015 (beginning January 16, 2015)

        

Fourth Quarter

   $ 24.20       $ 17.82       $ 0.04   

Third Quarter

     20.00         16.46         0.04   

Second Quarter

     20.33         17.90         0.04   

First Quarter

     21.70         15.20         0.04   

 



 

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The outstanding shares of Fox River Valley common stock are privately held and are not traded in any public market. The last transaction known by Fox River Valley’s management to occur prior to the date of this proxy/statement prospectus was on October 10, 2013, and the sales price was $12.00 per share. Fox River Valley has not paid dividends on its common stock since its inception in 1999, and does not anticipate paying dividends in the forseeable future. Fox River Valley is currently limited in its ability to pay dividends on its common stock pursuant to a board resolution required by the Federal Reserve. Under the resolution, Fox River Valley must obtain written approval from the Federal Reserve prior to paying dividends. See “Information About Fox River Valley—Information About Fox River Valley’s and The Business Bank’s Business—Regulatory Issues Facing The Business Bank and Fox River Valley—Board Resolution Limiting Certain Corporate Acts.” As of January 26, 2016, there were 156 record holders of Fox River Valley common stock.

On November 19, 2015, the last trading day before the public announcement of the signing of the merger agreement, the closing sale price per share of County common stock on NASDAQ was $19.00. On January 26, 2016, the latest practicable trading date before the date of this proxy statement/prospectus, the last sale price per share of County common stock on NASDAQ was $19.57. As of January 26, 2016, there were 288 record holders of County common stock.

Unaudited comparative per share data

We anticipate that the merger will provide the combined company with financial benefits that include reduced operating expenses and revenue enhancement opportunities. The unaudited pro forma information, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the impact of possible business model changes as a result of current market conditions which may impact revenues, expense efficiencies, asset dispositions, share repurchases and other factors. It also does not necessarily reflect what the historical results of the combined company would have been had the companies been combined during these periods nor is it indicative of the results of operations in future periods or the future financial position of the combined company. The Pro Forma Combined column for the year ended December 31, 2014, combines the historical income per share data of County and Fox River Valley giving effect to the transactions as if the merger, using the acquisition method of accounting, had become effective on January 1, 2014. The pro forma adjustments are based upon available information and certain assumptions that County’s management believes are reasonable. Upon completion of the merger, the operating results of Fox River Valley will be reflected in the consolidated financial statements of County on a prospective basis.

 

     County Bancorp,
Inc. Historical
     Fox River Valley
Bancorp, Inc.
Historical
     Pro Forma Combined  

Book value per share

        

Nine months ended September 30, 2015

   $ 16.82       $ 14.94       $ 17.03   

Year ended December 31, 2014

   $ 16.01       $ 14.63       $ 16.45   

Cash dividends paid per common share:

        

Nine months ended September 30, 2015

   $ 0.12       $ —         $ 0.12   

Year ended December 31, 2014

   $ —         $ —         $ —     

Diluted earnings per common share:

        

Nine months ended September 30, 2015

   $ 1.34       $ 0.29       $ 1.26   

Year ended December 31, 2014

   $ 1.69       $ 0.34       $ 1.56   

 



 

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RISK FACTORS

In addition to the other information contained in or incorporated by reference into this proxy statement/prospectus, including the matters addressed under the caption “Special Notes Concerning Forward-Looking Statements” on page 34, you should consider the following risk factors carefully in deciding whether to vote for approval of the merger agreement. Additional risks and uncertainties not presently known to County and Fox River Valley or that are not currently believed to be important to you, if they materialize, also may adversely affect the merger and County and Fox River Valley as a combined company.

Risks relating to the merger

Because there is no public market for Fox River Valley common stock, it is difficult to determine how the fair value of Fox River Valley common stock compares with the merger consideration.

The outstanding shares of Fox River Valley common stock are privately held and are not traded in any public market. This lack of a public market makes it difficult to determine the fair value of Fox River Valley. The merger consideration was determined based on negotiations between the parties and may not be indicative of the fair value of the shares of Fox River Valley common stock. However, Fox River Valley’s board of directors did obtain an opinion from a financial advisor regarding the fairness of the merger consideration, from a financial point of view, to the holders of Fox River Valley common stock.

County may be unable to successfully integrate Fox River Valley’s operations and may not realize the anticipated benefits of acquiring Fox River Valley.

County and Fox River Valley entered into the merger agreement with the expectation that County would be able to successfully integrate Fox River Valley’s operations and that the merger would result in various benefits, including, among other things, enhanced revenues and revenue synergies, an expanded market reach and operating efficiencies. Achieving the anticipated benefits of the merger is subject to a number of uncertainties, and involve a number of risks, any of which could adversely affect, County’s business, including:

 

    difficulties in integrating Fox River Valley’s operations, technologies, products, existing contracts, accounting processes and personnel and realizing the anticipated synergies of the combined businesses;

 

    difficulties in supporting and transitioning Fox River Valley’s customers;

 

    diversion of financial and management resources from existing operations;

 

    potential loss of key employees, customers and strategic alliances from either Fox River Valley’s or County’s current business;

 

    assumption of unanticipated problems or latent liabilities; and

 

    inability to generate sufficient revenue to offset acquisition costs.

Among the factors considered by the boards of directors of County and Fox River Valley in connection with their respective approvals of the merger agreement were the benefits that could result from the merger. County cannot give any assurance that these benefits will be realized within the time periods contemplated or even that they will be realized at all.

Fox River Valley will be subject to business uncertainties while the merger is pending, which could adversely affect its business.

Uncertainty about the effect of the merger on employees and customers may have an adverse effect on Fox River Valley, and, consequently, the combined company. Although Fox River Valley intends to take steps to reduce any adverse effects, these uncertainties may impair Fox River Valley’s ability to attract, retain and

 

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motivate key personnel until the merger is consummated and for a period of time thereafter, and could cause customers and others that deal with Fox River Valley to seek to change their existing business relationships with Fox River Valley. Employee retention at Fox River Valley’s subsidiary bank may be challenging during the pendency of the merger, as employees may experience uncertainty about their roles with the bank or within the combined company following the merger.

Some of the directors and executive officers of Fox River Valley and The Business Bank have interests and arrangements that could have affected their respective decision to support or approve the merger.

The interests of some of the directors and executive officers of Fox River Valley and The Business Bank in the merger are different from, and may be in addition to, those of Fox River Valley shareholders generally and could have affected their decision to support or approve the merger. These interests include:

 

    The change in control payments, pursuant to existing contracts, to each of William Hodgkiss, Matthew Kasdorf and David Kohlmeyer in connection with the merger;

 

    The intention of County to enter into employment agreements or employment arrangements with each of Messrs. Hodgkiss, Kasdorf and Kohlmeyer in connection with the merger;

 

    Messrs. Hodgkiss, Kasdorf and Kohlmeyer will be fully vested and paid out under The Business Bank’s Stock Appreciation Incentive Compensation Plan;

 

    County’s agreement to provide officers and directors of Fox River Valley with continuing indemnification rights; and

 

    County’s agreement to provide directors’ and officers’ insurance to the officers and directors of Fox River Valley for up to six years following the merger.

In addition, all of the directors of Fox River Valley have entered into a voting and support agreement that requires them to vote all of their shares of Fox River Valley common stock in favor of the merger agreement at the shareholders’ meeting. The voting and support agreement covers approximately 33% of Fox River Valley’s outstanding shares of common stock as of January 26, 2016.

As a result, a director may be more likely to recommend the approval of a merger agreement than if they did not have these interests. See “The Merger—Interests of certain persons in the merger.”

Because the merger consideration is subject to downward adjustment, the value of the merger consideration you receive in the merger may be less than you expect.

The merger consideration to be received by Fox River Valley shareholders at the closing of the merger is subject to downward adjustment by County if the balance sheet delivered to County by Fox River Valley at the closing reflects Fox River Valley’s total adjusted shareholders’ equity less than $23,000,000. For a description of the possible adjustment of the merger consideration, see “Description of the Merger Agreement—Consideration to be received in the merger—Potential Downward Adjustment to the Merger Consideration” on page 151.

Risks relating to the businesses of County and the combined company

Fox River Valley’s shareholders will not control County’s future operations.

Currently, Fox River Valley’s shareholders own 100% of Fox River Valley voting stock and have the power to approve or reject any matters requiring shareholder approval under Wisconsin law and Fox River Valley’s articles of incorporation and bylaws. After the merger, Fox River Valley shareholders are expected to become owners of less than 14.0% of the outstanding shares of County common stock. Even if all former Fox River Valley shareholders voted together on all matters presented to County’s shareholders, from time to time, the former Fox River Valley shareholders most likely would not have a significant impact on the approval or rejection of future County proposals submitted to a shareholder vote.

 

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County is subject to specific market risks due to its focus on agricultural lending.

County primarily concentrates its lending activities in the state of Wisconsin, which is to some extent dominated by an agricultural economy. Historically, County’s senior management’s primary business lending experience has been in agricultural lending, with a specific expertise in and focus on dairy and dairy-related businesses. Although County attempts to maintain a diversified customer base and a diversified loan portfolio, County is more heavily dependent upon the agricultural economy than a typical commercial bank. At September 30, 2015, agricultural loans comprised $469.2 million, or approximately 66.6% of its total loan portfolio.

The agricultural economy is subject to certain risks that are either inherently volatile or are beyond County’s ability, or the ability of farmers or other participants in the agricultural economy, to predict or control. Some of these risks include, but are not limited to:

 

    Weather-Related Risks. Severe weather, including such things as drought, hail, excessive rain or other natural disasters, could impact the quantity and quality of feed necessary to support County’s borrowers’ dairy operations and, in turn, increase their expenses. If significant adverse weather-related events occur, it could impair the ability of borrowers to repay outstanding loans or impair the value of collateral securing loans and cause significant property damage, which could either result in loss of revenue or cause County to incur additional expenses;

 

    Disease-Related Risks. The operations of County’s dairy farm and dairy-related borrowers depend primarily on their cattle. If the livestock were to contract an illness or disease, the borrowers would incur additional expenses, and the viability of their operations may be compromised if the disease is not properly managed. The existence of a widespread livestock disease or pandemic could have a significant impact on County’s borrowers’ ability to repay outstanding loans or impair the value of collateral securing loans, which could either result in loss of revenue or cause County to incur additional expenses;

 

    Real Property Value. County’s dairy farm and dairy-related borrowers tend to grow and produce much of their feed as opposed to purchasing it from third parties, unlike many dairy farmers in other parts of the country. While this means they are often less subject to fluctuations in feed prices, they require more land. Accordingly, declines in real property values in the areas in which County operates could result in a deterioration of the credit quality of County’s borrowers or an increase in the number of loan delinquencies, default and charge-offs, and could reduce the value of any collateral County realizes following a default on agricultural loans;

 

    Market Prices. Agricultural markets are sensitive to real and perceived changes in supply and demand of agricultural products, and given that approximately 90% of County’s agricultural lending is to dairy farms, the credit quality of a substantial portion of County’s loan portfolio is closely related to the performance of, and supply and demand in, this sub-sector of the agricultural market. For example, the success of a dairy operation hinges in large part on the cost of feed and the price of milk. When feed costs are high and milk prices are low, it places a strain on County’s dairy borrowers’ business, which may impair their ability to repay their outstanding loans to County.

 

    Governmental Policies and Regulations. County’s agricultural loans are dependent on the profitable operation and management of the farm properties securing the loans and their cash flows, and government policies and regulations (including the availability of price supports for crops and other agricultural products (in particular, milk), subsidies, or government-sponsored crop insurance) are outside the control of County’s borrowers and may affect the successful operation of a farm.

County’s focus on local markets and agricultural lending creates credit concentration risks.

Credit concentration risk is primarily related to the risk that a borrower will not be able to repay some or all of its obligations to County. Concentrations of credit risk occur when the aggregate amount owed by one borrower, a group of related borrowers, or borrowers within the same or related markets, industries or groups,

 

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represent a relatively large percentage of the total capital or total credit extended by a bank. Although each loan in a concentration may be of sound quality, concentration risks represent a risk not present when the same loan amounts are extended to a more diversified group of borrowers. Loans concentrated in one borrower depend, to a large degree, upon the financial capability and character of the individual borrower. Loans made to a group of related borrowers can be susceptible to financial problems experienced by one or a few members of that group. Loans made to borrowers that are part of the same or related industries or groups, or that are located in the same market area, can all be adversely impacted with respect to their ability to repay some or all of their obligations when adverse conditions prevail in the broader economy generally, in the market specifically or even within just the respective industries or groups. For example, lenders who focused on certain types of real estate lending experienced greater financial difficulties during the recent recession than more diversified lenders or those with concentrations other than real estate lending.

County’s lending is primarily to borrowers located or doing business in Wisconsin. Furthermore, at September 30, 2015, County had certain loan-type concentrations of credit risk, specifically in agricultural lending, which are described in more detail in the section of this proxy statement/prospectus entitled “Information About County—Information About County’s BusinessLending Activities” and “Information About County—Information About County’s Business—General—Market.” Because of the concentration of agricultural loans in County’s lending portfolio and the volume of County’s borrowers in regions dependent upon agriculture, County could be disproportionately affected relative to others because these high concentrations present a risk to County’s lending operations. If any of these borrowers becomes unable to repay their loan obligations for any reason, County’s nonperforming loans and County’s allowance for loan losses could increase significantly, which could have a material adverse effect on County’s business, financial condition and results of operations.

Our business is dependent on local economy, and a regional or local economic downturn affecting Wisconsin may magnify the adverse effects and consequences to us.

County operates as a community-oriented business bank, with a focus on servicing both business customers and individuals in County’s market areas, which include its headquarters in Manitowoc, a full-service branch in Stevens Point, and a loan production office in each of Eau Claire, Fond du Lac, Sheboygan and Darlington. Although County has a primary focus on agricultural and business banking, future growth opportunities will depend largely on market area penetration, market area growth and County’s ability to compete for traditional banking business within County’s market areas. County anticipates that as a result of this concentration, a downturn in the general economy in County’s market areas, including Wisconsin specifically, could increase the risk of loss associated with County’s loan portfolio. Although economic conditions in County’s markets have been generally stronger than those in other regions of the country recently, there can be no assurance that such conditions will continue to prevail.

Volatility in commodity prices may adversely affect County’s financial condition and results of operations.

At September 30, 2015, approximately 66.6% of County’s total loan portfolio was comprised of agricultural loans. Volatility in certain commodity prices, including milk, could adversely impact the ability of those borrowers to perform under the terms of their borrowing arrangements with County. In terms of the dairy industry, milk prices have fluctuated. For the 15-year period ended November 30, 2015, the per-year average All-Milk price (a weighted average price of all uses of milk in a particular milk order) in the United States paid to producers has ranged from an average low price of $12.11 per hundredweight (cwt) in 2002 to an average high price of $23.97 per cwt in 2014, according to the USDA National Agricultural Statistics. “Hundredweight” or “cwt” is a measure equal to 100 pounds of milk shipped. A decrease in milk prices may result in an increase in the number of non-performing loans in County’s agricultural portfolio, which could have a material adverse effect on County’s financial condition, earnings and capital.

 

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County’s business is significantly dependent on the real estate markets where County operates, as a large portion of County’s loan portfolio is secured by real estate.

At September 30, 2015, approximately 66.9% of County’s aggregate loan portfolio, comprising its agriculture real estate loans (including agricultural construction loans), commercial real estate loans and residential real estate loans, was primarily secured by interests in real estate predominantly located in Wisconsin. Additionally, some of County’s other lending occasionally involves taking real estate as primary or secondary collateral. Real property values in Wisconsin may be different from, and in some instances worse than, real property values in other markets or in the United States as a whole, and may be affected by a variety of factors outside County’s control and the control of County’s borrowers, including national and local economic conditions generally. Declines in real property prices, including prices for farmland, commercial property and homes in Wisconsin, could result in a deterioration of the credit quality of County’s borrowers, an increase in the number of loan delinquencies, defaults and charge-offs, and reduced demand for County’s products and services generally. Moreover, declines in real property values in Wisconsin could reduce the value of any collateral County realizes following a default on these loans and could adversely affect County’s ability to continue to grow its loan portfolio consistent with County’s underwriting standards. County’s failure to effectively mitigate these risks could have a material adverse effect on County’s business, financial condition or result of operations.

Strong competition could hurt County’s earnings and slow growth.

County faces intense competition in making loans and attracting deposits. Price competition for loans and deposits sometimes results in County charging lower interest rates on County’s loans and paying higher interest rates on County’s deposits, which may reduce County’s net interest income. Competition also makes it more difficult and costly to attract and retain qualified employees. Many of the institutions with which County competes have substantially greater resources and lending limits than County has and may offer services that County does not provide. County also faces competition for agricultural loans from participants in the nationwide Farm Credit System and much larger regional, national and global banks. County expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of non-bank competition in the financial services industry. If County is not able to effectively compete in County’s market areas and targeted business segments, County’s profitability may be negatively affected.

County’s ability to maintain its reputation is critical to the success of County’s business, and the failure to do so may materially adversely affect County’s performance.

County has benefited from strong relationships with its customers, and also from its relationships with financial intermediaries. As a result, County’s reputation is an important component of its business. A key component of County’s business strategy is to leverage its reputation for customer service and knowledge of its customers’ needs and business to expand County’s presence by capturing new business opportunities from existing and prospective customers in and outside of its local market areas. County strives to conduct its business in a manner that enhances its reputation. County aims to enhance its reputation, in part, by recruiting, hiring and retaining employees who share its core values of being an integral part of the communities and markets County serves, who are able to connect with customers through on-site visits and knowledge of County’s customers’ business, and who care about and deliver superior service to County’s customers. If County’s reputation is negatively affected by the actions of its employees, by its inability to conduct its operations in a manner that is appealing to current or prospective customers, or by events beyond its control, County’s business and operating results may be adversely affected.

County’s commercial real estate and commercial and industrial loans generally carry greater credit risk than loans secured by owner occupied one-to-four family real estate, and County’s credit risk may increase if County succeeds in its plan to increase its commercial lending.

At September 30, 2015, $200.2 million, or approximately 28.4%, of County’s loan portfolio consisted of commercial real estate and commercial and industrial loans. Given their generally larger balances and the

 

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complexity of the underlying collateral, commercial real estate and commercial and industrial loans generally expose a lender to greater credit risk than loans secured by owner occupied one-to-four family real estate. For commercial real estate loans, the principal risk is that repayment is generally dependent on income from tenant leases being generated in amounts sufficient to cover operating expenses and debt service. For commercial and industrial loans, the principal risk is that repayment is generally dependent upon the successful operation of the borrower’s business. If loans that are collateralized by real estate or other business assets become troubled and the value of the collateral has been significantly impaired, then County may not be able to recover the full contractual amount of principal and interest that County anticipated at the time it originated the loan, which could cause County to increase its provision for loan losses and would adversely affect County’s operating results.

Changes in interest rates may hurt County’s earnings and asset value.

Like other financial institutions, County is subject to interest rate risk. County’s primary source of income is net interest income, which is the difference between interest earned on loans and investments (consisting primarily of loans and securities) and the interest paid on interest-bearing liabilities (consisting primarily of deposits and borrowings). Changes in both the general level of interest rates and in the difference between short-term and long-term rates can affect County’s net interest income. Interest rates are highly sensitive to many factors, including government monetary policies, domestic and international economic and political conditions and other factors beyond County’s control.

While County pursues an asset/liability strategy designed to mitigate its risk from changes in interest rates, including by seeking to originate variable rate loans and balancing the respective terms of assets and liabilities, changes in interest rates may still have a material adverse effect on County’s financial condition and results of operations. Changes in the level of interest rates also may negatively affect County’s ability to originate loans, the value of County’s assets and liabilities and County’s ability to realize gains from the sale of its assets, all of which could affect County’s earnings.

If County’s allowance for loan losses is not sufficient to cover actual loan losses, County’s earnings and capital could decrease.

At September 30, 2015, County’s allowance for loan losses, totaled $9.8 million, which represented 1.4% of gross loans. County makes various assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and the value of the real estate and other assets serving as collateral for its loans. In determining the amount of the allowance for loan losses, County reviews its loss and delinquency experience, and County evaluates other factors including, among other things, current economic conditions. If County’s assumptions are incorrect, or if delinquencies or non-performing loans increase, its allowance for loan losses may not be sufficient to cover losses inherent in its loan portfolio, which would require additions to County’s allowance, and could decrease County’s net income or reduce its capital.

In addition, County’s regulators, as an integral part of their examination process, periodically review the allowance for loan losses and may require County to increase the allowance for loan losses by recognizing additional provisions for loan losses charged to expense, or to charge off loans, which, net of any recoveries, would decrease the allowance for loan losses. Any such additional provisions for loan losses or charge-offs could have a material adverse effect on County’s financial condition and results of operations.

The dividend rate on County’s SBLF Preferred Stock will increase to 9.0% during the first quarter of 2016 if County has not redeemed the SBLF Preferred Stock, which would impact the net income available to holders of County common stock and earnings per share of County common stock.

The per annum dividend rate on the 15,000 shares of the Noncumulative Perpetual Preferred Stock, Series C, which we refer to as SBLF Preferred Stock, County sold to the U.S. Department of Treasury, or the U.S. Treasury, in connection with County’s participation in the U.S. Treasury’s Small Business Lending Fund, which

 

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we refer to as the SBLF Program, is currently 1.0%. During the first quarter of 2016, the per annum dividend rate will increase to a fixed rate of 9.0% if any SBLF Preferred Stock remains outstanding at that time. The total dividends paid on County’s SBLF Preferred Stock for each of the years ended December 31, 2014 and 2013 were $150,000. Assuming the increased dividend rate of 9.0% per annum and assuming County has not redeemed any of its SBLF Preferred Stock, the total dividends payable on County’s SBLF Preferred Stock would be $1.3 million for the 12-month period beginning in February 2016. Depending on County’s financial condition at the time, any such increase in the dividend rate could have a material negative effect on County’s financial condition, including reducing County’s net income available to holders of County common stock and County’s earnings per share. County has given notice of redemption to the holders of the SBLF Preferred Stock and, subject to regulatory approval, intends to redeem the SBLF Preferred Stock in the first quarter of 2016.

Failure to pay dividends on County’s SBLF Preferred Stock may have negative consequences, including limiting County’s ability to pay dividends in the future.

County’s SBLF Preferred Stock pays a noncumulative quarterly dividend in arrears. Such dividends are not cumulative but County may only declare and pay dividends on County common stock (or any other equity securities junior to the SBLF Preferred Stock) if County has declared and paid dividends on the SBLF Preferred Stock for the current dividend period. Moreover, County’s ability to pay dividends is always subject to legal and regulatory restrictions. Any payment of dividends in the future will depend, in large part, on County’s earnings, capital requirements, financial condition and other factors considered relevant by County’s board of directors. There is no assurance that Count will pay dividends on its common stock in the future, or that if County does pay dividends, that such dividends will continue.

County relies on the accuracy and completeness of information about its customers and counterparties, and inaccurate or incomplete information could subject County to various risks.

In deciding whether to extend credit or enter into other transactions with its customers and counterparties, County may rely on information furnished by or on behalf of customers and counterparties, including financial statements and other financial information. County may also rely on representations as to the accuracy and completeness of such information and, with respect to financial statements, on reports of independent auditors.

While County strives to verify the accuracy and sufficiency of such information, if this information is inaccurate or incomplete, County may be subject to loan losses, regulatory action, reputational harm, or other adverse effects on the operation of its business, results of operations, or financial condition.

County depends on its management team to implement its business strategy and on its relationship managers to maintain and grow its agricultural and commercial relationships; County could be harmed by the loss of their services.

County is dependent upon the services and expertise of its founders and the other members of its management team who direct its strategy and operations, especially relating to County’s agricultural lending focus, and County has benefited from its management’s extensive banking knowledge and experience in this regard. County also relies heavily upon the talents, experience and customer relationships of its loan officers and has benefited from their expertise and relationship-building skills, especially with respect to County’s agricultural and commercial lending. Members of County’s executive management team and its seasoned loan officers could be difficult to replace. County’s loss of the services of one or more of these persons, or its inability to hire additional qualified personnel, could impact County’s ability to implement its business strategy and could have a material adverse effect on County’s business and results of operations.

Limits on County’s ability to use brokered deposits as part of its funding strategy may adversely affect its ability to grow.

A “brokered deposit” is any deposit that is obtained from or through the mediation or assistance of a deposit broker, which includes larger correspondent banks and securities brokerage firms. These deposit brokers attract

 

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deposits from individuals and companies throughout the country and internationally whose deposit decisions are based almost exclusively on obtaining the highest interest rates. County has used brokered deposits in the past, and County intends to continue to use brokered deposits as one of its funding sources to support future growth. At September 30, 2015, brokered deposits represented approximately 24.9% of its total deposits and equaled $158.3 million. There are risks associated with using brokered deposits. In order to continue to maintain its level of brokered deposits, County may be forced to pay higher interest rates than contemplated by its asset-liability pricing strategy. In addition, banks that become less than “well capitalized” under applicable regulatory capital requirements may be restricted in their ability to accept or prohibited from accepting brokered deposits. If this funding source becomes more difficult to access, County will have to seek alternative funding sources in order to continue to fund its growth. This may include increasing County’s reliance on the Federal Home Loan Bank of Chicago, or FHLB, borrowings, attempting to attract non-brokered deposits, reducing County’s available for sale securities portfolio and selling loans. There can be no assurance that brokered deposits will be available, or if available, sufficient to support County’s continued growth.

A lack of liquidity could adversely affect County’s ability to fund operations and meet its obligations as they become due.

Liquidity is essential to County’s business. Liquidity risk is the potential that County will be unable to meet its obligations as they come due because of an inability to liquidate assets or obtain adequate funding. The primary sources of County’s liquidity are customer deposits and loan repayments, in addition to borrowings. County’s access to deposits and other funding sources in adequate amounts and on acceptable terms is affected by a number of factors, including rates paid by competitors, returns available to customers on alternative investments and general economic conditions. Any decline in available funding could adversely impact County’s ability to originate loans, invest in securities, meet its expenses, pay dividends to its shareholders, or to fulfill obligations such as repaying ours borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on County’s business, financial condition, results of operations and growth prospects.

County incurs significant costs as a result of operating as a public company, and its management is required to devote substantial time to new compliance initiatives relating to its financial and accounting systems, procedures and controls in order to satisfy its new public company reporting requirements.

As a public company, County incurs significant legal, accounting and other expenses that it did not incur as a private company, and these expenses may increase even more after it is no longer an “emerging growth company.” County has made, and will continue to make, changes to its internal controls and procedures for financial reporting and accounting systems to meet its reporting obligations as a stand-alone public company, and County expects that the obligations of being a public company, including the substantial public reporting obligations, will require significant expenditures and place additional demands on its management team. These obligations increase County’s operating expenses and could divert management’s attention from other aspects of its business. However, the measures County takes may not be sufficient to satisfy its obligations as a public company. County is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, as well as rules adopted, and to be adopted, by the SEC and NASDAQ, except for such requirements that County may elect not to comply with during the period it is an emerging growth company, which could require it to further upgrade its systems and/or hire additional staff, which would increase its operating costs. County’s management and other personnel need to devote a substantial amount of time to these compliance initiatives. Moreover, County expects these rules and regulations to substantially increase its legal and financial compliance costs and to make some activities more time-consuming and costly. The increased costs may cause County to incur losses. County cannot predict or estimate the amount or timing of additional costs it may incur to respond to these requirements. The impact of these requirements could also make it more difficult for County to attract and retain qualified persons to serve on its board of directors, its board committees or as executive officers.

 

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County is dependent on its information technology and telecommunications systems and third-party service providers, and systems failures, interruptions or breaches of security could have a material adverse effect on County’s financial condition and results of operations and damage County’s reputation.

County’s business is highly dependent on the successful and uninterrupted functioning of its information technology and telecommunications systems and third-party service providers. County outsources many of its major systems, such as data processing and deposit processing systems. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt County’s operations. Because County’s information technology and telecommunications systems interface with and depend on third-party systems, County could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of County’s ability to provide customer service, compromise its ability to operate effectively, damage its reputation, result in a loss of customer business and/or subject County to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on County’s financial condition and results of operations.

In addition, County provides its customers the ability to bank remotely, including online over the internet. The secure transmission of confidential information is a critical element of remote banking. County’s network could be vulnerable to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches. County may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by these incidents. Further, County outsources some of the data processing functions used for remote banking, and accordingly County is dependent on the expertise and performance of its third-party providers. To the extent that County’s activities, the activities of its customers, or the activities of its third-party service providers involve the storage and transmission of confidential information, security breaches and viruses could expose County to claims, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in County’s systems and could adversely affect its reputation, results of operations and ability to attract and maintain customers and businesses. In addition, a security breach could also subject County to additional regulatory scrutiny, expose County to civil litigation and possible financial liability and cause reputational damage, any or all of which could have a material adverse effect on its business.

County relies on other companies to provide certain key components of its business infrastructure.

Third-party service providers provide certain key components of County’s business infrastructure, such as data processing and deposit processing systems, mobile payment systems, internet connections, and network access. While County has selected these third-party service providers carefully, it does not control their operations. Any failure by these third parties to perform or provide agreed-upon goods and services for any reason or their poor performance of services, could adversely affect County’s ability to deliver products and services to its customers and otherwise to conduct its business. Replacing these third-party service providers could also entail significant delay and expense.

County may face risks with respect to other future acquisitions.

Following the integration of Fox River Valley, County may continue to attempt to expand its business in Wisconsin or other states through mergers and acquisitions. As with the merger with Fox River Valley, County anticipates that it will seek targets that are culturally similar to it, have experienced management and possess either significant market presence or have potential for improved profitability through economies of scale or expanded services. In addition to the general risks associated with County’s growth plans, acquiring other banks, businesses or branches involves various risks commonly associated with acquisitions, including, among other things, the risks with the Fox River Valley transaction and other possible risks such as:

 

    the time and costs associated with identifying and evaluating potential acquisition and merger targets;

 

    unexpected delays, complications or expenses resulting from regulatory approval requirements or other conditions to closing;

 

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    inaccuracies in the estimates and judgments used to evaluate credit, operations, management and market risks with respect to the target institution;

 

    the time and costs of evaluating new markets, hiring experienced local management, and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion;

 

    County’s ability to finance an acquisition and possible dilution to its existing shareholders;

 

    the diversion of County’s management’s attention to the negotiation of a transaction;

 

    the incurrence of an impairment of goodwill associated with an acquisition and adverse effects on County’s results of operations;

 

    entry into new markets where County lacks experience; and

 

    risks associated with integrating the operations and personnel of the acquired business in a manner that permits growth opportunities and does not materially disrupt existing customer relationships or result in decreased revenues resulting from any loss of customers.

With respect to the risks particularly associated with the integration of an acquired business, County may encounter a number of difficulties, such as: (i) customer loss and revenue loss; (ii) the loss of key employees; (iii) the disruption of County’s operations and business; (iv) County’s inability to maintain and increase competitive presence; (v) possible inconsistencies in standards, control procedures and policies; and/or (vi) unexpected problems with costs, operations, personnel, technology and credit.

In addition to the risks posed by the integration process itself, the focus of management’s attention and effort on integration may result in a lack of sufficient management attention to other important issues, causing harm to County’s business. Also, general market and economic conditions or governmental actions affecting the financial industry generally may inhibit County’s successful integration of an acquired business.

County expects to continue to evaluate merger and acquisition opportunities that are presented to it and conduct due diligence activities related to possible transactions with other financial institutions. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities may occur at any time. County does not expect to comment publicly on possible acquisitions or business combinations until it has signed a definitive agreement for the transaction. Historically, acquisitions of non-failed financial institutions involve the payment of a premium over book and market values, and, therefore, some dilution of County’s book value and net income per share may occur in connection with any future transaction. Failure to realize the expected revenue increases, cost savings, increases in geographic or product presence and/or other projected benefits from an acquisition could have a material adverse effect on County’s business, financial condition, results of operations and growth prospects.

If County fails to successfully keep pace with technological change, its business could be materially adversely affected.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. County’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in its operations. Failure to successfully keep pace with technological change affecting the financial services industry generally, and virtual banking in particular, could have a material adverse impact on County’s business and, in turn, County’s financial condition and results of operations.

County’s disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

Upon completion of its intial public offering, County became subject to the periodic reporting requirements of the Exchange Act. County designed its disclosure controls and procedures to reasonably assure that

 

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information County must disclose in reports it files or submits under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. County believes that any disclosure controls and procedures or internal controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in County’s control system, misstatements due to error or fraud may occur and not be detected and any failure or circumvention of County’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on County’s business results of operations and financial condition.

If County’s risk management framework does not effectively identify or mitigate its risks, County could suffer losses.

County’s risk management framework seeks to mitigate risk and appropriately balance risk and return. County has established processes and procedures intended to identify, measure, monitor and report the types of risk to which it is subject, including credit risk, operations risk, compliance risk, reputation risk, strategic risk, market risk and liquidity risk. County seeks to monitor and control its risk exposure through a framework of policies, procedures, monitoring and reporting requirements. There may be risks that exist, or that develop in the future, that County has not appropriately anticipated, identified or mitigated. If County’s risk management framework does not effectively identify or mitigate its risks, County could suffer unexpected losses and could be materially adversely affected.

Risks related to an investment in County common stock

There may be a limited trading market in County common stock, which would hinder your ability to sell County common stock and may lower the market price of the stock.

In January 2015, County common stock was listed on NASDAQ under the symbol “ICBK”. The development of an active trading market depends on the existence of willing buyers and sellers, the presence of which is not within County’s control, or that of any market maker. The number of active buyers and sellers of the shares of common stock at any particular time may be limited. Under such circumstances, you could have difficulty selling your shares of common stock on short notice, and, therefore, you should not view the shares of common stock as a short-term investment. In addition, County’s public “float,” which is the total number of County’s outstanding shares less shares held by County’s directors and executive officers, if any, may be quite limited. As a result, it is unlikely that an active trading market for County common stock will develop or that, if it develops, it will continue. If you hold shares of County common stock, you may not be able to sell them at a price equal to or in excess of your per share purchase price or implied value from the merger. Holders of County common stock should have long-term investment intent and should recognize that there is a limited trading market in County common stock. The limited market for County common stock may make it difficult to sell County common stock and may have an adverse impact on the price at which County common stock can be sold.

 

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Anti-takeover provisions in County’s charter documents and under Wisconsin law could make an acquisition of County, which may be beneficial to County’s shareholders, more difficult and may prevent attempts by County’s shareholders to replace or remove County’s current management and limit the market price of County common stock.

Provisions in County’s amended and restated articles of incorporation and County’s amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in County’s management. County’s amended and restated articles of incorporation and amended and restated bylaws include provisions that:

 

    authorize County’s board of directors to issue, without further action by the shareholders, up to 570,000 shares of undesignated preferred stock;

 

    establish an advance notice procedure for shareholder proposals to be brought before an annual meeting of County’s shareholders, including proposed nominations of persons for election to County’s board of directors;

 

    establish that County’s board of directors is divided into two to three classes, with each class serving staggered three year terms;

 

    provide that County’s directors may be removed only for cause;

 

    provide that vacancies on County’s board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and

 

    specify that no shareholder is permitted to cumulate votes at any election of directors.

These provisions may frustrate or prevent any attempts by County’s shareholders to replace or remove County’s current management by making it more difficult for shareholders to replace members of County’s board of directors, which is responsible for appointing the members of County’s management. In addition, because County is incorporated in Wisconsin, the Wisconsin control share acquisition statute and Wisconsin’s “fair price” and “business combination” provisions, in addition to other provisions of Wisconsin law, would apply and limit the ability of an acquiring person to engage in certain transactions or to exercise the full voting power of acquired shares under certain circumstances. As a result, offers to acquire County, which may represent a premium over the available market price of County common stock, may be withdrawn or otherwise fail to be realized.

County is an “emerging growth company,” as defined in the JOBS Act and is able to avail itself of reduced disclosure requirements applicable to emerging growth companies, which could make County common stock less attractive to investors and adversely affect the market price of County common stock.

For so long as County remains an “emerging growth company,” as defined in the Jumpstart our Business Startups Act, or the JOBS Act, County may take advantage of certain exemptions from various requirements applicable to public companies that are not “emerging growth companies” including:

 

    the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that County’s independent registered public accounting firm audit the effectiveness of its internal control over financial reporting;

 

    the “say on pay” provisions (requiring a non-binding shareholder vote to approve compensation of certain executive officers) and the “say on golden parachute” provisions (requiring a non-binding shareholder vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other business combinations) of the Dodd-Frank Act and some of the disclosure requirements of the Dodd-Frank Act relating to compensation of County’s chief executive officer;

 

    the requirement to provide detailed compensation discussion and analysis in proxy statements and reports filed under the Exchange Act and instead provide a reduced level of disclosure concerning executive compensation; and

 

    any rules that the Public Company Accounting Oversight Board may adopt requiring mandatory audit firm rotation or a supplement to the auditor’s report on the financial statements.

 

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County may take advantage of these exemptions until it is no longer an “emerging growth company.” County would cease to be an “emerging growth company” upon the earliest of: (i) the first fiscal year following the fifth anniversary of its initial offering; (ii) the first fiscal year after its annual gross revenues are $1 billion or more; (iii) the date on which it has, during the previous three-year period, issued more than $1 billion in non-convertible debt securities; or (iv) as of the end of any fiscal year in which the market value of County common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year.

County cannot predict if investors will find County common stock less attractive because it may rely on these exemptions. If some investors find County common stock less attractive as a result, there may be a less active trading market for County common stock, and County’s stock price may be more volatile and may decline.

County common stock is equity and is subordinate to County’s existing and any future indebtedness.

Shares of County common stock represent equity interests in County and do not constitute indebtedness. Accordingly, the shares of County common stock are subordinate to County’s existing junior subordinated debentures with respect to the payment of dividends and the distribution of assets upon liquidation and rank junior to all of County’s existing and future indebtedness and to other non-equity claims against County with respect to assets available to satisfy claims against it, including in County’s liquidation.

County’s board of directors may issue shares of preferred stock that would adversely affect the rights of County’s common shareholders.

County’s authorized capital stock includes 600,000 shares of preferred stock, which includes: (i) 15,000 shares of Series B Nonvoting Noncumulative Perpetual Preferred Stock, which we refer to as Series B Preferred Stock, that are authorized, of which 8,000 shares are outstanding; (ii) 15,000 shares of SBLF Preferred Stock issued to the U.S. Treasury under the SBLF Program that are issued and outstanding; and (iii) 570,000 shares of preferred stock that are not classified. The SBLF Preferred Stock has rights that may be adverse to County’s common shareholders, including priority with regard to any dividends paid by County and any payment received in liquidation. County’s board of directors, in its sole discretion, may designate and issue one or more series of preferred stock from the authorized and unissued shares of preferred stock. Subject to limitations imposed by law or County’s amended and restated articles of incorporation, County’s board of directors is empowered to determine:

 

    the designation of, and the number of, shares constituting each series of preferred stock;

 

    the dividend rate for each series;

 

    the terms and conditions of any voting, conversion and exchange rights for each series;

 

    the amounts payable on each series on redemption or County’s liquidation, dissolution or winding-up;

 

    the provisions of any sinking fund for the redemption or purchase of shares of any series; and

 

    the preferences and the relative rights among the series of preferred stock.

County could issue preferred stock with voting and conversion rights that could adversely affect the voting power of the shares of County common stock and with preferences over County common stock with respect to dividends and in liquidation.

 

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County’s stock price may be volatile.

Stock price volatility may negatively impact the price at which County common stock may be sold, and may also negatively impact the timing of any sale. County’s stock price may fluctuate widely in response to a variety of factors including the risk factors described herein and, among other things:

 

    actual or anticipated variations in quarterly operating results;

 

    recommendations by securities analysts, including estimates of County’s financial performance or lack of research and reports by industry analysts;

 

    operating and stock price performance of other companies that investors deem comparable to County;

 

    news reports relating to trends, concerns and other issues in the financial services industry, such as cyber-attacks;

 

    new technology used, or services offered, by competitors;

 

    variations in milk or other commodity prices;

 

    perceptions in the marketplace regarding County and/or its competitors;

 

    significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving County or its competitors;

 

    failure to integrate acquisitions or realize anticipated benefits from acquisitions;

 

    additional investments from third parties;

 

    issuance of additional shares of stock;

 

    changes in government regulations; or

 

    geo-political conditions such as acts or threats of terrorism, pandemics or military conflicts.

General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes, credit loss trends or currency fluctuations, could also cause County’s stock price to decrease regardless of County’s operating results.

Shares of County common stock are not insured deposits and may lose value.

Shares of County common stock are not insured deposits or other obligations of any bank and are not insured by the FDIC or any other governmental agency and are subject to investment risk, including possible loss of principal.

Securities analysts may not initiate or continue coverage on County common stock.

The trading price of County common stock depends in part on the research and reports that securities analysts publish about County and its business. County does not have any control over these securities analysts, and they may not cover County common stock. If securities analysts do not cover County common stock, the lack of research coverage may adversely affect County common stock’s market price. If County is covered by securities analysts, and County common stock is the subject of an unfavorable report, the price of County common stock may decline. If one or more of these analysts cease to cover County or fail to publish regular reports on County, it could lose visibility in the financial markets, which could cause the price or trading volume of County common stock to decline.

 

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Risks related to County’s industry

Financial reform legislation will result in new regulations that are expected to increase County’s costs of operations.

County is subject to extensive regulation, supervision and examination by the Federal Reserve, the FDIC and the WDFI. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations or legislation, could have a material impact on County and its operations.

The Dodd-Frank Act was enacted on July 21, 2010. The Dodd-Frank Act represented a significant overhaul of many aspects of the regulation of the financial-services industry. Among other things, the Dodd-Frank Act created a new federal Consumer Financial Protection Bureau, tightened capital standards, and generally increased oversight and regulation of financial institutions and financial activities.

In addition to the self-implementing provisions of the statute, the Dodd-Frank Act calls for more than 300 administrative rulemakings by various federal agencies to implement various parts of the legislation. While some rules have been finalized or issued in proposed form, many have yet to be proposed. It is impossible to predict when additional rules will be issued or finalized, and what the content of such rules will be. County will have to apply resources to ensure that it is in compliance with all applicable provisions of the Dodd-Frank Act and any implementing rules, which may increase County’s costs of operations and adversely impact County’s earnings. The Dodd-Frank Act and any implementing rules that are ultimately issued could have adverse implications on the financial industry, the competitive environment, and/or County’s ability to conduct business.

County has and will become subject to more stringent capital requirements, which may adversely impact its return on equity or constrain County from paying dividends or repurchasing shares.

In July 2013, each of the U.S. federal banking agencies adopted final rules implementing the recommendations of the International Basel Committee on Bank Supervision to strengthen the regulatory capital requirements of all banking organizations in the United States. The new capital framework, which we refer to as Basel III, ultimately will replace the existing regulatory capital rules for all banks, savings associations and U.S. bank holding companies with greater than $500 million in total assets, and all savings and loan holding companies. The final Basel III rules became effective for County and Investors Community Bank on January 1, 2015, and the rules will be fully phased-in by January 1, 2019.

Basel III creates a new regulatory capital standard based on Tier 1 common equity and increases the minimum leverage and risk-based capital ratios applicable to all banking organizations. Basel III also changes how a number of the regulatory capital components are calculated. Any significant increase in County’s capital requirements could reduce its growth and profitability and materially adversely affect County’s business, financial condition, results of operations and growth prospects. For more information about the regulations to which County is subject, see the section of this proxy statement/prospectus entitled “Information About County—Information About County’s Business—Supervision and Regulation.”

County’s growth or future losses may require it to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high.

County is required by its regulators to maintain adequate levels of capital to support its operations. County believes that the net proceeds that County raised in its initial public offering are sufficient to permit Investors Community Bank to maintain regulatory capital compliance for the foreseeable future. Nonetheless, County may at some point need to raise additional capital to support continued growth or to address losses.

County’s ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside of its control, and on County’s financial condition and performance. Accordingly, County may not be able to raise additional capital if needed on terms that are acceptable to it or at all. If County cannot

 

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raise additional capital when needed, its operations and its financial condition could be materially and adversely affected. In addition, if County is unable to raise additional capital when required by the Federal Reserve, it may be subject to adverse regulatory action.

Increased FDIC insurance assessments could significantly increase County’s expenses.

The Dodd-Frank Act eliminated the maximum Deposit Insurance Fund ratio of 1.5% of estimated deposits, and the FDIC has established a long-term ratio of 2.0%. The FDIC has the authority to increase assessments in order to maintain the Deposit Insurance Fund ratio at particular levels. In addition, if County’s regulators issue downgraded ratings of Investors Community Bank in connection with their examinations, the FDIC could impose significant additional fees and assessments on County which could significantly increase its expenses.

County faces a risk of noncompliance with and enforcement actions under the Bank Secrecy Act and other anti-money laundering statutes and regulations.

County maintains systems and procedures designed to ensure that it complies with applicable laws and regulations. The federal Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the PATRIOT Act, and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the U.S. Treasury to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. Federal and state bank regulators also have begun to focus on compliance with Bank Secrecy Act and anti-money laundering regulations. If County’s policies, procedures and systems are deemed deficient, County would be subject to liability, including fines and regulatory actions such as restrictions on its ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of its business plan, including future acquisition plans, which would negatively impact County’s business, financial condition and results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for County.

Changes in accounting standards and policies may negatively affect County’s performance.

County’s accounting policies and methods are fundamental to how it records and reports its financial condition and results of operations. From time to time there are changes in the financial accounting and reporting standards that govern the preparation of County’s financial statements. These changes can be difficult to predict and can materially impact how County reports and records its financial condition and results of operations. In some cases, County could be required to apply a new or revised accounting standard retroactively, which could have a negative impact on its reported results.

County’s ability to pay dividends is dependent upon Investors Community Bank’s performance.

County’s only source of funds to pay dividends is dividends or other distributions it may receive directly from Investors Community Bank. County’s payment of dividends in the future, if any, will be subject to legal, regulatory and contractual restrictions (including with respect to its SBLF Preferred Stock and junior subordinated debentures (and related trust preferred securities), which are senior to its shares of preferred and common stock and have a preference on dividends), and will also depend on Investors Community Bank’s earnings, capital requirements, financial condition and other factors considered relevant by County’s board of directors. Dividends are payable on shares at the discretion of County’s board of directors, subject to the provisions of the WBCL and any regulatory restrictions.

 

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County is subject to examinations and challenges by tax authorities that may be costly and time-consuming and may require expensive remedial action or other costs.

In the normal course of business, County and Investors Community Bank are routinely subject to examinations and challenges from federal and state tax authorities regarding the amount of taxes due in connection with investments that both entities have made and the businesses in which they have engaged. Federal and state taxing authorities have over the past few years become increasingly aggressive in challenging tax positions taken by financial institutions. These tax positions may relate to tax compliance, sales and use, franchise, gross receipts, payroll, property and income tax issues, including tax base, apportionment and tax credit planning. The challenges made by tax authorities may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions. If not resolved in County’s favor, such challenges could have an adverse effect on County’s financial condition and results of operations.

 

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SPECIAL NOTES CONCERNING FORWARD-LOOKING STATEMENTS

This proxy statement/prospectus contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by the use of words such as “may,” “might,” “will,” “would,” “should,” “could,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “probable,” “potential,” “possible,” “target,” “continue,” “look forward,” or “assume” and words of similar import. Forward-looking statements are not historical facts but instead express only management’s beliefs regarding future results or events, many of which, by their nature, are inherently uncertain and outside of management’s control. It is possible that actual results and events may differ, possibly materially, from the anticipated results or events indicated in these forward-looking statements. Forward-looking statements are not guarantees of future performance, and County cautions you not to place undue reliance on these statements. Forward-looking statements are made only as of the date of this report, and County undertakes no obligation to update any forward-looking statements contained in this report to reflect new information or events or conditions after the date hereof.

Forward-looking statements are subject to certain risks, uncertainties and assumptions, including, but not limited to: expected synergies, cost savings and other financial or other benefits of the proposed transaction between County and Fox River Valley might not be realized within the expected timeframes or might be less than projected; the requisite shareholder and regulatory approvals for the proposed transaction between County and Fox River Valley might not be obtained; credit and interest rate risks associated with County’s and Fox River Valley’s respective businesses, customer borrowing, repayment, investment and deposit practices, and general economic conditions, either nationally or in the market areas in which County and Fox River Valley operate or anticipate doing business, may be less favorable than expected; new regulatory or legal requirements or obligations; and other risks, uncertainties and assumptions identified under the sections entitled “Risk Factors” on page 17, “Information About County—County Management’s Discussion and Analysis of Financial Condition and Results of Operations-September 30, 2015” on page 63 and “Information About County—County Management’s Discussion and Analysis of Financial Condition and Results of Operations-December 31, 2014” on page 76. However, these risks and uncertainties are not exhaustive. Other sections of such reports describe additional factors that could impact County’s business and financial performance and pending or consummated acquisition transactions, including the proposed acquisition of Fox River Valley.

 

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UNAUDITED SELECTED PRO FORMA CONDENSED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined financial information combines the historical consolidated financial position and results of operations of County and its subsidiaries and of Fox River Valley and its subsidiaries as an acquisition by County of Fox River Valley using the acquisition method of accounting and giving effect to the related pro forma adjustments described in the accompanying notes. Under the acquisition method of accounting, the assets and liabilities of Fox River Valley will be recorded by County at their respective fair values as of the date the merger is completed. The unaudited pro forma condensed combined balance sheet gives effect to the merger, as if the transaction had occurred on September 30, 2015. The unaudited pro forma condensed combined income statements for the year ended December 31, 2014 and for the nine months ended September 30, 2015 give effect to the merger as if the transaction had become effective at January 1, 2014.

The merger was announced on November 20, 2015, and the merger agreement provides that each outstanding share of Fox River Valley, will exchanged for, by operation of law, fifty percent cash and fifty percent of County common stock. The unaudited pro forma condensed combined financial information has been derived from and should be read in conjunction with the historical consolidated financial statements and the related notes of both County and Fox River Valley, which are included in this document as set forth in the index of financial statements on page 183.

The unaudited pro forma condensed combined financial statements included herein are presented for informational purposes only and do not necessarily reflect the financial results of the combined company had the companies actually been combined at the beginning of each period presented. The adjustments included in these unaudited pro forma condensed combined financial statements are preliminary and may be revised. This information also does not reflect the benefits of the expected cost savings and expense efficiencies, opportunities to earn additional revenue, potential impacts of current market conditions on revenues, or asset dispositions, among other factors, and includes various preliminary estimates and may not necessarily be indicative of the financial position or results of operations that would have occurred if the merger had been consummated on the date or at the beginning of the period indicated or which may be attained in the future.

 

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COUNTY BANCORP, INC.

UNAUDITED COMBINED PRO FORMA BALANCE SHEET

September 30, 2015

 

     County
Bancorp, Inc.
    Fox River Valley
Bancorp, Inc.
    Pro Forma
Adjustments
           Pro Forma
Combined
 
     (dollars in thousands, except per share data)  

ASSETS

           

Cash and cash equivalents

   $ 13,026      $ 44,302      $ (14,450     A      
         (5,456     D       $ 37,422   

Securities available-for-sale, at fair value

     85,783        54,992             140,775   

FHLB Stock, at cost

     3,507        —               3,507   

Loans held for sale

     13,712        —               13,712   

Loans, net of allowance for loan losses

     694,196        148,279        4,002        C      
         (4,680     C         841,797   

Premises and equipment, net

     5,771        1,485             7,256   

Loan servicing rights

     7,721        —               7,721   

Other real estate owned, net

     3,024        2,118             5,142   

Cash surrender value of bank owned life insurance

     11,082        —               11,082   

Goodwill

         3,793        C         3,793   

Core deposit intangible

     —          —          2,049        C         2,049   

Deferred tax asset, net

     2,047        2,673             4,720   

Accrued interest receivable and other assets

     4,922        1,359             6,281   
  

 

 

   

 

 

   

 

 

      

 

 

 

Total assets

   $ 844,791      $ 255,208      $ (14,742      $ 1,085,257   
  

 

 

   

 

 

   

 

 

      

 

 

 

LIABILITIES

           

Deposits:

           

Noninterest-bearing

   $ 60,685      $ 30,673           $ 91,358   

Interest-bearing

     575,536        187,888             763,424   
  

 

 

   

 

 

   

 

 

      

 

 

 

Total deposits

     636,221        218,561        —             854,782   

Other borrowings

     4,383        1,530        (1,530     D         4,383   

Advances from FHLB

     64,000        —               64,000   

Capital lease payable

     —          94             94   

Subordinated debentures

     —          3,926        (3,926     D         —     

Subordinated debentures—Trust preferred

     12,372        3,610             15,982   

Accrued interest payable and other liabilities

     8,379        3,034        717        C         12,130   
  

 

 

   

 

 

   

 

 

      

 

 

 

Total liabilities

     725,355        230,755        (4,739        951,371   
  

 

 

   

 

 

   

 

 

      

 

 

 

Small Business Lending Fund redeemable preferred stock

   $ 15,000      $ —             $ 15,000   

SHAREHOLDERS’ EQUITY

           

Preferred stock

     8,000        —               8,000   

Common stock

     18        1,634        (1,634     B      
         8        A         26   

Surplus

     34,118        14,695        (14,695     B      
         14,442        A         48,560   

Retained earnings

     66,274        8,169        (8,169     B      
              66,274   

Treasury stock

     (4,572     —               (4,572

Accumulated other comprehensive income

     598        (45     45        B         598   
  

 

 

   

 

 

   

 

 

      

 

 

 

Total shareholders’ equity

     104,436        24,453        (10,003        118,886   
  

 

 

   

 

 

   

 

 

      

 

 

 

Total liabilities and shareholders’ equity

   $ 844,791      $ 255,208      $ (14,742      $ 1,085,257   
  

 

 

   

 

 

   

 

 

      

 

 

 

Book value per common share

   $ 16.82      $ 14.97           $ 17.03   

Shares outstanding

     5,733,919        1,633,862             6,509,966   

See “Notes to Unaudited Selected Pro Forma Condensed Financial Information” below.

 

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COUNTY BANCORP, INC.

UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF OPERATIONS

For the Nine Months Ended September 30, 2015

 

     County
Bancorp, Inc.
    Fox River
Valley
Bancorp, Inc.
     Pro Forma
Adjustments
           Pro Forma
Combined
 
     (dollars in thousands, except per share data)  

Total interest income

   $ 24,765      $ 5,922         (77     F       $ 30,610   

Total interest expense

     5,504        1,661         (245     D         6,920   
  

 

 

   

 

 

         

 

 

 

Net interest income

     19,261        4,261              23,690   

Provision for loan losses

     (1,325     673              (652
  

 

 

   

 

 

         

 

 

 

Net interest income after provision for loan losses

     20,586        3,588              24,342   

Non-interest income

     5,310        328              5,638   

Non-interest expense

     12,983        3,158         100        E         16,241   
  

 

 

   

 

 

         

 

 

 

Income before income taxes

     12,913        758              13,739   

Income tax expense

     4,839        280         24        G         5,143   
  

 

 

   

 

 

         

 

 

 

NET INCOME

   $ 8,074      $ 478            $ 8,596   
  

 

 

   

 

 

         

 

 

 

Basic earnings per share

   $ 1.37      $ 0.29            $ 1.28   

Diluted earnings per share

   $ 1.34      $ 0.29            $ 1.26   

Average shares outstanding—basic

     5,635,515        1,633,862              6,411,562   

Average shares outstanding—diluted

     5,754,118        1,633,862              6,530,165   

See “Notes to Unaudited Selected Pro Forma Condensed Financial Information” below.

 

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COUNTY BANCORP, INC.

UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF OPERATIONS

For the Year Ended December 31, 2014

 

     County
Bancorp, Inc.
     Fox River Valley
Bancorp, Inc.
     Pro Forma
Adjustments
           Pro Forma
Combined
 
     (dollars in thousands, except per share data)  

Total interest income

   $ 30,897       $ 8,439         (102     F       $ 39,234   

Total interest expense

     7,537         2,692         (346     D         9,883   
  

 

 

    

 

 

         

 

 

 

Net interest income

     23,360         5,747              29,351   

Provision for loan losses

     589         600              1,189   
  

 

 

    

 

 

         

 

 

 

Net interest income after provision for loan losses

     22,771         5,147              28,162   

Non-interest income

     7,148         —                7,148   

Non-interest expense

     17,025         4,301         133        E         21,459   
  

 

 

    

 

 

         

 

 

 

Income before income taxes

     12,894         846              13,851   

Income tax expense

     4,684         285         39        G         5,008   
  

 

 

    

 

 

         

 

 

 

NET INCOME

   $ 8,210       $ 561            $ 8,843   
  

 

 

    

 

 

         

 

 

 

Basic earnings per share

   $ 1.73       $ 0.34            $ 1.60   

Diluted earnings per share

   $ 1.69       $ 0.34            $ 1.56   

Average shares outstanding—basic

     4,469,448         1,633,862              5,245,495   

Average shares outstanding—diluted

     4,580,915         1,633,862              5,356,962   

See “Notes to Unaudited Selected Pro Forma Condensed Financial Information” below.

County has performed a preliminary valuation analysis on the fair market value of Fox River Valley’s assets and liabilities. The following table summarizes the allocation of the preliminary purchase price as of the acquisition date (in thousands):

 

Cash and cash equivalents

   $ 44,302   

Securities available-for-sale, at fair value

     54,992   

Loans

     147,601   

Other real estate owned, net

     2,118   

Other assets

     5,517   

Core deposit intangible

     1,332   

Goodwill

     3,793   

Deposits

     (218,561

Borrowings

     (9,066

Other liabilities

     (3,128
  

 

 

 

Total consideration

   $ 28,900   
  

 

 

 

This preliminary purchase price allocation has been used to prepare pro forma adjustments in the pro forma balance sheet and income statement. The final purchase price allocation will be determined when County has completed the detailed valuations and necessary calculations. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments. The final allocation may include (1) changes in fair values, (2) changes in allocations to intangible assets, including goodwill and (3) other changes to assets and liabilities.

 

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Notes to Unaudited Selected Pro Forma Condensed Financial Information

 

(A) Entry to record purchase price consideration of $28,900 with approximately 50% cash and 50% County common stock issued to Fox River Valley shareholders based on 776,047 shares issued at $18.62 per share and $0.01 par value per share.

 

County Bancorp common shares issued—Par Value

   $ 8   

Surplus on shares issued

     14,442   
  

 

 

 

Total capital consideration

     14,450   
  

Cash consideration paid to shareholders

     14,450   
  

 

 

 

Total purchase price consideration

   $ 28,900   
  

 

 

 

 

(B) Adjustment to eliminate equity of Fox River Valley

 

(C) Based on the current estimates of fair value on the September 30, 2015 balance sheet of Fox River Valley, County would record approximately $5.2 million of goodwill. The core deposit intangible was estimated to be 0.6% of Fox River Valley's core deposits. And estimated discount was applied to Fox River Valley's total loans of 2.6% for credit discount and 0.3% for accretable discount to compute the estimated fair value.

 

Purchase price

   $ 28,900   
  

Equity in Fox River Valley

     23,736   

Core deposit intangible

     2,049   

Deferred tax liability in connection with intangible

     (717

Eliminate Fox River Valley allowance for loan losses

     4,002   

Adjust Fox River Valley loans to fair market value

     (4,680
  

 

 

 

Adjusted equity of Fox River Valley

     24,390   
  

 

 

 
  

Estimated Goodwill

     3,793   
  

 

 

 

 

(D) Adjustment for pay-down of long-term debt principal and related interest expense savings.

 

Line-of-credit due February 9, 2016 (30-day LIBOR + 3.0%,
3.199% at September 30, 2015)

   $ 1,530   

Subordinated debenture due December 3, 2017 (8.0%)

     1,896   

Subordinated debenture due November 16, 2034 (5 year swap
rate + 4.5%, 6.165% at September 30, 2015)

     2,030   
  

 

 

 

Total cash used to pay-down long-term debt

   $   5,456   
  

 

 

 

 

     Nine months
ended
9/30/2015
     Year ended
12/31/2014
 

Line-of-credit due February 9, 2016 (30-day LIBOR + 3.0%,
3.199% at September 30, 2015)

   $ 37       $ 48   

Subordinated debenture due December 3, 2017 (8.0%)

     114         152   

Subordinated debenture due November 16, 2034 (5 year swap
rate + 4.5%, 6.165% at September 30, 2015)

     94         146   
  

 

 

    

 

 

 

Interest expense saved in connection with the
pay-down of long-term debt

   $ 245       $ 346   
  

 

 

    

 

 

 

 

(E) Entry to record the amortization of the core deposit intangible net of the deferred tax liability associated with the intangible. Net core deposit intangible is estimated to be $1,332 and is amortized over 10 years using a straight-line method.

 

(F) Adjustment for the cost of capital for cash funding of purchase price.

 

(G) Income tax impact at an effective rate of 35%.

 

 

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INFORMATION ABOUT THE SPECIAL MEETING OF FOX RIVER VALLEY SHAREHOLDERS

Fox River Valley’s board of directors is using this proxy statement/prospectus to solicit proxies from the holders of Fox River Valley common stock for use at the special meeting of Fox River Valley’s shareholders.

Date, time and place of the special meeting

The special meeting will be held at North Shore Golf Club, N8421 North Shore Road, Menasha, Wisconsin 54952 on March 17, 2016 at 5:00 p.m., local time.

Purpose of the special meeting

At the special meeting, Fox River Valley board of directors will ask you to vote upon the following:

 

    a proposal to approve the merger agreement and thereby approve the merger;

 

    a proposal to approve an adjournment of the special meeting to permit further solicitation in the event that an insufficient number of votes are cast to approve the merger agreement and the transactions it contemplates; and

 

    any other business that properly comes before the special meeting and any adjournment or postponement thereof.

Record date and voting rights for the special meeting

Fox River Valley has set the close of business on January 26, 2016, as the record date for determining the holders of its common stock entitled to notice of and to vote at the special meeting. Only Fox River Valley shareholders at the close of business on the record date are entitled to notice of and to vote at the special meeting. As of the record date, there were 1,633,862 shares of Fox River Valley common stock outstanding and entitled to vote at the special meeting.

Quorum

The presence in person or by proxy of at least a majority of Fox River Valley’s shares issued and outstanding and entitled to vote at the special meeting is required for a quorum to be present at the special meeting. Abstentions and broker non-votes will count toward the establishment of a quorum.

Vote required

Assuming the presence of a quorum, approval of the merger agreement requires the affirmative vote of at least a majority of all the votes entitled to be cast. Approval of the proposal to adjourn the special meeting to permit further solicitation in the event that an insufficient number of votes are cast to approve the merger agreement and the transactions it contemplates requires that the votes cast for the proposal exceed the votes cast against the proposal, if a quorum is present. In the absence of a quorum, holders of a majority of the shares of Fox River Valley common stock present in person or by proxy at the special meeting may adjourn the special meeting.

The failure of a Fox River Valley shareholder to vote or to instruct his or her broker, bank or nominee to vote if his or her shares are held in “street name,” which we refer to as a broker non-vote, will have the same effect as voting against the proposal to approve the merger agreement and will have no effect on the meeting adjournment proposal. For purposes of the shareholder vote, an abstention, which occurs when a shareholder attends a meeting, either in person or by proxy, but abstains from voting, will have the same effect as voting against the proposal to approve the merger agreement and will have no effect on the proposal to adjourn the special meeting. Abstentions are not considered votes cast, but are included in determining whether there is a quorum present.

 

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Shares held by Fox River Valley directors; voting and support agreement

All of Fox River Valley’s directors whose aggregate beneficial ownership as of January 26, 2016, represents approximately 33% of Fox River Valley’s outstanding shares have committed through a formal voting agreement to vote their shares in favor of the merger. See “The Merger—Voting and support agreement” on page 145 for a description of the provisions of the voting and support agreement.

How to vote

You may vote in person at the special meeting or by proxy. To ensure your representation at the special meeting, we recommend you vote by proxy even if you plan to attend the special meeting. You can always change your vote at the meeting.

Voting instructions are included on your proxy form, which should be returned in the enclosed prepaid envelope. If you properly complete and timely submit your proxy, your shares will be voted as you have directed. You may vote for, against, or abstain with respect to the approval of the merger and the other proposals. If you are the record holder of your shares and submit your proxy without specifying a voting instruction, your shares will be voted as the Fox River Valley board of directors recommends and will be voted “FOR” approval of the merger agreement and “FOR” the adjournment of the special meeting to permit further solicitation in the event that an insufficient number of votes are cast to approve the merger agreement and the transactions it contemplates.

Revocability of proxies

You may revoke your proxy at any time before it is voted by:

 

    filing with the secretary of Fox River Valley a duly executed revocation of proxy;

 

    submitting a new proxy with a later date; or

 

    attending the special meeting and voting in person by written ballot after giving written notice to the acting secretary of the special meeting or oral notice to the presiding officer during the special meeting.

Attendance and submitting a written ballot at the special meeting will not, by themselves, constitute a revocation of a proxy. All written notices of revocation and other communication with respect to the revocation of proxies should be addressed to: Fox River Valley Bancorp, Inc., 5643 Waterford Lane, Appleton, Wisconsin 54913, Attention: Secretary.

Proxy solicitation

In addition to this mailing, proxies may be solicited by directors, officers or employees of Fox River Valley in person or by telephone or electronic transmission. None of such directors, officers or employees will be directly compensated for such services. Fox River Valley will pay the costs associated with the solicitation of proxies for the special meeting.

Other business; adjournments

Fox River Valley is not currently aware of any other business to be acted upon at the Fox River Valley special meeting. If, however, other matters are properly brought before the special meeting, or any adjournment or postponement thereof, your proxies include discretionary authority on the part of the individuals appointed to vote your shares to act on those matters according to their best judgment.

Adjournments may be made for the purpose of, among other things, soliciting additional proxies. If a quorum is present, any adjournment may be made from time to time if the votes cast for the adjournment exceed the votes cast against the adjournment, without further notice other than by announcement at the special meeting. In the absence of a quorum, holders of a majority of the shares of Fox River Valley common stock present in person or by proxy at the special meeting may adjourn the special meeting.

 

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INFORMATION ABOUT COUNTY

For purposes of this section only, all references to “we,” “us,” “our” or the “Company” refer to County Bancorp, Inc., and all references to the “Bank” refer to Investors Community Bank.

Information About County’s Business

General

County Bancorp, Inc. is a Wisconsin corporation founded in May 1996 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, or the BHCA. Our primary activities consist of holding the stock of our wholly-owned subsidiary bank, Investors Community Bank, and providing a wide range of banking and related business activities through the Bank and our other subsidiaries. At September 30, 2015, we had total assets of approximately $845 million. For additional financial information, see our Consolidated Financial Statements in this proxy statement/prospectus.

Investors Community Bank

Investors Community Bank is a Wisconsin state bank originally chartered in 1997, and headquartered in Manitowoc, Wisconsin. The Bank is an independent community bank offering a full range of financial services focusing on the needs of agricultural businesses statewide, with a primary focus on dairy-related lending with lending relationships in 62 of Wisconsin’s 72 counties. We also serve business and retail customers throughout Wisconsin, but primarily are focused in Northeastern and Central Wisconsin. Our customers are served from our full-service branches in Manitowoc and Stevens Point, and our loan production offices in Darlington, Eau Claire, Sheboygan and Fond du Lac.

Subsidiaries

In addition to the Bank, we have two wholly-owned subsidiaries, County Bancorp Statutory Trust II and County Bancorp Statutory Trust III, which are Delaware statutory trusts. The Bank is the sole shareholder of ICB Investments Corp, a wholly-owned Nevada subsidiary, and is the sole member of Investor Insurance Services, LLC and ABS 1, LLC, which are both Wisconsin limited liability companies. County Acquisition LLC is also a wholly owned subsidiary of County and was formed solely for the purpose of consummating the merger.

Corporate Governance Matters

We maintain a website at www.investorscommunitybank.com. We make available through that website, free of charge, copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we electronically file those materials with, or furnish them to, the SEC. Our SEC reports can be accessed through the Investor Relations link on our website. Investors can read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days during the hours of 10:00 am to 3:00 pm. Investors can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants.

Market

Our agricultural banking business, which is primarily dairy-related, extends throughout Wisconsin, with lending relationships in 62 of the state’s 72 counties as of November 30, 2015. We also serve business and retail customers throughout Wisconsin with a focus on Northeastern and Central Wisconsin.

 

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The economy in Wisconsin represents a diverse range of industries. According to the U.S. Census Bureau, manufacturing, trade, agriculture, professional and business services, finance and insurance, and government industries accounted for approximately 50% of employment in the state in 2012. According to the Bureau of Economic Analysis, the broader Wisconsin economy is growing at a pace on par with the United States as a whole and the overall unemployment rate has fallen below the national rate of unemployment. Agriculture, as defined by the Bureau of Economic Analysis, has grown faster than the U.S. economy as a whole, with real agricultural GDP growing at a compound annual rate of 3.4% nationally and 8.4% in Wisconsin from 2009 to 2013, compared to a compound annual growth rate of 2.0% for the overall economy during the same period. Further, according to a 2012 report from the University of Wisconsin-Madison, total revenue for the agricultural industry in Wisconsin was just over $59 billion in 2007 and had grown to $88.3 billion for 2012, representing approximately a 49% increase.

Dairy-related business lending has proven to be a source of stability and steady growth for both the Bank and the state of Wisconsin. The economic impact of the dairy industry on Wisconsin is significant. According to a 2012 report from the University of Wisconsin-Madison, as part of the overall Wisconsin agricultural economy, the dairy sector contributed $43.4 billion of revenue to the state’s economy. Steady growth in cheese and yogurt consumption has led to an increase of 19.2% in total dairy utilization from 2003 to 2013. In 2012, Wisconsin ranked first in total cheese production, accounting for 25.6% of U.S. output, and second in milk production with 13.6% of total output.

We believe increasing demand for agricultural products and changing agricultural industry dynamics will continue to drive the need for agricultural banking services in our markets while the broader business banking environment in Wisconsin continues to grow. We believe the Bank is well positioned to continue serving the banking needs of agricultural and business banking customers throughout Wisconsin.

Our Products and Services

The Bank provides a wide range of consumer and commercial banking services to individuals, businesses, and industries. The basic services offered by the Bank include: demand interest bearing and noninterest bearing accounts, money market deposit accounts, NOW accounts, time deposits, remote merchant deposit capture, internet banking, cash management services, safe deposit services, credit cards, debit cards, direct deposits, notary services, night depository, cashiers’ checks, drive-in tellers, banking by mail, and the full range of consumer loans, both collateralized and uncollateralized. In addition, the Bank makes secured and unsecured commercial loans as well as loans secured by residential and commercial real estate, and issues stand-by letters of credit. The Bank provides automated teller machine, or ATM, cards and is a member of the Pulse and Cirrus ATM networks thereby enabling customers to utilize the convenience of ATM access nationwide and internationally.

The revenues of the Bank are primarily derived from interest on loans and fees received in connection with loans, interest and dividends on its investment securities, and non-interest income primarily generated from loan sales and loan servicing rights. Most of the Bank’s investment portfolio is held in its wholly owned subsidiary of ICB Investment Corp. The principal sources of funds for the Bank’s lending activities are its deposits (primarily consumer deposits and brokered deposits), loan repayments, and income on and proceeds from the sale of investment securities. The Bank’s principal expenses are interest paid on deposits and operating and general administrative expenses. The Bank also generates non-interest income from Investors Insurance Services, LLC, which is a wholly-owned subsidiary of the Bank. Investors Insurance Services, LLC, provides crop insurance products to the agricultural sector of Wisconsin.

As is the case with financial institutions generally, our operations are materially and significantly influenced by general economic conditions and by related monetary and fiscal policies of financial institution regulatory agencies, including the Federal Reserve, the FDIC and the WDFI Banking Division. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market interest rates. Lending

 

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activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds. The Bank faces strong competition in the attraction of deposits and in the origination of loans. For additional information about the competition we face, see the section of this proxy statement/prospectus entitled “Information About County—Information About County’s Business—Competition.”

Lending Activities

Loans

A significant source of our revenues is the interest earned on the Bank’s loan portfolio. At September 30, 2015, our total assets were $844.8 million and our total loans were $704.0 million or 83.3% of total assets. At December 31, 2014, our total assets were $771.8 million and our total loans were $648.1 million or 84.0% of total assets. At December 31, 2013, our total assets were $757.8 million and our total loans were $569.1 million or 75.1% of total assets. At December 31, 2012, our total assets were $755.2 million and its total loans were $613.5 million or 81.2% of total assets. The increase in total loans from December 31, 2014 to September 30, 2015, was $55.9 million (8.6%) and from December 31, 2013 to December 31, 2014, was $79.0 million (13.9%), and from December 31, 2012 to December 31, 2013, total loans decreased $44.4 million (7.2%).

Lending activities are conducted pursuant to a written policy adopted by the Bank. Each loan officer has defined lending authority beyond which loans, depending upon their type and size, must be reviewed and approved by the management loan committee or the board loan committee, depending on the size and risk classification of the loan.

At September 30, 2015 and December 31 of the previous five years the composition of our loan portfolio was as follows:

 

(dollars in
thousands)
  At
September 30,
    At December 31,  
  2015     2014     2013     2012     2011     2010  
  Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent  

Agricultural loans

  $ 469,166        66.6   $ 415,164        64.1   $ 375,240        65.9   $ 381,893        62.3   $ 317,486        55.2   $ 308,427        52.3

Commercial real estate loans

    147,638        21.0        137,517        21.2        102,645        18.0        123,499        20.1        134,791        23.4        155,198        26.3   

Commercial loans

    52,597        7.5        53,745        8.3        51,008        9.0        57,928        9.4        55,560        9.7        47,815        8.1   

Residential real estate loans

    34,326        4.9        40,885        6.3        39,901        7.0        49,050        8.0        66,252        11.5        76,021        12.9   

Installment and consumer other

    302        0.0        811        0.1        344        0.1        1,120        0.2        973        0.2        2,160        0.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

    704,029        100.0   $ 648,122        100.0   $ 569,138        100.0   $ 613,490        100.0   $ 575,062        100.0   $ 589,621        100.0
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Less: Allowance for credit losses

    (9,833       (10,603       (10,495       (12,521       (9,090       (13,245  
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Net loans

  $ 694,196        $ 637,519        $ 558,643        $ 600,969        $ 565,972        $ 576,376     
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Loan Portfolio Concentrations

Our agricultural loan portfolio, while heavily dependent on the dairy industry, is the beneficiary of a number of mitigating factors to this concentration risk. First, our farm customers are diversified geographically throughout the state of Wisconsin, which we believe helps mitigate the weather-related risk impacting feed availability and cost. Secondly, the USDA provides government support for a number of insurance type products that dairy producers can purchase, which we believe substantially mitigate weather and pricing risks for crops and pricing risks for milk. The availability of these types of products in addition to the ability to use the futures markets to hedge both milk price and feed cost brings some additional stability and predictability to the cash flow of farmers.

 

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We originate and maintain large credit relationships with a number of customers in the ordinary course of our business. As of September 30, 2015, we have established a formal, internal house lending limit on loans to one borrower of $7 million, which is significantly lower than our legal lending limit of approximately $20.9 million as of September 30, 2015. Exceptions to this limit may be made in the case of particularly strong credits. As of September 30, 2015, only seven relationships exceeded our internal house lending limit.

Loan Underwriting

Management seeks to maintain a high quality of loans through sound underwriting and lending practices. We believe the most relevant measurement for monitoring overall credit quality of our loan portfolio is the ratio of non-performing assets to total assets as nonperforming loans may ultimately progress to other real estate owned, or OREO. Accordingly, the initial underwriting of loans is vital. Our non-performing assets to total assets as of December 31, 2014, December 31, 2013 and 2012 were 2.42%, 2.92% and 2.88%, respectively. We have customized our loan underwriting to reflect the risks that are specific to each product type as described below.

Agricultural Lending. Our agricultural banking team consists of bankers, most of whom grew up on farms in Wisconsin, which provides a solid understanding of the nuances of the industry. As of the date of this filing, we have 11 agricultural banking officers driving the relationships with our customers, as well as three crop insurance sales representatives. Our philosophy is to bring the Bank to the customer, and most contacts are made on the farm. The deep relationships our team has with our agricultural customers, and the value each team member provides given his or her strong agricultural roots creates a barrier to entry for our competitors. We believe this regular personal contact with our customers provides a high level of service and allows our bankers to monitor our credits more effectively.

Our relationships with our agricultural customers typically involve their entire primary banking needs. We lend money to our customers for short term needs, such as planting crops or buying feed, as needed. We also provide intermediate-term loans to fund cattle or equipment needs, as well as longer-term real estate loans to provide funds to purchase real estate or improve existing real estate. Collateral for these loans will typically involve cross collateralization of all of a farm’s assets, and the Bank will be in a primary lien position. We apply a consistent credit philosophy when underwriting agricultural loans, which focuses on repayment of credit facilities from current and historical cash flow analysis, both cash and accrual. Other factors considered in granting credit are management capability, collateral quality and adequacy, and balance sheet leverage.

Commercial Lending. Our commercial and industrial loans, which we refer to as C&I loans, are offered to established businesses by business bankers who have extensive experience in making commercial loans. Our commercial loan portfolio is comprised of conventional term loans, lines of credit and government guaranteed loans, primarily Small Business Administration, or SBA, loans. These loans have either adjustable or fixed rates typically with terms of five years or less, longer with SBA guarantees. C&I loans are underwritten on the basis of the borrower’s ability to make repayment for the cash flow of its business and generally are collateralized by business assets, such as accounts receivable, equipment and inventory, as well as personal guarantees of the principals. The availability of funds for the repayment of commercial loans is substantially dependent on the success of the business itself, which is subject to adverse economic conditions. Commercial loans often involve larger loan balances to single borrowers or a related group of borrowers, resulting in a more concentrated loan portfolio.

Commercial real estate mortgage loans, which we refer to as CRE loans, in our portfolio consist of fixed and adjustable interest rate loans that were originated at prevailing market interest rates. Our policy has been to originate CRE loans predominantly in our primary market area. CRE loans consist primarily of multi-family investment properties and investment retail, office, mini-storage and warehouse loans. These loans are generally underwritten to a maximum loan-to-value of 75% of the lower of appraised value or purchase price of the property securing the loan. In making CRE loans, we primarily consider the net operating income generated by

 

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the real estate to support the debt service, the financial resources and income level and managerial expertise of the borrower, the marketability of the collateral and our lending experience with the borrower. CRE loans entail significant additional risks compared to residential mortgage loans. The collateral underlying CRE loans may depreciate over time, cannot be appraised with as much precision as residential real estate, and may fluctuate in value based on the success of the tenants.

Consumer Lending. While not a primary focus of ours, we do provide consumer and personal loans on a collateralized and non-collateralized basis. These loans are most often collateralized by primary residences, secondary residences, automobiles and recreational vehicles. Consumer loans are priced at prevailing market rates and are made to the individuals responsible for making the scheduled payments. Consumer and personal loans generally have a term of five years or less, with amortizations that match the useful life of the asset(s) being financed. Consumer loans represent less than 1.0% of our overall loan portfolio.

Concentrations. Loan concentrations are defined as amounts loaned to multiple borrowers engaged in similar activities that could cause them to be similarly impacted by economic or other conditions. We, on a routine basis, monitor these concentrations in order to consider adjustments in our lending practices to reflect economic conditions, loan to deposit ratios, and industry trends. As of September 30, 2015, and December 31, 2014, 2013 and 2012, except for agricultural real estate and agricultural production loans, which together comprised approximately 67%, 64%, 66% and 62%, respectively, of our loan portfolio on each of those dates, no concentration of loans within any portfolio category to any group of borrowers engaged in similar activities or in a similar business exceeded 25% of total loans.

The loan committee of the board of directors of the Bank concentrates its efforts and resources, and that of its senior management and lending officers, on loan review and underwriting procedures. Internal controls include ongoing reviews of loans made to monitor documentation and the existence and valuations of collateral. In addition, management of the Bank has established a review process with the objective of identifying, evaluating, and initiating necessary corrective action for marginal loans. The goal of the loan review process is to address classified and non-performing loans as early as possible.

For additional information concerning our risk management, see “Information About County—County Management’s Discussion and Analysis of Financial Condition and Results of Operations-December 31, 2014—Risk Management.”

Loan Servicing

As part of our growth and risk management strategy, we have actively developed a loan participation and loan sales network. Our ability to sell loan participations and whole loans benefits us by freeing up capital and funding to lend to new customers but, because we continue to service these loans, we are able to maintain a relationship with the customer. Additionally, we typically earn a gain on the sale of loans sold and receive a servicing fee that generally exceeds the cost of administering the loan and maintaining the customer relationship.

Loans serviced for others are not included in the accompanying consolidated balance sheets. The risks inherent in servicing assets relate primarily to changes in prepayments that result from shifts in interest rates. The unpaid principal balances of mortgage and other loans serviced for others were approximately $468.2 million and $429.3 million at September 30, 2015 and December 31, 2014, respectively. The fair value of these rights were approximately $10.2 million and $10.0 million at September 30, 2015 and December 31, 2014, respectively. The fair value of servicing rights was determined using an assumed discount rate of 10 percent and prepayment speeds primarily ranging from 4 percent to 9 percent, depending upon the stratification of the specific right, and nominal credit losses.

 

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The following summarizes servicing rights capitalized and amortized, along with the aggregate activity in related valuation allowances (dollars in thousands):

 

     September 30,
2015
     December 31,
2014
 

Loan servicing rights:

     

Balance, beginning of period

   $ 7,746       $ 7,529   

Additions

     2,444         3,414   

Disposals

     (1,039      (1,243

Amortization

     (1,430      (1,954
  

 

 

    

 

 

 

Balance, end of period

   $ 7,721       $ 7,746   
  

 

 

    

 

 

 

Classification of Assets

Interest on loans accrues and is credited to income based upon the principal balance outstanding. It is management’s policy to discontinue the accrual of interest income and classify a loan as nonaccrual when principal or interest is past due 90 days or more unless, in the opinion of management, the credit is well secured and in the process of collection. Loans may also be placed on nonaccrual status when, in management’s opinion, repayment is not likely to be paid in accordance with the terms of the obligation. Consumer installment loans are generally charged-off after 90 days of delinquency unless adequately collateralized and in the process of collection. Loans are not returned to accrual status until principal and interest payments are brought current and future payments appear reasonably certain. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is charged against interest income.

Real estate acquired by us as a result of foreclosure or by deed in lieu of foreclosure is classified as OREO. OREO properties are recorded on the balance sheet at the lower of cost or fair value less estimated selling costs, and the estimated loss, if any, is charged to the allowance for loan losses at the time it is transferred to OREO. Further write-downs in OREO are recorded at the time management believes additional deterioration in value has occurred and are charged to non-interest expense. At December 31, 2014 and December 31, 2013 and 2012, we have OREO of $7.1 million, $16.1 and $10.5 million, respectively.

Loans on nonaccrual status and OREO and certain other related information was as follows:

 

     As of December 31,
2014
    As of December 31,
2013
    As of December 31,
2012
 
     Amount      Percent
of
Loans
    Amount      Percent
of
Loans
    Amount      Percent
of
Loans
 
     (dollars in thousands)  

Total loans on nonaccrual status

   $ 11,555         1.78   $ 6,056         1.06   $ 11,212         1.83

Total loans 90+ days past due still accruing

     —             —           —          —           —     

Other real estate owned

     7,137         1.10        16,083         2.83        10,517         1.71   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total non-performing assets

   $ 18,692         2.88   $ 22,139         3.89   $ 21,729         3.54
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Loans past-due 30-89 days

   $ 412         0.06   $ 312         0.05   $ 1,917         0.31

As a % of total assets

               

Total non-performing loans

        1.50           0.80           1.48   

Total non-performing assets

        2.42           2.92           2.88   

Allowance for loan losses as a % of

               

Total loans

        1.64           1.84           2.04   

Non-performing loans

        91.76           173.30           111.67   

At December 31, 2014, loans 30 to 89 days delinquent comprised 7 customer relationships, which totaled $412 thousand. Management continually evaluates the collectability of its non-performing loans and the

 

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adequacy of its allowance for loan losses to absorb the identified and unidentified losses inherent in the loan portfolio. As a result of these evaluations, loans considered uncollectible are charged-off and adjustments to the reserve considered necessary are provided through a provision charged against earnings. These evaluations consider the current economic environment, the real estate market and its impact on underlying collateral values, trends in the level of non-performing and past-due loans, and changes in the size and composition of the loan portfolio.

Provision for loan losses for the years ended December 31, 2014, 2013, and 2012 totaled $589 thousand, $4.2 million and $4.2 million, respectively. For such periods, net loans charged-off totaled $481 thousand, $6.2 million and $769 thousand, respectively. At December 31, 2014 and December 31, 2013 and 2012, we had non-performing loans (i.e., nonaccrual loans and loans 90 days or more past due) of $11.6 million, $6.1 million and $11.2 million, respectively. Considering the nature of our loan portfolio, management believes that the allowance for loan losses at December 31, 2014 was adequate.

During the years ended December 31, 2014, 2013 and 2012, the activity in our allowance for loan losses was as follows:

 

     Year Ended December 31,  
     2014      2013      2012  
     (dollars in thousands)  

Allowance for loan losses:

        

Beginning of period

   $ 10,495       $ 12,521       $ 9,090   

Actual charge-offs

     (647      (6,438      (1,520

Less: recoveries

     166         212         751   
  

 

 

    

 

 

    

 

 

 

Net loan charge-offs

     (481      (6,226      (769

Provision for loan losses

     589         4,200         4,200   
  

 

 

    

 

 

    

 

 

 

End of period

   $ 10,603       $ 10,495       $ 12,521   
  

 

 

    

 

 

    

 

 

 

Deposit Activities

Deposits are the major source of our funds for lending and other investment purposes. Deposits are attracted principally from within our primary market area through the offering of a broad variety of deposit instruments including checking accounts, money market accounts, regular savings accounts, term certificate accounts (including “jumbo” certificates in denominations of $100,000 or more) and retirement savings plans. As of December 31, 2014, 2013, and 2012, the distribution by type of deposit accounts was as follows:

 

     As of December 31,  
     2014     2013     2012  
     Amount      % of
Deposits
    Amount      % of
Deposits
    Amount      % of
Deposits
 
     (dollars in thousands)  

Time deposits

   $ 296,921         49.0   $ 321,257         52.1   $ 313,168         51.1

Brokered deposits

     125,396         20.7        150,661         24.4        167,887         27.4   

Money market accounts

     69,742         11.5        52,961         8.6        53,604         8.7   

Demand, noninterest-bearing

     81,534         13.5        57,231         9.3        54,276         8.9   

NOW accounts and interest checking

     27,312         4.5        28,688         4.7        18,853         3.1   

Savings

     4,564         0.8        5,510         0.9        5,031         0.8   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total deposits

   $ 605,469         100.0   $ 616,308         100.0   $ 612,819         100.0

Our deposits decreased during 2014, from $616.3 million at December 31, 2013 to $605.5 million at December 31, 2014, a decrease of $10.8 million or 1.8%. This decrease in total deposits from December 31, 2013 to December 31, 2014 resulted from decreases in brokered and time deposits of $25.3 million and $24.3 million, respectively, offset by increases in other deposits of $38.8 million. Our deposits increased to $616.3 million at

 

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December 31, 2013, from $612.8 million at December 31, 2012, an increase of $3.5 million or 0.6%, reflecting an increase in time deposits of $8.1 million, a decrease in brokered deposits of $17.2 million, and an increase in other deposits of $12.6 million, respectively.

Maturity terms, service fees and withdrawal penalties are established by us on a periodic basis. The determination of rates and terms is predicated on funds acquisition and liquidity requirements, rates paid by competitors, growth goals and federal regulations.

Brokered and Other Deposits

We use various funding sources including: (i) core deposits consisting of traditional bank deposit products, such as demand deposits, money market accounts and certificates of deposit, and (ii) wholesale funds consisting of brokered deposits, national CDs and FHLB advances. Wholesale funding is used to supplement normal deposit accumulation by us and to assist in asset liability management. We use brokered deposits to obtain non-putable deposits (except for death and incompetence) with maturities and options that assist management of various balance sheet interest rate risks. These deposits may have a higher or lower interest rate than deposits obtained locally. As noted above, brokered deposit balances were $125.4 million, $150.7 million and $167.9 million at December 31, 2014, December 31, 2013 and December 31, 2012, respectively.

FDIC regulations limit the ability of certain insured depository institutions to accept, renew, or roll over brokered deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in such depository institutions’ normal market area. Under these regulations, “well capitalized” depository institutions may accept, renew, or roll over deposits at such rates without restriction, “adequately capitalized” depository institutions may accept, renew or roll over deposits at such rates with a waiver from the FDIC (subject to certain restrictions on payments of rates), and “undercapitalized” depository institutions may not accept, renew or roll over deposits at such rates. The regulations contemplate that the definitions of “well capitalized,” “adequately capitalized” and “undercapitalized” will be the same as the definitions adopted by the agencies to implement the prompt corrective action provisions of applicable law. For additional information, see the section in this proxy statement/prospectus entitled “Information About County—Information About Couny’s Business—Supervision and Regulation—Supervision and Regulation of the Company—Imposition of Liability for Undercapitalized Subsidiaries.” As of December 31, 2014 and December 31, 2013, the Bank met the definition of a “well capitalized” depository institution.

Time deposits of $100,000 and over, public fund deposits and other large deposit accounts tend to be short-term in nature and more sensitive to changes in interest rates than other types of deposits and, therefore, may be a less stable source of funds. In the event that existing short-term deposits are not renewed, the resulting loss of the deposited funds could adversely affect our liquidity. In a rising interest rate market, such short-term deposits may prove to be a costly source of funds because their short-term nature facilitates renewal at increasingly higher interest rates, which may adversely affect our earnings. However, the converse is true in a falling interest-rate market where such short-term deposits are more favorable to us.

The following table sets forth the maturity of time deposits, including brokered time deposits as of December 31, 2014, 2013 and 2012.

 

     As of December 31,  
     2014      2013      2012  
     (dollars in thousands)  

3 months or less

   $ 66,722       $ 55,896       $ 72,358   

Over 3 through 12 months

     106,352         98,953         127,458   

Over 1 year through 3 years

     167,409         181,522         159,749   

Over 3 years

     43,156         96,333         92,468   
  

 

 

    

 

 

    

 

 

 

Total

   $ 383,639       $ 432,704       $ 452,033   
  

 

 

    

 

 

    

 

 

 

 

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Competition

We encounter strong competition both in making loans and in attracting deposits. The deregulation of the banking industry and the widespread enactment of state laws that permit multi-bank holding companies as well as an increasing level of interstate banking have created a highly competitive environment for commercial banking. In one or more aspects of our business, we compete with other commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking companies and other financial intermediaries. Most of these competitors, some of which are affiliated with bank holding companies, have substantially greater resources and lending limits, and may offer certain services that we do not currently provide.

In addition, many of our non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks. Recent federal and state legislation has heightened the competitive environment in which financial institutions must conduct their business, and the potential for competition among financial institutions of all types has increased significantly. There is no assurance that increased competition from other financial institutions will not have an adverse effect on our operations.

To compete, we rely upon specialized services, responsive handling of customer needs, and personal contacts by our officers, directors, and staff. Large multi-branch banking competitors tend to compete primarily by rate and the number and locations of branches while smaller, independent financial institutions tend to compete primarily by rate and personal service.

Employees

At December 1, 2015, we had 95 full-time employees and 15 part-time employees. Our employees are not represented by a collective bargaining unit. We consider our relations with our employees to be good.

Supervision and Regulation

General

Financial institutions, their holding companies and their affiliates are extensively regulated under federal and state law. As a result, our growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory authorities, including the WDFI Banking Division, the Federal Reserve, and the FDIC. Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities, accounting rules developed by the Financial Accounting Standards Board and securities laws administered by the SEC and state securities authorities have an impact on our business. The effect of these statutes, regulations, regulatory policies and accounting rules are significant to our operations and results, and the nature and extent of future legislative, regulatory or other changes affecting financial institutions are impossible to predict with any certainty.

The comprehensive system of bank supervision, regulation and enforcement referred to above is intended primarily for the protection of the FDIC-insured deposits and depositors of banks, rather than shareholders. The federal and state banking laws, and the regulations of the bank regulatory authorities issued under them, affect, among other things, the scope of business, the kinds and amounts of investments banks may make, reserve requirements, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire, dealings with insiders and affiliates and the payment of dividends. In addition, we are subject to regular examination by our regulatory authorities, which results in examination reports and ratings (which are not publicly available) that can impact the conduct and growth of business. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors. The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations

 

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of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies.

The following is a description of the material elements of the supervisory and regulatory framework applicable to us and our subsidiaries. Applicable law, regulations or regulatory policies are subject to change, and any such changes may have a material effect on our business.

The Dodd-Frank Wall Street Reform and Consumer Protection Act

In July 2010, President Obama signed into law the Dodd-Frank Act. The Dodd-Frank Act has had and will have a broad impact on the financial services industry, imposing significant regulatory and compliance changes, including the designation of certain financial companies as systemically significant, the imposition of increased risk-based and leverage capital and liquidity requirements, and numerous other provisions designed to improve supervision and oversight of, and strengthen safety and soundness within, the financial services sector. Additionally, the Dodd-Frank Act establishes a new framework of authority to conduct systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC.

The following items provide a brief description of certain provisions of the Dodd-Frank Act that are or are likely to apply to us and our business:

Payment of Interest on Demand Deposits Permitted. The Dodd-Frank Act repealed the prohibition on banks and other financial institutions from paying interest on demand deposits.

Consumer Financial Protection Bureau. The Dodd-Frank Act created the Consumer Financial Protection Bureau, which we refer to as the Bureau, within the Federal Reserve System. The Bureau is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The Bureau has rulemaking authority over many of the statutes governing products and services offered to bank and thrift consumers. For depository institutions with assets of $10 billion or more, the Bureau has exclusive rule making and examination authority with respect to the federal consumer financial laws, and primary enforcement authority with respect to such laws. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are stricter than those regulations promulgated by the Bureau. This new federal and state regulatory framework may result in significant new regulatory requirements applicable to us in respect of consumer financial products and services, with potentially significant increases in compliance costs and litigation risks.

Mortgage Loan Origination and Risk Retention. The Dodd-Frank Act contains additional regulatory requirements that may affect our operations and result in increased compliance costs. For example, the Dodd-Frank Act imposes new standards for mortgage loan originations on all lenders, including banks, in an effort to require steps to verify a borrower’s ability to repay. In January 2013, the Bureau adopted rules, effective January 2014, requiring creditors to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling. In addition, the Dodd-Frank Act generally requires lenders or securitizers to retain a 5% economic interest in the credit risk relating to loans the lender sells or mortgage and other asset-backed securities that the securitizer issues.

Interstate Branching. The Dodd-Frank Act, subject to a state’s restrictions on intra-state branching, permits interstate branching. Therefore, a bank may enter a new state by acquiring a branch of an existing institution or by establishing a new branch office. As a result, there will be no need for the entering bank to acquire or merge with an existing institution in the target state. This ability to establish a de novo branch across state lines will have the effect of increasing competition within a community bank’s existing markets and may create downward pressure on the franchise value for existing community banks.

 

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Imposition of Restrictions on Certain Activities. The Dodd-Frank Act requires new regulations for the over-the-counter derivatives market, including requirements for clearing, exchange trading, capital, margin, and reporting. Additionally, the Dodd-Frank Act requires that certain swaps and derivatives activities be “pushed out” of insured depository institutions and conducted in non-bank affiliates. The Dodd-Frank Act also significantly restricts the ability of a member of a depository institution holding company group to invest in or sponsor “covered funds” (as defined in the Volcker Rule), which may restrict our ability to hold certain securities, and broadly restricts such entities from engaging in “proprietary trading,” subject to limited exemptions. These restrictions may affect our ability to manage certain risks in our business.

Expanded FDIC Resolution Authority. While insured depository institutions have long been subject to the FDIC’s resolution framework, the Dodd-Frank Act creates a new mechanism for the FDIC to conduct the orderly liquidation of certain “covered financial companies,” including bank holding companies and systemically significant non-bank financial companies. Upon certain findings being made, the FDIC may be appointed receiver for a covered financial company, and would be tasked to conduct an orderly liquidation of the entity. The FDIC liquidation process is generally modeled on the existing Federal Deposit Insurance Act, bank resolution regulations, and generally gives the FDIC more discretion than in the traditional bankruptcy context.

Deposit Insurance. The Dodd-Frank Act makes permanent the general $250,000 deposit insurance limit for insured deposits. The Dodd-Frank Act also changes the assessment base for federal deposit insurance premiums from the amount of insured deposits to average consolidated total assets less average tangible equity, eliminates the ceiling on the size of the FDIC’s Deposit Insurance Fund, or the DIF, and increases the floor applicable to the size of the DIF, which may require an increase in the level of assessments for institutions such as the Bank.

Transactions with Affiliates and Insiders. The Dodd-Frank Act generally enhances the restrictions on transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered credit transactions must be satisfied.

Enhanced Lending Limits. The Dodd-Frank Act strengthens the existing limits on a depository institution’s credit exposure to one borrower. The Dodd-Frank Act expands the scope of these restrictions to include credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions.

Corporate Governance. The Dodd-Frank Act addresses many investor protections, corporate governance and executive compensation matters that will affect most U.S. publicly traded companies, including the Company. The Dodd-Frank Act (1) grants shareholders of U.S. publicly traded companies an advisory vote on executive compensation (although, as an emerging growth company, we are not required to seek such advisory votes); (2) enhances independence requirements for compensation committee members; (3) requires companies listed on national securities exchanges to adopt incentive-based compensation clawback policies for executive officers; and (4) provides the SEC with authority to adopt proxy access rules that would allow shareholders of publicly traded companies to nominate candidates for election as a director and have those nominees included in a company’s proxy materials.

Limits on Debit Card Interchange Fees. Under the Dodd-Frank Act, the Federal Reserve has adopted rules concerning debit card transaction fees and network exclusivity arrangements for debit card issuers that, together with their affiliates, have more than $10 billion in total consolidated assets. Although community banks are exempt from the cap on interchange fees, the cap on the fees of large banks will create market forces that force all fees downward. Therefore, community banks should expect lower interchange revenues in the future.

Although a significant number of the rules and regulations mandated by the Dodd-Frank Act have been finalized, many of the new requirements called for have yet to be implemented and will likely be subject to implementing regulations over the course of several years. Given the uncertainty surrounding the manner in

 

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which many of the Dodd-Frank Act’s provisions will be implemented by the various regulatory agencies, the full extent of the impact on our operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent risk-based or leverage capital and liquidity requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new requirements may negatively impact our results of operations and financial condition. While we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, these changes could be materially adverse to our investors.

We and the Bank are subject to various regulatory capital requirements administered by the Federal Reserve, with respect to us, and the FDIC, with respect to the Bank. Failure to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material adverse effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (described below), we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies. Our capital amounts and classification are also subject to judgments by the regulators regarding qualitative components, risk weightings and other factors.

The Basel Committee on Banking Supervision has drafted frameworks for the regulation of capital and liquidity of internationally active banking organizations, which we refer to as Basel III. In July 2013, the Federal Reserve and the FDIC issued final rules establishing a new comprehensive capital framework for U.S. banking organizations that would implement the Basel III capital framework and certain provisions of the Dodd-Frank Act, which we refer to as the Basel III Capital Rules. The Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, including us and the Bank, compared to the current U.S. risk-based capital rules.

The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The Basel III Capital Rules also address risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing risk-weighting approach, which was derived from the Basel I capital accords of the Basel Committee, with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committee’s 2004 Basel II capital accords. The Basel III Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking rules. The Basel III Capital Rules became effective for us and the Bank on January 1, 2015, subject to a phase-in period.

The Basel III Capital Rules, among other things: (i) revise minimum capital requirements and adjust prompt corrective action thresholds; (ii) revise the components of regulatory capital and create a new capital measure called “Common Equity Tier 1,” which must constitute at least 4.5% of risk-weighted assets; (iii) specify that Tier 1 capital consist only of Common Equity Tier 1 and certain “Additional Tier 1 Capital” instruments meeting specified requirements; (iv) increase the minimum Tier 1 capital ratio requirement from 4% to 6%; (v) retain the existing risk-based capital treatment for 1-4 family residential mortgage exposures; (vi) permit most banking organizations, including us, to retain, through a one-time permanent election, the existing capital treatment for accumulated other comprehensive income; (vii) implement a new capital conservation buffer of Common Equity Tier 1 capital equal to 2.5% of risk-weighted assets, which will be in addition to the 4.5% Common Equity Tier 1 ratio and be phased in over a three-year period beginning January 1, 2016, which buffer is generally required in order for an institution to make capital distributions and pay executive bonuses; (viii) increase capital requirements for past-due loans, high volatility commercial real estate exposures and certain short-term loan commitments; (ix) require the deduction of mortgage servicing assets and deferred tax assets that exceed 10% of Common Equity Tier 1 in each category and 15% of Common Equity Tier 1 in the aggregate; and (x) remove references to credit ratings consistent with the Dodd-Frank Act and establish due diligence requirements for securitization exposures.

 

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Compliance with the Basel III Capital Rules is required for most banking organizations beginning January 1, 2015, including us and the Bank, subject to a transition period for several aspects of the final rules, including the new minimum capital ratio requirements, the capital conservation buffer and the regulatory capital adjustments and deductions. Requirements to maintain higher levels of capital could adversely impact our return on equity. We believe that we will continue to exceed all estimated well-capitalized regulatory requirements under these new rules on a fully phased-in basis. For further detail on capital and capital ratios, see the discussion under the section of this proxy statement/prospectus entitled “Information About County—County Management’s Discussion and Analysis of Financial Condition and Results of Operations-December 31, 2014—Liquidity Management and Capital Resources,” “Information About County—County Management’s Discussion and Analysis of Financial Condition and Results of Operations-September 30, 2015—Liquidity Management and Capital Resources,” and Note 16, “Regulatory Matters,” of the notes to our consolidated financial statements as of and for the year ended December 31, 2014.

Supervision and Regulation of the Company

General. We are a legal entity separate and distinct from the Bank. As a registered bank holding company, we are regulated under the BHCA, and are subject to inspection, examination and supervision by the Federal Reserve. The BHCA and other federal laws subject bank holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of law and regulations. The Federal Reserve’s jurisdiction also extends to any company that we directly or indirectly control, such as any non-bank subsidiaries and other companies in which we own a controlling investment.

Investments and Activities. Under the BHCA, a bank holding company must obtain Federal Reserve approval before: (1) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after the acquisition, it would own or control more than 5% of the shares of the other bank or bank holding company (unless it already owns or controls the majority of such shares); (2) acquiring all or substantially all of the assets of another bank; or (3) merging or consolidating with another bank holding company. Subject to certain conditions (including certain deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States without regard to whether the acquisition is prohibited by the law of the state in which the target bank is located. In approving interstate acquisitions, however, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) and state laws which require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company.

The BHCA also generally prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve to be “so closely related to banking … as to be a proper incident thereto.” Under current regulations of the Federal Reserve, bank holding companies and their subsidiary banks are permitted to engage in a variety of banking-related businesses, including the operation of a thrift, consumer finance, equipment leasing, the operation of a computer service bureau (including software development), and mortgage banking and brokerage. The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies.

In 1999, the Gramm-Leach-Bliley Financial Modernization Act of 1999, or the GLBA, was signed into law. Under the GLBA, bank holding companies that meet certain standards and elect to become “financial holding

 

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companies” are permitted to engage in a wider range of activities than those permitted to bank holding companies, including certain securities and insurance activities. The Company has not elected to be treated as a financial holding company.

The GLBA changed federal laws to facilitate affiliation between banks and entities engaged in securities and insurance activities. The law also established a system of functional regulation under which banking activities, securities activities, and insurance activities conducted by financial holding companies and their subsidiaries and affiliates will be separately regulated by banking, securities, and insurance regulators, respectively.

Control Acquisitions. Federal and state laws, including the BHCA and the Change in Bank Control Act, impose additional prior notice or approval requirements and ongoing regulatory requirements on any investor that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution or bank holding company. “Control” of a depository institution is a facts and circumstances analysis, but generally an investor is deemed to control a depository institution or other company if the investor owns or controls 25% or more of any class of voting securities. Ownership or control of 10% or more of any class of voting securities, where either the depository institution or company is a public company or no other person will own or control a greater percentage of that class of voting securities after the acquisition, is also presumed to result in the investor controlling the depository institution or other company, although this is subject to rebuttal. If an investor’s ownership of our voting securities were to exceed certain thresholds, the investor could be deemed to “control” us for regulatory purposes, which could subject such investor to regulatory filings or other regulatory consequences.

Sound Banking Practices. Bank holding companies and their non-banking subsidiaries are prohibited from engaging in activities that represent unsafe and unsound banking practices or that constitute violations of law or regulations. For example, the Federal Reserve’s Regulation Y requires a bank holding company to give the Federal Reserve prior notice of any redemption or repurchase of its own equity securities if the consideration to be paid, together with the consideration paid for any repurchases in the preceding year, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. As another example, a holding company could not impair its subsidiary bank’s soundness by causing it to make funds available to non-banking subsidiaries or their customers if the Federal Reserve believed it not prudent to do so. The Federal Reserve can assess civil money penalties for activities conducted on a knowing or reckless basis, if the activities caused a substantial loss to a depository institution. The penalties can be as high as $1,000,000 for each day the activity continues.

Payment of Dividends; Source of Strength. Our ability to pay dividends to our shareholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. As a Wisconsin corporation, we are subject to the limitations of the WBCL, which prohibit us from paying dividends if such payment would: (1) render us unable to pay our debts as they become due in the usual course of business, or (2) result in our assets being less than the sum of our total liabilities plus the amount needed to satisfy the preferential rights upon dissolution of any shareholders with preferential rights superior to those shareholders receiving the dividend. Additionally, policies of the Federal Reserve caution that a bank holding company should not pay cash dividends, without prior consultation with the Federal Reserve, when (i) the bank holding company’s net income available to shareholders over the last four quarters (net of dividends paid) has not been sufficient to fully fund the dividends, (ii) the prospective rate of earnings retention is not consistent with the bank holding company’s capital needs and overall current and prospective financial condition, or (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.

As discussed above, the Federal Reserve possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices, or violations of statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. The Company is not currently subject to any such restrictions on the payment of dividends.

 

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After the enactment of the Dodd-Frank Act (which codified long-standing Federal Reserve policy), a bank holding company is required to serve as a source of financial strength to its subsidiary banks. This means that we are expected to use available resources to provide adequate resources to the Bank, including during periods of financial stress or adversity, and to maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting the Bank where necessary. In addition, any capital loans that we make to the Bank are subordinate in right of payment to deposits and to certain other indebtedness of the Bank. In the event of our bankruptcy, any commitment by us to a federal bank regulatory agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Annual Reporting; Examinations. Bank holding companies are required to file an annual report with the Federal Reserve, and such additional information as the Federal Reserve may require. The Federal Reserve may examine a bank holding company and any of its subsidiaries, and charge the company for the cost of such examination.

Imposition of Liability for Undercapitalized Subsidiaries. The Federal Deposit Insurance Corporation Improvement Act of 1991, or the FDICIA, requires bank regulators to take “prompt corrective action” to resolve problems associated with insured depository institutions. In the event a depository institution becomes “undercapitalized,” it must submit a capital restoration plan. The capital restoration plan will not be accepted by the regulators unless each company “having control of” the undercapitalized depository institution “guarantees” the subsidiary’s compliance with the capital restoration plan until it becomes “adequately capitalized.” For purposes of this statute, the Company has control of the Bank.

Under the FDICIA, the aggregate liability of all companies controlling a particular institution is limited to the lesser of five percent of the depository institution’s total assets at the time it became undercapitalized or the amount necessary to bring the institution in compliance with applicable capital standards. The FDICIA grants greater powers to bank regulators in situations where an institution becomes “significantly” or “critically” undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior Federal Reserve approval of proposed distributions, or might be required to consent to a merger or to divest the troubled institution or other affiliates. Because the Bank currently qualifies as “well capitalized”, we are not subject to the capital plan guarantee requirement of the FDICIA.

State Law Restrictions. As a Wisconsin corporation, we are subject to certain limitations and restrictions under the WBCL. For example, state law restrictions in Wisconsin include limitations and restrictions relating to indemnification of directors, distributions to shareholders, transactions involving directors, officers or interested shareholders, maintenance of books, records, minutes and observance of certain corporate formalities.

Supervision and Regulation of the Bank

General. As a Wisconsin state-chartered bank that is not a member of the Federal Reserve system, the Bank is subject to supervision, periodic examination and regulation by the FDIC and the WDFI. The regulations of the FDIC and the WDFI affect virtually all of the Bank’s activities, including the minimum level of capital, the ability to pay dividends, mergers and acquisitions, borrowing and the ability to expand through new branches or acquisitions and various other matters.

Deposit Insurance. Customer deposits with the Bank are insured up to applicable limits by the DIF, which is administered by the FDIC. The DIF is funded with insurance premiums paid by insured depository institutions. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank’s capital level and supervisory rating. Risk Category I is the lowest risk category, while Risk Category IV is the highest risk category. The specific Risk Category to which banks are assigned is considered by the FDIC to be confidential nonpublic information and may not be disclosed by banks.

 

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In 2010, the Dodd-Frank Act revised the statutory authorities governing the FDIC’s management of the DIF. Among other things, the Dodd-Frank Act (1) raised the minimum fund reserve ratio from 1.15% to 1.35%, (2) required the fund reserve ratio to reach 1.35% by September 30, 2020, (3) eliminated the requirement that the FDIC provide dividends from the DIF when the reserve ratio is between 1.35% and 1.5%, (4) removed the 1.5% cap on the reserve ratio, (5) granted the FDIC sole discretion in determining whether to suspend or limit the declaration or payment of dividends, and (6) changed the assessment base for banks from insured deposits to the average consolidated total assets of the bank minus the average tangible equity of the bank during the assessment period. In December 2010, the FDIC adopted a new restoration plan, pursuant to which, among other things, the FDIC (i) eliminated the uniform three basis point increase in initial assessment rates that were scheduled to take effect on January 1, 2011, (ii) pursued further rulemaking in 2011 regarding the method used to offset the effect on banks with less than $10 billion in assets of the requirement that the reserve ratio reach 1.35% and (iii) at least semiannually, will update its projections for the DIF and increase or decrease assessment rates, if needed. In February 2011, the FDIC adopted final rules to implement the dividend provisions of the Dodd-Frank Act, changed the assessment base and set new assessment rates. In addition, as part of its final rules, the FDIC made certain assessment rate adjustments by (a) altering the unsecured debt adjustment by adding an adjustment for long-term debt issued by another insured depository institution and (b) eliminating the secured liability adjustment, and changing the brokered deposit adjustment to conform to the change in the assessment base. The new assessment rates became effective April 1, 2011. The new initial base assessment rates range from 5 to 9 basis points for Risk Category I banks to 35 basis points for Risk Category IV banks. Risk Category II and III banks have an initial base assessment rate of 14 and 23 basis points, respectively.

The FDIC may further increase or decrease the assessment rate schedule in order to manage the DIF to prescribed statutory target levels. An increase in the Risk Category for the Bank or in the assessment rates could have an adverse effect on the Bank’s earnings. The FDIC may terminate deposit insurance if it determines the institution involved has engaged in or is engaging in unsafe or unsound banking practices, is in an unsafe or unsound condition, or has violated applicable laws, regulations or orders. In the case of a Wisconsin state-chartered bank, the termination of deposit insurance would result in the revocation of its charter. Management is not aware of any existing circumstances which would result in termination of the Bank’s deposit insurance.

In addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, or FICO, a mixed-ownership government corporation established to recapitalize a predecessor to the DIF. The current annualized assessment rate is 0.60 basis points, which is adjusted quarterly. These assessments will continue until the FICO bonds mature in 2017 through 2019.

Branching. The Bank has the authority under Wisconsin law to establish branches anywhere in the State of Wisconsin, subject to receipt of all required regulatory approvals. Federal law permits state and national banks to merge with banks in other states subject to: (1) regulatory approval; (2) federal and state deposit concentration limits; and (3) state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger. The establishment of new interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) has historically been permitted only in those states the laws of which expressly authorize such expansion. After the Dodd-Frank Act, however, we can establish branch offices outside of Wisconsin, subject to prior regulatory approval, so long as the laws of the state where the branch is to be located would permit a state bank chartered in that state to establish a branch.

Dividends. There are state and federal requirements limiting the amount of dividends which the Bank may pay. Under Wisconsin banking law, the Bank generally may not pay dividends in excess of its undivided profits. If dividends declared and paid in either of the two immediately preceding years exceeded net income for either of those two years respectively, the Bank may not declare or pay any dividend in the current year that exceeds year-to-date net income, except with the written consent of the WDFI.

 

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The payment of dividends by any financial institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. Notwithstanding the availability of funds for dividends, however, the FDIC or WDFI may prohibit the payment of any dividends by banks they regulate if the FDIC or the WDFI determines such payment would constitute an unsafe or unsound practice. The Bank is not currently subject to any prohibitions by the FDIC or WDFI on the payment of dividends.

Capital Adequacy Guidelines. The FDIC has promulgated risk-based capital guidelines similar to those established by the Federal Reserve with respect to bank holding companies. The risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure, to minimize disincentives for holding liquid assets, and to achieve greater consistency in evaluating the capital adequacy of major banks throughout the world. Under these guidelines, assets and off balance sheet items are assigned to broad risk categories each with designated weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.

Prior to January 1, 2015, the guidelines require all bank holding companies and federally regulated banks to maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier 1 Capital. Tier 1 Capital, which includes common shareholders’ equity, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock and trust preferred securities, less certain goodwill items and other intangible assets, is required to equal at least 4% of risk-weighted assets. The remainder, or Tier 2 Capital, may consist of (i) an allowance for loan losses of up to 1.25% of risk-weighted assets, (ii) excess of qualifying perpetual preferred stock, (iii) hybrid capital instruments, (iv) perpetual debt, (v) mandatory convertible securities, and (vi) subordinated debt and intermediate-term preferred stock up to 50% of Tier 1 Capital. Total capital is the sum of Tier 1 Capital and Tier 2 Capital, less reciprocal holdings of other banking organizations’ capital instruments, investments in unconsolidated subsidiaries and any other deductions as determined by the appropriate regulator.

The federal bank regulatory authorities have also adopted regulations that supplement the risk-based guidelines. These regulations generally require banks and bank holding companies to maintain a minimum level of Tier 1 Capital to total assets less goodwill of 4%, which we refer to as the Leverage Ratio. The FDIC permits a bank to maintain a minimum 3% Leverage Ratio if the bank achieves a 1 rating under the CAMELS rating system in its most recent examination, as long as the bank is not experiencing or anticipating significant growth. The CAMELS rating is a non-public system used by bank regulators to rate the strengths and weaknesses of financial institutions. The CAMELS rating comprises six categories: capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk. Banking organizations experiencing or anticipating significant growth, as well as those organizations which do not satisfy the criteria described above, will be required to maintain a minimum Leverage Ratio ranging generally from 4% to 5%.

The Federal Deposit Insurance Act, or the FDIA, requires, among other things, the federal banking agencies to take “prompt corrective action” in respect to depository institutions that do not meet minimum capital requirements. The capital-based regulatory framework consists of five categories of compliance with regulatory capital guidelines, including “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” Prior to January 1, 2015, to qualify as a “well-capitalized” institution, a bank must have a Leverage Ratio of no less than 5%, a Tier 1 Capital ratio of no less than 6% and a total risk-based capital ratio of no less than 10%, and the bank must not be under any order or directive from the appropriate regulatory agency to meet and maintain a specific capital level. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.

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unsound practice. The degree of regulatory scrutiny of a financial institution will increase, and the permissible activities of the institution will decrease, as it moves downward through the capital categories. Institutions that fall into one of the three undercapitalized categories may be required to (i) submit a capital restoration plan; (ii) raise additional capital; (iii) restrict their growth, deposit interest rates, and other activities; (iv) improve their management; (v) eliminate management fees; or (vi) divest themselves of all or a part of their operations.

Immediately upon becoming undercapitalized, a depository institution becomes subject to the provisions of Section 38 of the FDIA, which (a) restricts payment of capital distributions and management fees; (b) requires that the appropriate federal banking agency monitor the condition of the institution and its efforts to restore its capital; (c) requires submission of a capital restoration plan; (d) restricts the growth of the institution’s assets; and (e) requires prior approval of certain expansion proposals. The appropriate federal banking agency for an undercapitalized institution also may take any number of discretionary supervisory actions if the agency determines that any of these actions is necessary to resolve the problems of the institution at the least possible long-term cost to the DIF. These discretionary supervisory actions include: (i) requiring the institution to raise additional capital; (ii) restricting transactions with affiliates; (iii) requiring divestiture of the institution or sale of the institution to a willing purchaser; and (iv) any other supervisory action that the agency deems appropriate. These and additional mandatory and permissive supervisory actions may be taken with respect to significantly undercapitalized and critically undercapitalized institutions.

As of December 31, 2014, we and the Bank exceeded the guidelines contained in the applicable regulations, policies and directives pertaining to capital adequacy to be classified as “well-capitalized.”

The Basel III Capital Rules revise the current prompt corrective action requirements effective January 1, 2015 by: (i) introducing a Common Equity Tier 1 ratio requirement at each level (other than critically undercapitalized), with the required Common Equity Tier 1 ratio being 6.5% for “well-capitalized” status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category (other than critically undercapitalized), with the minimum Tier 1 capital ratio for “well-capitalized” status being 8% (compared to 6%); and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3% Leverage Ratio and still be adequately capitalized. The Basel III Capital Rules do not change the total risk based capital requirement for any prompt corrective action category.

Community Reinvestment Act. The Community Reinvestment Act of 1977, or the CRA, requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low- and moderate-income individuals and communities. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. The applicable federal regulators regularly conduct CRA examinations to assess the performance of financial institutions and assign one of four ratings to the institution’s records of meeting the credit needs of its community. During its last examination, the Bank received a rating of “Satisfactory.”

State Bank Investments and Activities. The Bank is permitted to make investments and engage in activities directly or through subsidiaries as authorized by Wisconsin law. However, under federal law and FDIC regulations, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law and FDIC regulations also prohibit FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member. These restrictions have not had, and are not currently expected to have, a material impact on the operations of the Bank.

Loans to One Borrower. Under Wisconsin law, the Bank’s total loans and extensions of credit and leases to one person is limited to 20% of the Bank’s capital (as defined under Section 221.0102 of the Wisconsin Statutes), subject to several exceptions.

 

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Examinations. The Bank is examined from time to time by its primary federal banking regulator, the FDIC, and the WDFI, and is charged the cost of such examinations. Based upon an examination, the FDIC and the WDFI may revalue the Bank’s assets and require that it establish specific reserves to compensate for the difference between the value determined by the regulator and the book value of the assets.

Federal Home Loan Bank System. The Bank is a member of the FHLB System, which consists of 12 regional FHLBs. The FHLBs provide a credit reserve and other services for their member institutions. The Bank, as a member of the FHLB-Chicago, is required to hold shares of capital stock in that FHLB.

Limitations on Transactions with Affiliates. Transactions between a bank and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act and Regulation W promulgated thereunder. An affiliate of a bank includes any company or entity which controls the bank or that is controlled by a company that controls the bank. In a holding company context, the parent holding company of a bank (such as the Company) and any companies which are controlled by such parent holding company are affiliates of the bank. Generally, Section 23A limits the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an aggregate amount equal to 10% of such bank’s capital stock and surplus, with all such transactions with all affiliates in the aggregate limited to an amount equal to 20% of such capital stock and surplus. Section 23B applies to “covered transactions” as well as certain other transactions and requires that all transactions be on terms, including credit standards, substantially the same, or at least as favorable, to the bank or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans to, the purchase of assets from, or the issuance of a guarantee to, an affiliate as well as similar transactions. Section 23B transactions also include the provision of services and the sale of assets by a bank to an affiliate.

In addition, Sections 22(g) and (h) of the Federal Reserve Act place restrictions on loans to executive officers, directors and principal shareholders, and the FDIC has adopted regulations applying similar restrictions to banks that are not members of the Federal Reserve. Under Section 22(h), loans to a director, an executive officer and a greater than 10% shareholder of a bank, and certain affiliated interests of either, may not exceed, together with all other outstanding loans to such person and affiliated interests, the bank’s loans to one borrower limit (generally equal to 15% of the bank’s unimpaired capital and surplus). Section 22(h) also requires that loans to directors, executive officers and principal shareholders be made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions to persons not covered by Section 22(h) and not involve more than the normal risk of repayment or present other unfavorable features. Section 22(h) also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a bank to all insiders cannot exceed the bank’s unimpaired capital and surplus. Section 22(g) also places additional restrictions on loans to executive officers.

Standards for Safety and Soundness. The FDIC has established safety and soundness standards applicable to banks regarding such matters as internal controls, loan documentation, credit underwriting, interest-rate risk exposure, asset growth, compensation and other benefits, and asset quality and earnings. If a bank were to fail to meet these standards, the FDIC could require it to submit a written compliance plan describing the steps the bank would take to correct the situation and the time within which such steps will be taken. The FDIC has authority to issue orders to secure adherence to the safety and soundness standards.

Financial Privacy. In accordance with the GLBA, federal bank regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. The privacy provisions of the GLBA affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.

Anti-Money Laundering. A federal law commonly known as the Patriot Act is designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and has significant implications for

 

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depository institutions, brokers, dealers and other businesses involved in the transfer of money. The Patriot Act mandates financial services companies to have policies and procedures designed to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure by a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with the Patriot Act and other relevant anti-money laundering laws and regulations, could have serious legal and reputational consequences for the institution.

Office of Foreign Assets Control Regulation. The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are typically known as the “OFAC” rules based on their administration by the U.S. Treasury’s Department Office of Foreign Assets Control, or OFAC. The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (1) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on a “U.S. person” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (2) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.

Other Laws and Regulations. The Bank’s loan operations are subject to federal laws applicable to credit transactions, such as:

 

    the federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

 

    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 obligations to help meet the housing needs of the community it serves;

 

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

 

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

 

    the Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by collection agencies; and

 

    the rules and regulations of various federal agencies charged with the responsibility of implementing these federal laws.

The deposit operations of the Bank are subject to:

 

    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; and

 

    the Electronic Funds Transfer Act, and Regulation E issued by the Consumer Financial Protection Bureau to implement that act, 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.

Guidance on Sound Incentive Compensation Policies

The federal banking agencies have issued comprehensive guidance on incentive compensation policies. This guidance is designed to ensure that a financial institution’s incentive compensation structure does not encourage

 

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imprudent risk-taking, which may undermine the safety and soundness of the institution. The guidance, which applies to all employees that have the ability to materially affect an institution’s risk profile, either individually or as part of a group, is based upon three primary principles: (1) balanced risk-taking incentives, (2) compatibility with effective controls and risk management, and (3) strong corporate governance.

An institution’s supervisory ratings will incorporate any identified deficiencies in an institution’s compensation practices, and it may be subject to an enforcement action if the incentive compensation arrangements pose a risk to the safety and soundness of the institution. Further, a provision of the Basel III Capital Rules described above would limit discretionary bonus payments to bank executives if the institution’s regulatory capital ratios fail to exceed certain thresholds.

Monetary Policy and Economic Environment

The policies of regulatory authorities, including the monetary policy of the Federal Reserve, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the Federal Reserve to affect the money supply are open market operations in United States Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits. The Federal Reserve’s monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the effect of these policies on the Company’s business and earnings cannot be predicted.

Information About County’s Properties

The Bank owns its headquarters in Manitowoc, Wisconsin and leases its other locations. The following table provides information related to its leased locations:

 

Location

  

Function

  

Expiration
     Date

Stevens Point, WI

   Full service banking location    2016

Darlington, WI

   Loan production office    2016

Eau Claire, WI

   Loan production office    Month-to-month

Fond du Lac, WI

   Loan production office    2017

Sheboygan, WI

   Loan production office    2016

In 2015, the Bank began construction on a new branch in Stevens Point. The project is estimated to be completed during the first quarter of 2016 at a cost of $3.6 million, of which $1.5 million has been incurred as of September  30, 2015.

County Legal Proceedings

From time to time, County is subject to certain legal proceedings and claims in the ordinary course of business. County is not presently party to any legal proceedings the resolution of which County believes would have a material adverse effect on its business, financial condition, operating results or cash flows. County establishes reserves for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable.

 

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County Management’s Discussion and Analysis of Financial Condition and Results of Operations—September 30, 2015

Overview

County Bancorp, Inc. is a Wisconsin corporation founded in May 1996 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Our primary activities consist of operating through our wholly-owned subsidiary bank, Investors Community Bank, headquartered in Manitowoc, Wisconsin, and providing a wide range of banking and related business services through the Bank and our other subsidiaries.

In addition to the Bank, we have two wholly-owned subsidiaries, County Bancorp Statutory Trust II and County Bancorp Statutory Trust III, which are Delaware statutory trusts. The Bank is the sole shareholder of ICB Investments Corp., a Nevada corporation, and is the sole member of Investors Insurance Services, LLC and ABS 1, LLC, which are both Wisconsin limited liability companies.

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans, and the interest we pay on interest-bearing liabilities, such as deposits. We generate most of our revenue from interest on loans and investments and loan- and deposit-related fees. Our loan portfolio consists of a mix of agricultural, commercial real estate, commercial, residential real estate, and installment and consumer loans. Our primary source of funding is deposits. Our largest expenses are interest on these deposits and salaries and related employee benefits. We measure our performance through various metrics, including our pre-tax net income, net interest margin, efficiency ratio, return on average assets, return on average common shareholders’ equity, earnings per share, and non-performing assets to total assets. We are also required to maintain appropriate regulatory leverage and risk-based capital ratios.

Initial Public Offering

On January 22, 2015, we closed our initial public offering, which we refer to as the IPO, in which we offered 1,357,000 shares of common stock for gross proceeds of $21.4 million. Of the 1,357,000 shares sold, 1,210,750 shares were sold by the Company and 146,250 shares were sold by certain selling shareholders. The Company did not receive any proceeds from the sale of shares by the selling shareholders. The offer and sale of all shares of the IPO were registered under the Securities Act, pursuant to a registration statement on Form S-1, which was declared effective by the SEC on January 15, 2015.

The net proceeds from our IPO were $16.9 million after deducting underwriting discounts and commissions of $1.2 million and other offering expenses of $1.0 million for total expenses of $2.2 million.

Operational Highlights

 

    Total loans were $704.0 million at September 30, 2015 compared to $654.4 million at June 30, 2015, an increase of 7.6%.

 

    Net income was up $2.0 million from $6.1 million for the nine months ended September 30, 2014, to $8.1 million for the nine months ended September 30, 2015.

 

    For the three months ended September 30, 2015, a negative provision for loan losses of $867 thousand was recorded compared to $0 for three months ended September 30, 2014. For the nine months ended September 30, 2015, a negative provision for loan losses of $1.3 million was recorded compared to $0 for the nine months ended September 30, 2014.

 

    Return on average assets was 1.63% for the three months ended September 30, 2015 compared to 1.22% for the three months ended September 30, 2014.

 

    Non-performing assets as a percentage of total assets was 1.68% at September 30, 2015 compared to 2.79% at September 30, 2014.

 

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Selected Financial Data

 

    Three Months Ended     Nine Months Ended     Year Ended  
    September 30,
2015
    September 30,
2014
    September 30,
2015
    September 30,
2014
    December 31,
2014
 
    (unaudited)     (unaudited)        

Selected Income Statement Data:

         

(In thousands, except per share data)

         

Interest income

  $ 8,764      $ 7,582      $ 24,765      $ 22,820      $ 30,897   

Interest expense

    1,893        1,777        5,504        5,721        7,537   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    6,871        5,805        19,261        17,099        23,360   

Provision for (recovery of ) loan losses

    (867     —          (1,325     —          589   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for (recovery of) loan losses

    7,738        5,805        20,586        17,099        22,771   

Non-interest income

    1,723        1,798        5,310        5,167        7,148   

Non-interest expense

    4,135        4,264        12,983        12,735        17,025   

Income tax expense

    1,996        1,068        4,839        3,403        4,684   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 3,330      $ 2,271      $ 8,074      $ 6,128      $ 8,210   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Common Share Data:

         

Basic

  $ 0.56      $ 0.48      $ 1.37      $ 1.29      $ 1.73   

Diluted

  $ 0.55      $ 0.47      $ 1.34      $ 1.26      $ 1.69   

Cash dividends per common share

  $ 0.04      $ —        $ 0.12      $ —        $ —     

Weighted average common shares—basic

    5,733,919        4,463,790        5,635,515        4,465,548        4,469,450   

Weighted average common shares—diluted

    5,858,211        4,578,611        5,754,118        4,583,912        4,580,917   

Common shares outstanding, end of period

    5,733,919        4,463,790        5,733,919        4,463,790        4,498,790   

Selected Balance Sheet Data (at period end):

         

Total assets

      $ 844,791      $ 743,018      $ 771,756   

Securities

        85,783        77,673        81,282   

Total loans

        704,029        591,623        648,122   

Allowance for loan losses

        (9,833     (10,374     (10,603

Total deposits

        636,221        599,931        605,469   

Other borrowings and FHLB advances

        68,383        31,347        51,857   

Subordinated debentures

        12,372        12,372        12,372   

Total shareholders’ equity

        104,436        77,722        80,043   

Performance Ratios:

         

Return on average assets

    1.63     1.22     1.36     1.10     1.10

Return on average common shareholders’ equity(1)

    13.58     12.51     11.28     11.50     11.37

Net interest margin

    3.49     3.27     3.37     3.22     3.29

Interest rate spread

    3.25     3.06     3.13     3.01     3.07

Non-interest income to average assets

    0.84     1.07     0.89     0.96     0.96

Non-interest expense to average assets

    2.02     2.29     2.18     2.28     2.28

Net overhead ratio(2)

    1.18     1.22     1.29     1.32     1.32

Efficiency ratio(1)

    48.42     53.23     51.04     52.87     50.99

Asset Quality Ratios:

         

Nonperforming loans to total loans

    1.59     2.12     1.59     2.12     1.78

Allowance for loan losses to:

         

Total loans

    1.40     1.75     1.40     1.75     1.64

Nonperforming loans

    88.01     82.65     88.01     82.65     91.76

Net charge-offs (recoveries) to average loans

    (0.12 )%      0.03     (0.08 )%      0.02     0.08

Nonperforming assets to total assets(3)

    1.68     2.79     1.68     2.79     2.42

Capital Ratios:

         

Shareholders’ common equity to assets

    11.42     9.38     11.42     9.38     9.33

Tier 1 risk-based capital (Bank)

    14.23     16.58     14.23     16.58     15.51

Total risk-based capital (Bank)

    15.48     17.84     15.48     17.84     16.77

Tier 1 Common Equity Ratio (Bank)

    14.23     N/A        14.23     N/A        N/A   

Leverage ratio (Bank)

    13.70     13.74     13.70     13.74     13.96

 

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(1) The return on average common shareholders’ equity and the efficiency ratio are not recognized under generally accepted accounting principals, or GAAP, and are therefore considered to be non-GAAP financial measures. See below for reconciliations of the return on average common shareholders’ equity and the efficiency ratio to their most comparable GAAP measures.
(2) Net overhead ratio represents the difference between noninterest expense and noninterest income, divided by average assets.
(3) Non-performing assets consist of nonaccrual loans and other real estate owned.

Non-GAAP Financial Measures

“Efficiency ratio” is defined as non-interest expenses, excluding gains and losses on sales, and write-downs of other real estate owned, divided by operating revenue, which is equal to net interest income plus non-interest income excluding gains and losses on sales of securities. In our judgment, the adjustments made to non-interest expense allow investors to better asses our operating expenses in relation to our core operating revenue by removing the volatility that is associated with certain one-time items and other discrete items that are unrelated to our core business.

 

     Three Months Ended     Nine Months Ended     Year Ended  
     September 30,
2015
    September 30,
2014
    September 30,
2015
    September 30,
2014
    December 31,
2014
 

Efficiency Ratio GAAP to Non-GAAP Reconciliation:

          

Non-interest expense

   $ 4,135      $ 4,264      $ 12,983      $ 12,735      $ 17,025   

Less: net gain (loss) on sales and write-downs of OREO

     26        (217     (442     (964     (1,468
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted non-interest expense (non-GAAP)

   $ 4,161      $ 4,047      $ 12,541      $ 11,771      $ 15,557   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   $ 6,871      $ 5,805      $ 19,261      $ 17,099      $ 23,360   

Non-interest income

     1,723        1,798        5,310        5,167        7,148   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating revenue

   $ 8,594      $ 7,603      $ 24,571      $ 22,266      $ 30,508   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Efficiency ratio

     48.42     53.23     51.04     52.87     50.99

Return on average common shareholders’ equity is a non-GAAP based financial measure calculated using non-GAAP based amounts. The most directly comparable GAAP based measure is return on average shareholders’ equity. We calculate return on average common shareholders’ equity by excluding the average preferred shareholders’ equity and the related dividends. Management uses the return on average common shareholders’ equity in order to review our core operating results and our performance.

 

     Three Months Ended     Nine Months Ended     Year Ended  
     September 30,
2015
    September 30,
2014
    September 30,
2015
    September 30,
2014
    December 31,
2014
 

Return on Average Common Shareholders’ Equity GAAP to Non-GAAP Reconciliation:

          

Return on average common shareholders’ equity

          

Return on average shareholders’ equity

     11.32     9.88     9.44     9.08     9.02

Effect of excluding average preferred shareholders’ equity

     2.26     2.63     1.84     2.42     2.35
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Return on average common shareholders’ equity

     13.58     12.51     11.28     11.50     11.37
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Results of Operations

Our operating revenue is comprised of interest income and non-interest income. Net interest income increased by 18.4% to $6.9 million for the three months ended September 30, 2015 compared to the three months ended September 30, 2014; the increase is attributable to loan growth of 19.0% for the same period. Non-interest income decreased 4.2% to $1.7 million for the three months ended September 30, 2015 from the same period in 2014.

For the nine months ended September 30, 2015, net interest income was $19.3 million, an increase $2.2 million, or 12.6%, compared to the nine months ended September 30, 2014. Non-interest income increased to $5.3 million for the first three quarters of 2015 which represents a 2.8% increase compared to the nine months ended September 30, 2014.

Analysis of Net Interest Income

Net interest income is the largest component of our income, and is dependent on the amounts of and yields on interest-earning assets as compared to the amounts of and rates paid on interest bearing liabilities. The following tables reflect the components of net interest income for the three and nine months ended September 30, 2015 and 2014 (dollars in thousands):

 

     Three Months Ended  
     September 30, 2015     September 30, 2014  
     Average
Balance (1)
    Income/
Expense
     Yields/
Rates
    Average
Balance (1)
    Income/
Expense
     Yields/
Rates
 

Assets

              

Investment securities

   $ 84,528      $ 359         1.70   $ 76,259      $ 334         1.75

Loans (2)

     691,049        8,393         4.86     590,272        7,225         4.90

Interest bearing deposits due from other banks

     12,741        11         0.35     43,837        23         0.21
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

   $ 788,318      $ 8,763         4.45   $ 710,368      $ 7,582         4.27

Allowance for loan losses

     (10,462          (10,474     

Other assets

     40,043             45,542        
  

 

 

        

 

 

      

Total assets

   $ 817,899           $ 745,436        
  

 

 

        

 

 

      

Liabilities

              

Savings, NOW, money market, interest checking

     162,719        194         0.48     138,713        166         0.48

Time deposits

     395,967        1,381         1.40     404,854        1,383         1.37
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

   $ 558,686      $ 1,575         1.13   $ 543,567      $ 1,549         1.14

Other borrowings

     8,830        63         2.83     10,629        32         1.19

FHLB advances

     52,058        157         1.20     19,609        77         1.56

Junior subordinated debentures

     12,372        99         3.21     12,372        120         3.88
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

   $ 631,946      $ 1,894         1.20   $ 586,177      $ 1,778         1.21

Non-interest bearing deposits

     60,196             60,156        

Other liabilities

     8,099             7,188        
  

 

 

        

 

 

      

Total liabilities

     700,241             653,521        

SBLF preferred stock(3)

     15,000             15,000        

Shareholders’ equity

     102,658             76,915        
  

 

 

        

 

 

      

Total liabilities and equity

   $ 817,899           $ 745,436        
  

 

 

        

 

 

      

Net interest income

       6,869             5,804      

Interest rate spread(4)

          3.25          3.06

Net interest margin(5)

          3.49          3.27

Ratio of interest-earning assets to interest -bearing liabilities

     1.25             1.21        

 

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     Nine Months Ended  
     September 30, 2015     September 30, 2014  
     Average
Balance(1)
     Income/
Expense
     Yields/
Rates
    Average
Balance(1)
     Income/
Expense
     Yields/
Rates
 

Assets

                

Investment securities

   $ 82,187       $ 1,037         1.68   $ 74,402       $ 1,026         1.84

Loans(2)

     661,797         23,687         4.77     582,616         21,704         4.97

Interest bearing deposits due from other banks

     17,715         41         0.31     50,305         90         0.24
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

   $ 761,699       $ 24,765         4.34   $ 707,323       $ 22,820         4.30

Allowance for loan losses

     (10,438           (10,531      

Other assets

     42,010              48,751         
  

 

 

         

 

 

       

Total assets

   $ 793,271            $ 745,543         
  

 

 

         

 

 

       

Liabilities

                

Savings, NOW, money market, interest checking

     154,046         543         0.47     130,884         468         0.48

Time deposits

     395,005         3,998         1.35     417,125         4,198         1.34
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing deposits

   $ 549,051       $ 4,541         1.10   $ 548,009       $ 4,666         1.14

Other borrowings

     9,369         221         3.15     12,377         463         4.99

FHLB advances

     39,276         403         1.37     19,271         232         1.61

Junior subordinated debentures

     12,372         339         3.66     12,372         360         3.88
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

   $ 610,068       $ 5,504         1.20   $ 592,029       $ 5,721         1.29

Non-interest bearing deposits

     61,236              56,733         

Other liabilities

     7,900              6,828         
  

 

 

         

 

 

       

Total liabilities

     679,204              655,590         

SBLF preferred stock(3)

     15,000              15,000         

Shareholders’ equity

     99,067              74,953         
  

 

 

         

 

 

       

Total liabilities and equity

   $ 793,271            $ 745,543         
  

 

 

         

 

 

       

Net interest income

        19,261              17,099      

Interest rate spread(4)

           3.13           3.01

Net interest margin(5)

           3.37           3.22

Ratio of interest-earning assets to interest -bearing liabilities

     1.25              1.19         

 

(1) Average balances are calculated on amortized cost.
(2) Includes loan fee income, nonaccruing loan balances, and interest received on such loans.
(3) The SBLF preferred stock refers to the 15,000 shares of our Series C noncumulative perpetual preferred stock, no par value, issued to the U.S. Treasury through the U.S. Treasury’s Small Business Lending Fund program.
(4) Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest bearing liabilities.
(5) Net interest margin represents net interest income divided by average total interest-earning assets.

 

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Rate/Volume Analysis

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

 

     Three Months Ended September 30, 2015 v. 2014  
     Increase (Decrease)
Due to Change in Average
 
         Volume             Rate             Net      

Interest Income:

      

Investment securities

   $ 38      $ (12   $ 26   

Loans

     1,224        (56     1,168   

Federal funds sold and interest-bearing deposits with banks

     (254     242        (12
  

 

 

   

 

 

   

 

 

 

Total interest income

     1,008        174        1,182   
  

 

 

   

 

 

   

 

 

 

Interest Expense:

      

Savings, NOW, money market and interest checking

     29        (1     28   

Time deposits

     (49     47        (2

Other borrowings

     (4     35        31   

FHLB advances

     93        (13     80   

Junior subordinated debentures

     —          (21     (21
  

 

 

   

 

 

   

 

 

 

Total interest expense

     69        47        116   
  

 

 

   

 

 

   

 

 

 

Net interest income

   $ 939      $ 127      $ 1,066   
  

 

 

   

 

 

   

 

 

 

 

     Nine Months Ended September 30, 2015 v. 2014  
     Increase (Decrease)
Due to Change in Average
 
         Volume             Rate             Net      

Interest Income:

      

Investment securities

   $ 59      $ (48   $ 11   

Loans

     2,787        (804     1,983   

Federal funds sold and interest-bearing deposits with banks

     (92     43        (49
  

 

 

   

 

 

   

 

 

 

Total interest income

     2,754        (809     1,945   
  

 

 

   

 

 

   

 

 

 

Interest Expense:

      

Savings, NOW, money market and interest checking

     81        (6     75   

Time deposits

     (225     25        (200

Other borrowings

     (96     (145     (241

FHLB advances

     199        (29     170   

Junior subordinated debentures

     —          (21     (21
  

 

 

   

 

 

   

 

 

 

Total interest expense

     (41     (176     (217
  

 

 

   

 

 

   

 

 

 

Net interest income

   $ 2,795      $ (633   $ 2,162   
  

 

 

   

 

 

   

 

 

 

 

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Provision for Loan Losses

Based on our analysis of the components of the allowance for loan losses, management recorded a negative provision for loan losses of $867 thousand for the three months ended September 30, 2015 compared to a provision of $0 for the three months ended September 30, 2014. During the third quarter of 2015, we experienced a decrease in specific reserve related to impaired loans of 15.8% from $2.7 million at June 30, 2015 to $2.3 million at September 30, 2015. During the third quarter, we received a $1.9 million payment of principal and interest to pay-off a forbearance agreement for loans that had been completely charged-off in 2013. The payment resulted in a $1.6 million recovery of loan losses and $0.3 million of interest income and fee income. This recovery was partially offset by $1.2 million in loans that we charged-off.

We have seen an improvement in credit quality year-over-year. As a result of our improved credit quality, the specific reserve related to impaired loans has decreased 38.3% from $3.7 million at September 30, 2014 to $2.3 million at September 30, 2015. For the nine months ended September 30, 2015, we have recorded a negative provision of $1.3 million, compared to $0 for the nine months ended September 30, 2014.

There have been no substantive changes to our methodology for estimating the appropriate level of allowance for loan losses from what was previously outlined in our 2014 Annual Report on Form 10-K. Based upon this methodology, which includes actively monitoring the asset quality and inherent risks within the loan and lease portfolio, management concluded that an allowance for loan losses of $9.8 million, or 1.40% of total loans, was appropriate as of September 30, 2015. This is compared to an allowance for loan losses of $10.4 million, or 1.75% of total loans, at September 30, 2014, and $10.6 million, or 1.64% of total loans, at December 31, 2014.

Non-Interest Income

Non-interest income for the three months ended September 30, 2015 decreased by 4.2% compared to the three months ended September 30, 2014 from $1.8 million to $1.7 million. The decrease was primarily the result of decreases in service charges, loan servicing rights, and income on OREO partially offset by the reimbursement of legal fees related to the repayment of the forbearance agreement discussed above, which is included in other expenses.

For the nine months ended September 30, 2015, non-interest income increased 2.8% to $5.3 million from $5.2 million for the nine months ended September 30, 2014. The following table reflects the components of non-interest income for the three months and nine months ended September 30, 2015 and 2014 (dollars in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,
2015
     September 30,
2014
     September 30,
2015
     September 30,
2014
 

Service charges

   $ 238       $ 388       $ 744       $ 559   

Gain on sale of loans, net

     44         69         166         251   

Loan servicing fees

     1,236         1,183         3,648         3,518   

Loan servicing rights

     (51      84         (25      116   

Income on other real estate owned

     33         100         243         509   

Other

     223         (26      534         214   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

   $ 1,723       $ 1,798       $ 5,310       $ 5,167   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-Interest Expense

Non-interest expense decreased 3.0% to $4.1 million for the three months ended September 30, 2015 compared to $4.3 million for the three months ended September 30, 2014, primarily as the result of gains on sales of other real estate owned. This decrease was partially offset by increased professional fees.

 

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For the nine months ended September 30, 2015, non-interest expense increased 1.9% to $13.0 million from $12.7 million for the nine months ended September 30, 2014. The increase is primarily due to increased compensation and benefits, which resulted from an increased headcount, an approximate 10% increase in insurance premiums, and higher performance based compensation, resulting from improved year-over-year bottom line results. The increase was partially offset by lower expenses associated with the write-down of our OREO properties. The following table reflects the components of our non-interest expense for the three and nine months ended September 30, 2015 and 2014 (dollars in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,
2015
     September 30,
2014
     September 30,
2015
     September 30,
2014
 

Employee compensation and benefits

   $ 2,643       $ 2,570       $ 8,232       $ 7,628   

Occupancy

     100         75         260         229   

Information processing

     183         361         527         641   

Professional fees

     513         343         900         696   

FDIC assessment

     101         121         321         397   

Other real estate owned expenses

     121         192         261         686   

Write-down of other real estate owned

     —           44         182         729   

Net loss/(gain) on other real estate owned

     (26      173         260         235   

Business development

     147         203         371         402   

Other

     353         182         1,669         1,092   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

   $ 4,135       $ 4,264       $ 12,983       $ 12,735   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income taxes

The Company accounts for income taxes in accordance with income tax accounting guidance, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions.

The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50%; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not the some portion or all of the deferred tax asset will not be realized.

The Company files income taxes returns in the U.S. federal jurisdiction and in the state of Wisconsin. The Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2011.

 

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The Company recognizes interest and penalties on income taxes as a component of other non-interest expense.

Certain results previously reported as of and for the period ended September 30, 2014 have been insignificantly revised from those previously reported on our Form S-1 to reflect a revision to the estimated income tax impact of a net operating loss carryforward.

Financial Condition

Total assets increased $73.0 million, or 9.5%, from $771.8 million at December 31, 2014 to $844.8 million at September 30, 2015. The increase is primarily due to an increase in total loans of $55.9 million, an increase in loans held for sale of $9.6 million, and an increase in securities available for sale of $4.5 million.

Total liabilities increased $48.6 million, or 7.2%, from $676.7 million at December 31, 2014 to $725.4 million at September 30, 2015. This increase is attributed to the cash needs associated with our increased loan demand and consists of a $32.9 million increase in brokered deposits and by a $36.0 million advance from the Federal Home Loan Bank. This increase was partially offset by the repayment of a $15.0 million Federal Discount Window advance that was taken out at the end of 2014.

Shareholders’ equity increased $24.4 million, or 30.5%, to $104.4 million at September 30, 2015 from $80.0 million at December 31, 2014. This increase was the result of income for the nine months ended September 30, 2015 of $8.1 million and the approximately $16.9 million of net proceeds from our IPO that closed on January 22, 2015.

Net Loans

Total net loans increased by $56.7 million, or 8.9%, from $637.5 million at December 31, 2014 to $694.2 million at September 30, 2015. The increase in loans was due primarily to increased agriculture loans of 13.0% and increased commercial real estate loans of 7.4%, and was partially offset by residential real-estate pay-downs.

The following table sets forth the composition of our loan portfolio at the dates indicated (dollars in thousands):

 

     September 30, 2015     December 31, 2014  
     Amount      Percent     Amount      Percent  

Agriculture loans

   $ 469,166         66.6   $ 415,164         64.1

Commercial real estate loans

     147,638         21.0     137,517         21.2

Commercial loans

     52,597         7.5     53,745         8.3

Residential real estate loans

     34,326         4.9     40,885         6.3

Installment and consumer other

     302         0.0     811         0.1
  

 

 

    

 

 

   

 

 

    

 

 

 

Total gross loans

   $ 704,029         100.0   $ 648,122         100.0
     

 

 

      

 

 

 

Allowance for loan losses

     (9,833        (10,603   
  

 

 

      

 

 

    

Loans, net

   $ 694,196         $ 637,519      
  

 

 

      

 

 

    

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged to expense, which affects our earnings directly. Loans are charged against the allowance for loan losses when management believes that the collectability of all or some of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that reflects management’s estimate of the level of probable incurred

 

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losses in the loan portfolio. Factors considered by management in determining the adequacy of the allowance include, but are not limited to, detailed reviews of individual loans, historical and current trends in loan charge-offs for the various portfolio segments evaluated, the level of the allowance in relation to total loans and to historical loss levels, levels and trends in non-performing and past due loans, volume and migratory direction of adversely graded loans, external factors including regulation, reputation, and competition, and management’s assessment of economic conditions. Our board of directors reviews the recommendations of management regarding the appropriate level for the allowance for loan losses based upon these factors.

The provision for loan losses is the charge to operating earnings necessary to maintain an adequate allowance for loan losses. We have developed policies and procedures for evaluating the overall quality of our loan portfolio and the timely identification of problem credits. Management continuously reviews these policies and procedures and makes further improvements as needed. The adequacy of our allowance for loan losses and the effectiveness of our internal policies and procedures are also reviewed periodically by our regulators and our auditors and external loan review personnel. Our regulators may advise us to recognize additions to the allowance based upon their judgments about information available to them at the time of their examination. Such regulatory guidance is taken under consideration by management, and we may recognize additions to the allowance as a result.

We continually refine our methodology for determining the allowance for loan losses by comparing historical loss ratios utilized to actual experience and by classifying loans for analysis based on similar risk characteristics. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreements; however, cash receipts on impaired and nonaccrual loans for which the accrual of interest has been discontinued are applied to principal and interest income depending upon the overall risk of principal loss to us.

At September 30, 2015 and December 31, 2014, the allowance for loan losses was $9.8 million and $10.6 million, respectively, which resulted in a ratio to total loans of 1.4% and 1.6%, respectively. The decreased allowance was the result of a lower level of specific reserves related to impaired loans during the nine months ended September 30, 2015.

 

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Charge-offs and recoveries by loan category for the three and nine months ended September 30, 2015 and 2014 are as follows (dollars in thousands):

 

     Three Months Ended     Nine Months Ended  
     September 30,
2015
    September 30,
2014
    September 30,
2015
    September 30,
2014
 

Balance, beginning of period

   $ 9,897      $ 10,556      $ 10,603      $ 10,495   

Loans charged off:

        

Agriculture loans

     1,145        115        1,145        115   

Commercial real estate loans

     31        —          162        —     

Commercial loans

     4        100        415        103   

Residential real estate loans

     —          —          172        —     

Installment and consumer other

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans charged off

   $ 1,180      $ 215      $ 1,894      $ 218   

Recoveries:

        

Agriculture loans

     42        5        47        17   

Commercial real estate loans

     740        27        743        36   

Commercial loans

     740        —          1,196        43   

Residential real estate loans

     461        —          463        —     

Installment and consumer other

     —          1        —          1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     1,983        33        2,449        97   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loans charged off (recovered)

   $ (803   $ 182      $ (555   $ 121   

Provision for (recovery of) loan losses

     (867     —          (1,325     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, end of period

   $ 9,833      $ 10,374      $ 9,833      $ 10,374   
  

 

 

   

 

 

   

 

 

   

 

 

 

Selected loan quality ratios:

        

Net charge-offs (recoveries) to average loans

     (0.12 )%      0.03     (0.08 )%      0.02

Allowance for loan losses to total loans

     1.40     1.75     1.40     1.75

Allowance for loan losses to non-performing assets and performing troubled debt restructurings

     66.38     47.99     66.38     47.99

Loan Servicing Rights

As part of our growth and risk management strategy, we have actively developed a loan participation and loan sales network. Our ability to sell loan participations and whole loans benefits us by freeing up capital and funding to lend to new customers as well as to increase non-interest income through the recognition of loan sale and servicing revenue. Because we continue to service these loans, we are able to maintain a relationship with the customer. Additionally, we receive a servicing fee that offsets some of the cost of administering the loan, while maintaining the customer relationship.

Servicing assets are recognized as separate assets when rights are acquired through the sale of financial assets. Servicing rights resulting from the sale or securitization of loans originated by the Company are initially measured at fair value at the date of transfer. The Company subsequently measures each class of servicing asset using the amortization method. Under the amortization method, servicing rights are amortized in proportion to and over the period of estimated net servicing income. The amortized assets are assessed for impairment or increased obligation based on fair value at each reporting date.

Fair value is based on market prices for comparable servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary

 

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income, prepayment speeds and default rates and losses. These variables may have an adverse impact on the value of the servicing right and may result in a reduction to non-interest income.

Servicing assets measured using the amortization method are evaluated and measured for impairment. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the carrying amount of the servicing assets for that tranche. The valuation allowance is adjusted to reflect changes in the measurement of impairment after the initial measure of the impairment.

Changes in the valuation allowances are reported with loan servicing fees on the income statement. Fair value in excess of the carrying amount of servicing assets for that stratum is not recognized.

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of loan servicing rights is netted against loan servicing fee income.

The loan servicing portfolio is shown below (dollars in thousands):

 

     September 30, 2015      December 31, 2014  

Total loans

   $ 704,029       $ 648,122   

Less: nonqualified loan sales included below

     (4,383      (8,894

Loans serviced:

     

Agricultural

     455,418         413,933   

Commercial

     8,002         10,419   

Commercial real estate

     4,785         4,941   
  

 

 

    

 

 

 

Total loans serviced

     468,205         429,293   
  

 

 

    

 

 

 

Total loans and loans serviced

   $ 1,167,851       $ 1,068,521   
  

 

 

    

 

 

 

Securities

Our securities portfolio is predominately composed of municipal securities, investment grade mortgage-backed securities, and U.S. Government and agency securities. We classify substantially all of our securities as available for sale. We do not engage in active securities trading in carrying out our investment strategies.

Securities increased to $85.8 million at September 30, 2015 from $81.3 million at December 31, 2014. During the nine months ended September 30, 2015, we recognized unrealized holding gains of $0.3 million before income taxes through other comprehensive income.

The following table sets forth the amortized cost and fair values of our securities portfolio at September 30, 2015 and December 31, 2014 (dollars in thousands):

 

     September 30, 2015      December 31, 2014  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Available for sale:

           

Municipal securities

   $ 46,580       $ 46,962       $ 41,751       $ 41,849   

Mortgage-backed securities

     36,213         36,811         36,889         37,428   

U.S. Government and agency securities

     2,004         2,010         2,006         2,005   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale

   $ 84,797       $ 85,783       $ 80,646       $ 81,282   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Deposits

Deposits are the major source of our funds for lending and other investment purposes. Deposits are attracted principally from within our primary market area through the offering of a broad variety of deposit instruments including checking accounts, money market accounts, regular savings accounts, time deposit accounts (including “jumbo” certificates in denominations of $100,000 or more) and retirement savings plans. We will also obtain brokered deposits on an as-needed basis.

Deposit growth was 5.1% to $636.2 million at September 30, 2015 from $605.5 million at December 31, 2014. Management believes that raising deposits has been challenging in recent years in a market with compressed interest rates. We are continually focusing our strategic efforts on expanding our relationships and generating new deposit accounts. As of September 30, 2015 and December 31, 2014, the distribution by type of deposit accounts was as follows (dollars in thousands):

 

     September 30, 2015     December 31, 2014  
     Amount      % of Deposits     Amount      % of Deposits  

Time deposits

   $ 301,835         47.5   $ 296,921         49.0

Brokered deposits

     158,346         24.9     125,396         20.7

Money market accounts

     81,854         12.9     69,742         11.5

Demand, noninterest-bearing

     60,685         9.5     81,534         13.5

NOW accounts and interest checking

     28,212         4.4     27,312         4.5

Savings

     5,289         0.8     4,564         0.8
  

 

 

    

 

 

   

 

 

    

 

 

 

Total deposits

   $ 636,221         100.0   $ 605,469         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Liquidity Management and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term and long-term nature including, but not limited to, funding loans and depositor withdrawals. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, calls of investment securities and borrowed funds and prepayments on loans are greatly influenced by general interest rates, economic conditions and competition.

Management adjusts our investments in liquid assets based upon an assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, (4) the objectives of our interest-rate risk and investment policies and (5) the risk tolerance of management and our board of directors.

Our cash flows are composed of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by (used in) operating activities was $(0.4) million and $14.9 million for the nine months ended September 30, 2015 and September 30, 2014, respectively. Net cash used in investing activities, which consists primarily of purchases of and proceeds from the sale, maturities/calls, and principal repayments of securities available for sale, as well as loan purchases, sales and originations, net of repayments was $60.1 million and $21.1 million for the nine months ended September 30, 2015 and 2014, respectively. Net cash provided by (used in) financing activities, consisting primarily of the activity in deposit accounts, FHLB advances, and proceeds from our IPO was $63.1 million and $(21.9) million for the nine months ended September 30, 2015 and 2014, respectively.

At September 30, 2015, the Bank exceeded all of its regulatory capital requirements with Tier 1 leverage capital of $112.1 million, or 13.70% of adjusted average total assets, which is above the minimum level to be well-capitalized of $40.9 million, or 5.0% of adjusted total assets, and total risk-based capital of $121.9 million, or 15.48% of risk-weighted assets, which is above the minimum level to be well-capitalized of $78.8 million, or 10.0% of risk-weighted assets.

 

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At the holding company level, our primary sources of liquidity are dividends from the Bank, investment income and net proceeds from investment sales, borrowings and capital offerings. The main uses of liquidity are the payment of interest to holders of our junior subordinated debentures and the payment of interest or dividends to common and preferred shareholders. The Bank is subject to certain regulatory limitations regarding its ability to pay dividends to the Company; however, we do not believe that the Company will be adversely affected by these dividend limitations. At September 30, 2015, there were $54.8 million of retained earnings available for the payment of dividends by the Bank to us.

Off-Balance Sheet Arrangements

As of September 30, 2015, there were no significant changes to our contractual obligations and off-balance sheet arrangements disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014. We continue to believe that we have adequate capital and liquidity available from various sources to fund projected obligations and commitments.

County Management’s Discussion and Analysis of Financial Condition and Results of Operations—December 31, 2014

General

The following discussion and analysis presents our financial condition and results of operations on a consolidated basis. However, because we conduct all of our material business operations through the Bank, the discussion and analysis relates to activities primarily conducted at the Bank.

Executive Overview

We are the holding company for Investors Community Bank, which is headquartered in Manitowoc, Wisconsin. Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans, and the interest we pay on interest-bearing liabilities, such as deposits. We generate most of our revenue from interest on loans and investments and loan- and deposit-related fees. Our loan portfolio consists of a mix of agricultural, commercial real estate, commercial and industrial, multi-family and construction, residential real estate and consumer loans. Our primary source of funding is deposits. Our largest expenses are interest on these deposits and salaries and related employee benefits. We measure our performance through various metrics, including our pre-tax net income, net interest margin, efficiency ratio, return on average assets and return on average common shareholders’ equity, earnings per share, and non-performing assets to total assets. We must also maintain appropriate regulatory leverage and risk-based capital ratios. The following table sets forth the key financial metrics we use to measure our performance.

 

     As of or for the Year Ended December 31,  
     2014     2013     2012  
           (dollars in thousands)        

Pre-tax income

   $ 12,894      $ 11,152      $ 12,235   

Net interest margin

     3.29     3.35     3.59

Return on average assets

     1.10     0.94     1.09

Basic earnings per share

   $ 1.73      $ 1.45      $ 1.56   

Diluted earnings per share

   $ 1.69      $ 1.43      $ 1.53   

Non-performing assets to total assets(1)

     2.42     2.92     2.88

 

(1) Non-performing assets consist of nonaccrual loans and other real estate owned.

 

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Critical Accounting Policies and Estimates

Certain of our accounting policies are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Our significant accounting policies are discussed in detail in Note 1 to our Consolidated Financial Statements as of and for the year ended December 31, 2014 included elsewhere in this proxy statement/prospectus. Those significant accounting policies that we consider to be most critical are described below. Our policies with respect to the methodology for the determination of the allowance for loan losses, OREO and fair value of financial instruments involves a degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. These critical policies and their application are reviewed with the board of directors annually and prior to any change in policy.

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged to expense, which affects our earnings directly. Loans are charged against the allowance for loan losses when management believes that the collectability of all or some of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that reflects management’s estimate of the level of probable incurred losses in the loan portfolio. Factors considered by management in determining the adequacy of the allowance include, but are not limited to, detailed reviews of individual loans, historical and current trends in loan charge-offs for the various portfolio segments evaluated, the level of the allowance in relation to total loans and to historical loss levels, levels and trends in non-performing and past due loans, volume of and migratory direction of adversely graded loans, external factors including regulatory, reputation, and competition, and management’s assessment of economic conditions. Our board of directors reviews the recommendations of management regarding the appropriate level for the allowance for loan losses based upon these factors.

The provision for loan losses is the charge to operating earnings necessary to maintain an adequate allowance for loan losses. We have developed policies and procedures for evaluating the overall quality of our loan portfolio and the timely identification of problem credits. Management continuously reviews these policies and procedures and makes further improvements as needed. The adequacy of our allowance for loan losses and the effectiveness of our internal policies and procedures are also reviewed periodically by our regulators and our auditors and external loan review personnel. Our regulators may advise us to recognize additions to the allowance based upon their judgments about information available to them at the time of their examination. Such regulatory guidance is taken under consideration by management, and we may recognize additions to the allowance as a result.

We continually refine our methodology for determining the allowance for loan losses by comparing historical loss ratios utilized to actual experience and by classifying loans for analysis based on similar risk characteristics. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreements; however, cash receipts on impaired and nonaccrual loans for which the accrual of interest has been discontinued are applied to principal and interest income depending upon the overall risk of principal loss to us.

Other Real Estate Owned

Assets acquired through or in lieu of loan foreclosure are initially recorded at lower of cost or fair value less estimated costs to sell, establishing a new cost basis. Subsequent to foreclosure, independent valuations are

 

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performed annually and the assets are carried at the lower of carrying amount or fair value less estimated costs to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other non-interest expense. Costs related to the development and improvement of real estate owned is capitalized.

Fair Value of Financial Instruments

A significant portion of the Company’s assets are financial instruments carried at fair value. This includes securities available for sale and certain impaired loans. The majority of assets carried at fair value are based on either quoted market prices or market prices for similar instruments. See Note 18 “Fair Value Measurements” in the “Notes to Consolidated Financial Statements” herein for additional disclosures regarding the fair value of financial instruments.

JOBS Act Transition Period

The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this extended transition period.

Comparison of Financial Condition at December 31, 2014, 2013, and 2012

Total Assets. Total assets increased $14.0 million, or 1.85%, from $757.8 million at December 31, 2013 to $771.8 million at December 31, 2014. Loan increases of $78.9 million during the year was offset by a decrease in cash and due from banks of $61.3 million, limiting growth in total assets.

Total assets increased $2.6 million, or 0.3%, from $755.2 million at December 31, 2012 to $757.8 million at December 31, 2013. Total assets were generally flat for 2013 with a decrease in total net loans of $42.3 million, partially offset by an increase in cash and cash equivalents of $27.1 million and an increase in investment securities of $10.9 million.

Net Loans. Total net loans increased by $78.9 million, or 14.1%, from $558.6 million at December 31, 2013 to $637.5 million at December 31, 2014. The increase in loans was due primarily to strong growth in the agricultural and commercial real estate loan portfolios and reduced loan sale activity.

Total net loans decreased by $42.3 million, or 7.0%, from $601.0 million at December 31, 2012 to $558.6 million at December 31, 2013. The decrease in loans was due primarily to a decrease of $20.9 million, or 16.9%, in commercial real estate loans, and a decrease of $6.9 million or 11.9%, in commercial loans. The decrease in net loans reflects a transfer of $25.0 million in loans to OREO and a decrease of $51.2 million from the sale of primarily agricultural and C&I loans. This overall loan growth reflects our continuing emphasis on originating agricultural and commercial loans by taking advantage of increased loan demand. Sales of loans were strategically executed to take advantage of balance sheet management opportunities in consideration of our capital position and loan mix concentration.

 

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The following tables set forth the composition of our loan portfolio at the dates indicated:

 

     As of December 31,  
     2014     2013     2012  
     Amount     Percent     Amount     Percent     Amount     Percent  
     (dollars in thousands)  

Agricultural loans

   $ 415,164        64.1   $ 375,240        65.9   $ 381,893        62.3

Commercial real estate loans

     137,517        21.2        102,645        18.0        123,499        20.1   

Commercial loans

     53,745        8.3        51,008        9.0        57,928        9.4   

Residential real estate loans

     40,885        6.3        39,901        7.0        49,050        8.0   

Installment and consumer other

     811        0.1        344        0.1        1,120        0.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross loans

   $ 648,122        100.0   $ 569,138        100.0   $ 613,490        100.0
    

 

 

     

 

 

     

 

 

 

Allowance for loan losses

   $ (10,603     $ (10,495     $ (12,521  
  

 

 

     

 

 

     

 

 

   

Loans, net

   $ 637,519        $ 558,643        $ 600,969     
  

 

 

     

 

 

     

 

 

   

The following table sets forth loan origination activity:

 

     As of December 31,  
     2014      2013      2012  
     (dollars in thousands)  

Total loans:

        

Balance at beginning of period

   $ 569,138       $ 613,490       $ 575,061   

Loan originations, net of repayments

     96,116         38,269         91,835   

Less: Loans sold, net of repayments

     (15,165      (51,154      (43,418

Less: Loans charged-off, net

     (647      (6,438      (1,520

Less: Transfers to other real estate owned

     (1,321      (25,029      (8,468
  

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 648,122       $ 569,138       $ 613,490   
  

 

 

    

 

 

    

 

 

 

The changes in the balances of “Loans sold, net of repayments” were caused by the reduced volume of loan participations sold versus prior years. The majority of our loan participations and sales relate to agricultural customers. When customers request additional funding, generally for expansion of their operations, the existing loan participations are usually repurchased, with the consent of the participating institution, to allow for repackaging of the loans. This allows the new loans, including the additional funding, to be re-participated at a later time. The decision to re-participate a loan is dependent on many factors, including in-house lending limits and longer-term interest rate options provided to the borrower. As reflected by the numbers, we have not been participating as many loans in 2014 as we have in the past, but have retained the balances internally.

Loan Servicing. As part of our growth and risk management strategy, we have actively developed a loan participation and loan sales network. Our ability to sell loan participations and whole loans benefits us by freeing up capital and funding to lend to new customers as well as to increase non-interest income through the recognition of loan sale and servicing revenue. Because we continue to service these loans, we are able to maintain a relationship with the customer. Additionally, we receive a servicing fee that offsets some of the cost of administering the loan, while maintaining the customer relationship.

 

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The loan servicing portfolio is shown below:

 

     As of December 31,  
     2014      2013      2012  
     (dollars in thousands)  

Total loans

   $ 648,122       $ 569,138       $ 613,490   

Less: nonqualified loan sales included below

     (8,894      (14,169      (18,396

Loans serviced

        

Agricultural

     413,933         382,094         308,514   

Commercial

     10,419         25,822         37,969   

Commercial real estate

     4,941         6,213         16,491   
  

 

 

    

 

 

    

 

 

 

Total loans serviced

     429,293         414,129         362,974   
  

 

 

    

 

 

    

 

 

 

Total loans and loans serviced

   $ 1,068,521       $ 969,098       $ 958,068   
  

 

 

    

 

 

    

 

 

 

Loan Maturity. The following table sets forth certain information at December 31, 2014 and December 31, 2013 regarding scheduled contractual maturities during the periods indicated. The tables do not include any estimate of prepayments, which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below.

 

    As of December 31, 2014     As of December 31, 2013  
    Due In
One Year
or Less
    More than
One Year
to Five
Years
    More
than Five
Years to
Ten
Years
    Due
More
Than
Ten
Years
    Due
Under
One Year
    More than
One Year
to Five
Years
    More
than Five
Years to
Ten
Years
    Due
More
than Ten
Years
 
    (dollars in thousands)  

By Loan Portfolio Class:

               

Agricultural loans

  $ 278,513      $ 106,584      $ 21,527      $ 8,540      $ 252,598      $ 97,088      $ 13,994      $ 11,560   

Commercial real estate loans

    32,639        83,068        17,121        4,689        32,494        62,544        5,154        2,453   

Commercial loans

    31,306        16,900        2,131        3,408        30,025        16,736        2,421        1,826   

Residential real estate loans

    13,951        23,876        1,139        1,919        13,787        20,043        772        5,299   

Installment and consumer other

    159        100        —          552        224        102        —          18   
 

 

 

   

 

 

   

 

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