Commitments and Contingent Liabilities

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and financial guarantees which involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. The contract amounts of those instruments reflect the extent of involvement and exposure to credit loss the Company has in particular classes of financial instruments. The same credit policies are used in making commitments and conditional obligations as for on-balance sheet instruments.

Financial instruments whose contract amounts represent credit risk are as follows:



	December 31,
	2015		2014
	(In thousands)
Commitments to extend credit	$	133,670	$	39,251
Unused lines of credit:
Home equity	111,185		111,365
Credit cards	—		23,249
Commercial	281,459		144,333
Letters of credit	3,237		8,564
Credit enhancement under the FHLB of Chicago Mortgage Partnership Finance ("MPF") Program	3,387		7,644

Commitments to extend credit are in the form of a loan in the near future. Unused lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract and may be drawn upon at the borrowers’ discretion. Letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Commitments and letters of credit primarily have fixed expiration dates or other termination clauses and may require payment of a fee. As some such commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The Company primarily extends credit on a secured basis. Collateral obtained consists primarily of single-family residences and income-producing commercial properties.

The Bank previously participated in the MPF Program of the FHLB of Chicago. Pursuant to the credit enhancement feature of the MPF Program, the Bank retained a secondary credit loss exposure in the amount of $3.4 million at December 31, 2015 related to approximately $122.7 million of residential mortgage loans that the Bank has originated and are still outstanding. The Bank acts as a servicing agent for the FHLB of Chicago. Under the credit enhancement, the FHLB of Chicago is liable for losses on loans up to one percent of the original delivered loan balances in each pool up to the point the credit enhancement is reset. After the credit enhancement resets, the FHLB of Chicago and the Bank’s loss contingency could be reduced depending upon losses experienced and loan balances remaining. The Bank is liable for losses over and above the FHLB of Chicago first loss position up to a contractually agreed-upon maximum amount in each pool that was delivered to the MPF Program. The Bank receives a monthly fee for this credit enhancement obligation based on the outstanding loan balances. The monthly fee received is net of losses under the MPF Program. The Bank discontinued funding loans through the MPF Program in 2008.

Unfunded Commitments

In addition to the allowance for loan losses reflected in the Consolidated Balance Sheets, a reserve is also provided for unfunded loan commitments. The reserve for unfunded loan commitments includes unfunded commitments to lend and commercial letters of credit. This reserve is classified in other liabilities in the Consolidated Balance Sheets.

The balances of this reserve for the periods presented is as follows:



	Year Ended December 31, 2015		Year Ended December 31, 2014			Nine Months Ended December 31, 2013
	(In thousands)
Reserve for unfunded commitment losses beginning balance	$	2,557	$	4,664		$	1,956
Provision for unfunded commitments	17		(2,107		)	2,708
Ending reserve for unfunded commitment losses	$	2,574	$	2,557		$	4,664

The amount of the allowance for unfunded loan commitments is determined using the average reserve rate that applies to the associated funded loan category multiplied by the unfunded commitment amount. The reserve also covers potential loss on letters of credit outstanding for which the Bank may be unable to recover the amount outstanding. At December 31, 2015 and 2014, a liability of $2.6 million was required compared to a liability of $4.7 million at December 31, 2013 and reflects a decrease primarily due to a release of a $2.7 million specific reserve related to letter of credit litigation that was resolved during 2014.

Repurchase Loan Reserve

Loans intended to be sold are originated in accordance with specific criteria established by the investor agencies – these are known as “conforming loans.” During the sale of these loans, certain representations and warranties are made that the loans conform to these previously established underwriting standards. In the event that any of these representations and warranties or standards are found to be out of compliance, the Company may be responsible for repurchasing the loan at the unpaid principal balance or indemnifying the buyer against loss related to that loan.

Other loans sold to investors must meet specific criteria as determined by the investor at the time of sale. If it is determined at a later date, that a loan did not meet these requirements or was a fraudulent transaction, the investor may require the Bank to either repurchase the loan or make the investor whole in the event of a loss. As the Company expects relatively few such loans to become delinquent, the total amount of loans sold with recourse does not necessarily represent future cash requirements. Collateral obtained on such loans consists primarily of single-family residences. The unpaid principal balance of loans repurchased from investors totaled $1.0 million, $1.1 million and $1.8 million during the years ended December 31, 2015 and 2014 and the nine months ended December 31, 2013, respectively. Alternatively, investors make requests to be made whole on a loan whereby the property has been disposed of at a loss. The related amounts for requests by the investor to be made whole was $125,000, $754,000 and $687,000 for the years ended December 31, 2015 and 2014 and the nine months ended December 31, 2013, respectively. All losses incurred are recorded against the reserve for repurchased loans in the Consolidated Balance Sheets.

Accordingly, in addition to the allowance for loan losses reflected on the Consolidated Balance Sheets, a reserve is also provided for the repurchase of previously sold loans. This reserve is classified in other liabilities on the Consolidated Balance Sheets.

The balances of this reserve for the periods presented is as follows:



	Year Ended December 31, 2015			Year Ended December 31, 2014			Nine Months Ended December 31, 2013
	(In thousands)
Reserve for repurchased loans beginning balance	$	1,338		$	2,600		$	2,600
Charge off	(172		)	(1,176		)	—
Recovery	74			27			—
Provision for repurchased loans	(212		)	(113		)	—
Ending reserve for repurchased loans	$	1,028		$	1,338		$	2,600

The amount of the reserve for repurchased loans is determined using the serviced portfolio balances multiplied by historical and expected loss rates to provide for the probable losses related to sold mortgage loans. The reserve declined $310,000 during the year ended December 31, 2015. During the year ended December 31, 2014 the reserve declined $1.3 million. Total income incurred for investor loss reimbursements, including any provision recorded or reserve released, was $212,000 for the year ended December 31, 2015 and total expense incurred for the year ended December 31, 2014 was $50,000. Losses may result from the repurchase of loans or indemnification of losses incurred upon foreclosure and disposition of related collateral. The analysis of the reserve at December 31, 2015 required a liability of $1.0 million.

Legal Proceedings

In the ordinary course of business, there are legal proceedings against the Company and its subsidiaries. Management considers that the aggregate liabilities, if any, resulting from such actions would not have a material, adverse effect on the consolidated financial position of the Company.

On February 25, 2016, a plaintiff filed a purported class action complaint in the United States District Court for the Western District of Wisconsin on behalf of himself and other Company stockholders against the Company, its Board, and Old National in connection with a proposed transaction between the Company and Old National, pursuant to which the Company will be acquired by Old National. The lawsuit is captioned Parshall v. Anchor Bancorp Wisconsin, Inc., et al., Case No. 16-CV-120 (W.D. Wis.), and alleges state law breach of fiduciary duty claims against the Company’s Board for, among other things, seeking to sell the Company through an allegedly defective process, for an unfair price and on unfair terms. The lawsuit seeks, among other things, to enjoin the consummation of the transaction and damages. The complaint alleges that Old National aided and abetted the directors’ breaches of fiduciary duty. The complaint also brings state and federal law claims alleging that the Form S-4 Registration Statement that was filed with the U.S. Securities and Exchange Commission on February 17, 2016 for the transaction, omitted certain material information.