UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended December 31, ~~2014~~2015



¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to __________

Commission File No. 001-35684

LaPorte Bancorp, Inc.

(Exact name of registrant as specified in its charter)



Maryland		35-2456698
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)



710 Indiana Avenue, LaPorte, Indiana		46350
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (219) 362-7511

Securities Registered Pursuant to Section 12(b) of the Act:



Common Stock, $0.01 par value		The NASDAQ Stock Market, LLC
(Title of each class)		(Name of each exchange on which registered)

Securities Registered Pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x¨

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



Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

Based on the closing sales price on the NASDAQ Stock Market on June 30, ~~2014~~2015, the aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant was $6368.46 million.

On March 921, ~~2015~~2016, the number of shares outstanding of the Registrant’s Common Stock was 5,~~623~~580,~~566~~115 shares.

DOCUMENTS INCORPORATED BY REFERENCE

~~DOCUMENTS~~Document ~~INCORPORATED~~Part BYof ~~REFERENCE~~Form 10-K into which incorporated Not Applicable

Portions of the Registrant’s definitive proxy statement for its 2015 Annual Meeting of Shareholders are incorporated by reference in Part III.

TABLE OF CONTENTS

PART I
Item 1.	Business	3
Item 1A.	Risk Factors	3940
Item 1B.	Unresolved Staff Comments	4448
Item 2.	Properties	4548
Item 3.	Legal Proceedings	4548
Item 4.	Mine Safety Disclosures	4548
PART II
Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	4649
Item 6.	Selected Financial Data	4750
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4952
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	6264
Item 8.	Financial Statements and Supplementary Data	6466
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	6466
Item 9A.	Controls and Procedures	6466
Item 9B.	Other Information	6566
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	6567
Item 11.	Executive Compensation	6569
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	6575
Item 13.	Certain Relationships and Related Transactions, and Director Independence	6577
Item 14.	Principal Accountant Fees and Services	6578
PART IV
Item 15.	Exhibits, Financial Statement Schedules	6579
SIGNATURES

PART I

Forward Looking Statements

This Annual Report on Form 10-K (including information incorporated by reference) contains future oral and written statements of LaPorte Bancorp, Inc. (the “Company”) and its management and may contain, forward-looking statements, as such term is defined in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance, and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should,” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors which could have a material adverse effect on the operations and future prospects of the Company and certain subsidiaries are detailed in “Item 1A – Risk Factors” within this Annual Report on Form 10-K. In addition to these risk factors, there are other factors that may impact any public company, including ours, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries. These additional factors include, but are not limited to, the following:


•	changes in prevailing real estate values and loan demand both nationally and within our current and future market area;


•	increased competitive pressures among financial services companies;


•	changes in consumer spending, borrowing, and savings habits;


•	the amount of assessments and premiums we are required to pay for FDIC deposit insurance;


•	legislative or regulatory changes that affect our business including the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and its impact on our compliance costs;


•	the success of our mortgage warehouse lending program including the impact of the Dodd-Frank Act on the mortgage companies;


•	our ability to manage the impact of changes in interest rates, spreads on interest earning assets and interest-bearing liabilities, and interest rate sensitivity;


•	rising interest rates and their impact on mortgage loan volumes;


•	our ability to successfully manage our commercial lending;


•	the financial health of certain entities, including government sponsored enterprises, the securities of which are owned or acquired by the Company;


•	adverse changes in the securities market;


•	the new capital rules effective on January 1, 2015;


•	the costs, effects, and outcomes of existing or future litigation;

• the economic impact of past and any future terrorist attacks, acts of war, or threats thereof and the response of the United States to any such threats and attacks; ~~and~~


•	delays in closing the merger with and into Horizon Bancorp;


•	the potential impact of the announcement of the proposed merger with and into Horizon Bancorp on relationships with third parties, including customers, employees, and competitors;


•	the actual results of our proposed merger with and into Horizon Bancorp could vary materially as a result of a number of factors, including the possibility that various closing conditions for the transaction may not be satisfied or waived, and the merger agreement could be terminated under certain circumstances; and


•	the ability of the Company to manage the risks associated with the foregoing factors as well as anticipated risk factors.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.


Item 1.	Business

LaPorte Bancorp, Inc.

On October 4, 2012, LaPorte Bancorp, Inc., a Maryland corporation (the “Company,” including as the context requires prior to October 4, 2012, LaPorte Bancorp, Inc., a federal corporation) completed its conversion and reorganization to the stock holding company form of organization. The Company became the new stock holding company for The LaPorte Savings Bank (the “Bank”) and sold 3,384,611 shares of common stock at $8.00 per share, for gross offering proceeds of $27.1 million, in its stock offering. Concurrent with the completion of the offering, shares of common stock of LaPorte Bancorp, Inc., a federal corporation owned by the public were exchanged for 1.319 shares of the Company’s common stock so that existing shareholders of LaPorte Bancorp, Inc., a federal corporation, owned approximately the same percentage of the Company’s common stock as they owned of the common stock of LaPorte Bancorp, Inc., a federal corporation immediately prior to the conversion, as adjusted for the assets of LaPorte Savings Bank, MHC and their receipt of cash in lieu of fractional exchange shares.

The Company’s primary business activities, apart from owning the shares of The LaPorte Savings Bank, currently consists of loaning funds to The LaPorte Savings Bank’s ESOP, investing in checking and money market accounts at The LaPorte Savings Bank, and investing in other investment securities. The Company has two wholly-owned subsidiaries, the Bank and LSB Risk Management, LLC, which was formed on December 27, 2013 as a pooled captive insurance company subsidiary to provide additional insurance coverage for the Company and its subsidiaries related to the operations of the Company for which insurance may not be economically feasible.

The Company is subject to regulation and examination by the Federal Reserve Board. The Company, as the holding company of The LaPorte Savings Bank, is authorized to pursue other business activities permitted by applicable laws and regulations, which may include the acquisition of banking and financial services companies. The Company is a financial holding company. See “Supervision and Regulation—Holding Company Regulation” for a discussion of permitted activities. The Company currently has no specific arrangements or understandings regarding any such other activities.

The Company’s cash flow depends on dividends received from The LaPorte Savings Bank. The Company neither owns nor leases significant infrastructure, but instead pays a fee to the Bank for the use of its premises, furniture, and equipment. The Company employs only persons who are officers of the Bank to serve as officers of the Company. The Company will utilize support staff of the Bank from time to time and pay a fee to the Bank for the time devoted to Company business by those employees. However, these persons are not separately compensated by the Company. The Company may hire additional employees, as appropriate, to the extent it expands its business in the future.

At December 31, ~~2014~~2015, the Company had consolidated assets of $~~518~~543.62 million, deposits of $~~340~~391.80 million and total shareholders'’ equity of $8285.45 million.

On March 10, 2016, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Horizon Bancorp, an Indiana corporation (“Horizon”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, the Company will merge with and into Horizon, with Horizon as the surviving corporation in the merger (the “Merger”). Immediately following the Merger, the Company’s wholly owned subsidiary, The LaPorte Savings Bank, will merge with and into Horizon’s wholly owned subsidiary, Horizon Bank, N.A (the “Bank Merger”). Horizon Bank will be the surviving entity in the Bank Merger. The Merger Agreement was approved and adopted by the Board of Directors of each of the Company and Horizon and is subject to the receipt of customary shareholder and regulatory approvals, among other customary closing conditions.

Upon completion of the Merger, each Company shareholder will have the right to receive, at their election, $17.50 per share in cash or 0.629 shares of Horizon common stock, or a combination of both, for each share of the Company’s common stock, subject to allocation provisions. The Merger Agreement provides that, in the aggregate, 65% of the outstanding common shares of the Company will be converted into the right to receive shares of Horizon common stock and the remaining 35% of the outstanding common shares of the Company will be converted into the right to receive cash. Based on Horizon’s March 9, 2016 closing price of $24.21 per share as reported on the NASDAQ Global Select Market, the transaction value was estimated at $94.1 million.

The Company’s home office is located at 710 Indiana Avenue, LaPorte, Indiana 46350 and the telephone number is (219) 362-7511.

The LaPorte Savings Bank

The LaPorte Savings Bank is an Indiana-chartered savings bank that operates seven full-service locations in LaPorte and Porter Counties, Indiana, and a mortgage loan production office in St. Joseph, Michigan. We offer a variety of deposit and loan products to individuals and businesses, most of which are located in our primary market areas of LaPorte and Porter Counties, Indiana. The Bank is subject to comprehensive regulation and examination by the Federal Deposit Insurance Corporation and the Indiana Department of Financial Institutions. The Bank has one wholly-owned subsidiary, LSB Investments, Inc., which manages a large portion of the investment portfolio for the Bank. LSB Investments, Inc. has one wholly-owned subsidiary, LSB Real Estate, Inc., which is a real estate investment trust that purchases mortgage loans originated by the Bank.

Our business consists primarily of accepting deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in mortgage warehouse loans, commercial real estate loans, residential loans, commercial loans, home equity loans and lines of credit, and to a lesser extent, construction and land loans, automobile, and other consumer loans. In addition, we invest in mortgage-backed securities, collateralized mortgage obligation securities, municipal bond securities, U.S. treasury and agency securities, corporate bond securities, and interest-earning time deposits at other financial institutions. We also offer trust services through a referral agreement with a third party. For a description of our business strategy, see “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Strategy.”

Our website address is www.laportesavingsbank.com. Information on our website is not and should not be considered a part of this Annual Report on Form 10-K.

The LaPorte Savings Bank

The LaPorte Savings Bank is an Indiana-chartered savings bank that operates seven full-service locations in LaPorte and Porter Counties, Indiana, and a mortgage loan production office in St. Joseph, Michigan. We offer a variety of deposit and loan products to individuals and businesses, most of which are located in our primary market areas of LaPorte, Porter, and Lake Counties, Indiana. The Bank is subject to comprehensive regulation and examination by the Federal Deposit Insurance Corporation and the Indiana Department of Financial Institutions. The Bank has one wholly-owned subsidiary, LSB Investments, Inc., which manages a large portion of the investment portfolio for the Bank. LSB Investments, Inc. has one wholly-owned subsidiary, LSB Real Estate, Inc., which is a real estate investment trust that purchases mortgage loans originated by the Bank.

Our business consists primarily of accepting deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in mortgage warehouse loans, commercial real estate loans, residential loans, commercial loans, home equity loans and lines of credit, and to a lesser extent, construction and land loans, automobile, and other consumer loans. In addition, we invest in mortgage-backed securities, collateralized mortgage obligation securities, municipal bond securities, U.S. treasury and agency securities, corporate bond securities, and interest-earning time deposits at other financial institutions. We also offer trust services through a referral agreement with a third-party. For a description of our business strategy, see “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Strategy.”

Our website address is www.thelpsb.com. Information on our website is not and should not be considered a part of this Annual Report on Form 10-K.

Market Area

Our primary market for both loans (with the exception of mortgage warehouse loans) and deposits is currently around the areas where our full-service banking offices are located in LaPorte and Porter Counties in Indiana as well as ~~the~~Lake County in Indiana where we employ a qualified commercial lender. We also market to contiguous counties in Indiana and Michigan. We ~~also~~ serve St. Joseph, Michigan, and its surrounding areas by providing residential mortgage loans through our mortgage loan production office located in St. Joseph.

Because of its location at the southern tip of Lake Michigan, LaPorte County is a major access point to the Chicago market for both rail and highway. LaPorte County is the second largest county geographically in Indiana. The southern part of the county is rural and agricultural in nature. The northern part of the county is where LaPorte and Michigan City are located and the majority of the population is centered. It is also where the majority of the growth is centered for the county. LaPorte County ~~has~~ranks ~~experienced~~16th ain ~~small~~the ~~growth~~state of Indiana for total population at 111,444 in 2014. The population of ~~1.0%~~the ~~from~~county ~~110,106~~has inbeen ~~2000~~stable tosince ~~111,281~~the in2010 ~~2013,~~census according to the ~~2013~~most recent data provided by the Indiana Business Research Center at Indiana University Kelley School of Business (“Indiana Business Research Center”). The economies of LaPorte and Michigan City are mainly large manufacturing and retail trade; however, both have made the transition to health care and social services, accommodation and food services, and ~~construction~~education. According to the Indiana Business Research Center, LaPorte County’s major employment sectors are manufacturing, retail trade, and health care and social assistance,. ~~and~~LaPorte ~~its~~County’s unemployment rate ~~was~~decreased from 9.4% during 2013, ~~which~~to ~~was~~7.7% during 2014 and remains above the state’s average rate of 76.50% during ~~2013~~2014. For the month of December 2015, LaPorte County'’s unemployment rate was 6.4% which remained above the state’s rate of 4.5%. LaPorte County’s median household income in ~~2013~~2014 was slightly below the state’s median household income and ranked 56th in the state. LaPorte County ranks ~~33rd~~38th in the state for those with educations of college graduate or higher. WeOverall, ~~continued~~property tovalues ~~experience~~based ~~moderately~~on ~~declining~~actual ~~property~~sales ~~values~~during 2015 within the county have slightly increased from 2014 with ~~pockets~~the number of ~~stability~~units insold ~~certain~~increasing ~~areas~~as ofwell. ~~LaPorte~~The ~~County~~county, ~~during~~however, ~~2014~~continues to see property values lower than the values reported in 2008.

Porter County, to the west of LaPorte County, has historically seen higher growth because of its proximity to the Chicago market. The population of Porter County grew 1.37% from the 2010 U.S. Census to ~~166~~167,~~557~~076 in ~~2013~~2014, 9th in the state, according to the Indiana Business Research Center. Porter County’s major employment sectors are manufacturing, ~~retail trade,~~ health care and social services, retail trade, accommodation and food services, and educational services. The economy of Porter County is critical to the Northwest Indiana region, which is made up of seven counties. The ~~majority of the population within Porter County is centered between Portage and Valparaiso. Our Chesterton branch is located between Portage and Valparaiso. The~~ unemployment rate for Porter County of 76.43% during ~~2013~~2014 was ~~similar~~slightly tohigher than the state’s average rate of 76.50% ~~during~~for ~~2013~~the same year and the median household income in ~~2013~~2014 ranked ~~5th~~6th highest in the state of Indiana according to the Indiana Business Research Center. For the month of December 2015, Porter County’s unemployment rate was 5.4% which remained above the state’s rate of 4.5%. It is the 13th highest ranking county in the state for those with educations of college graduate or higher also according to the Indiana Business Research Center. WeProperty ~~also~~values in Porter County continue to ~~experience~~be ~~moderately~~lower ~~declining~~than values experienced in 2008 based on actual sales in 2015 compared to 2008, however, property values remained stable with values experienced in 2014 with pockets of ~~stability~~increasing values as well as an increase in ~~certain~~units ~~areas~~sold ofin ~~Porter~~certain ~~County~~areas during ~~2014~~2015.

Competition

We face significant competition in both originating loans and attracting deposits. The markets that we serve have a significant concentration of financial institutions, many of which are significantly larger than us and have greater financial resources than we do. Our competition for loans comes principally from commercial banks, mortgage banking companies, credit unions, leasing companies, insurance companies, and other financial service companies. In addition, our mortgage warehouse lending competition is nationwide, and we are often competing with institutions that are significantly larger and may be able to offer larger lines or facilities and lower interest rates and fees. Our most direct competition for deposits has historically come from commercial banks, savings banks, and credit unions. We face additional competition for deposits from non-depository competitors such as the mutual fund industry, securities and brokerage firms, and insurance companies.

We believe our convenient branch locations, our emphasis on personalized banking, and our ability for local decision-making in our banking business provide a competitive advantage over the competition in our market areas. Specifically, we promote and maintain relationships and build customer loyalty within the communities we serve by focusing our marketing and community involvement on the specific needs of these communities. During the fourth quarter of 2015, we also introduced a checking and savings rewards program which give customers the opportunity to earn higher interest rates on their deposits or cash back on their debit card transactions when they meet certain monthly qualifications. We believe that these products provide a competitive advantage over other banks and financial services providers in our market. Within LaPorte and Porter Counties in Indiana, the Bank had deposit market shares of 1920.53% and 1.75%, respectively, at June 30, ~~2014~~2015, which represented the second and ninth largest deposit market shares in the respective counties.

Lending Activities

Our lending strategy is primarily driven by our strategy to grow our commercial real estate and commercial business loan portfolios and to build commercial banking relationships within the markets we serve as well as the contiguous counties in Indiana and Michigan. We believe we employ experienced commercial lenders who have developed relationships with small to mid-market businesses. In addition, our Executive Vice President ~~and~~– Chief Credit Officer has over 20 years of experience in commercial lending and offers additional support along with our credit administration department.

4We offer one- to four-family residential loans that are primarily originated for sale into the secondary market. We also retain a percentage of fixed mortgages with a 10-15 year term as well as five and seven year adjustable rate mortgages with 30 year amortizations within our portfolio in order to increase our loan balances and to reduce the effect of the amortization of the older mortgages in the portfolio. We believe we have a strong residential lending team and infrastructure led by an experienced residential mortgage lending manager who was hired to grow our mortgage origination business in our local market areas in LaPorte and Porter Counties in Indiana. In addition, we established a mortgage loan production office in St. Joseph, Michigan, and serve that market as well. During 2015, we were voted by readers of the Herald Argus community newspaper as the Best Mortgage Company, which demonstrates our commitment to our mortgage origination business in the communities we serve.

We ~~offer~~also ~~one-~~provide financing to ~~four-family~~mortgage ~~residential~~companies ~~loans~~through ~~and~~our ~~originate~~mortgage ~~primarily~~warehouse ~~for~~lending ~~sale~~department, ~~into~~which ~~the~~is ~~secondary~~led ~~market.~~by Weour ~~also~~Senior ~~retain~~Vice aPresident ~~percentage~~ of ~~fixed~~Mortgage ~~mortgages~~Warehouse Lending who has over 18 years of experience with athis ~~10-15~~type ~~year~~of ~~term~~lending. asMortgage ~~well~~warehouse aslending ~~five~~provides ~~and~~additional ~~seven~~profitability ~~year~~through ~~adjustable~~higher ~~rate~~interest ~~mortgages~~income ~~with~~and 30related ~~year~~fees ~~amortizations~~but ~~within~~is ~~our~~subject ~~portfolio~~to changes in ~~order~~mortgage topurchase ~~increase~~and ~~our~~refinancing ~~loan~~activity ~~balances~~from changes in mortgage interest rates and current market trends. In an effort to ~~reduce~~offset the ~~effect~~impact of challenges within the ~~amortization~~mortgage industry and to lessen our reliance on a smaller number of ~~the~~larger ~~older~~lines, ~~mortgages~~we incontinued to increase the ~~portfolio.~~number ~~During~~of ~~2013,~~warehouse lenders we ~~strengthened~~are ~~our~~authorized ~~residential~~to ~~lending~~do ~~team~~business with and ~~infrastructure~~also byremained ~~hiring~~diversified angeographically ~~experienced~~throughout ~~residential~~the ~~mortgage~~United ~~lending~~States. During ~~manager~~2015, towe ~~grow~~added ~~our~~eight new mortgage ~~origination~~warehouse ~~business~~lines, inone ~~our~~of ~~local~~which ~~market~~is ~~areas~~ in ~~LaPorte~~Utah ~~and~~where ~~Porter~~we ~~Counties~~did innot ~~Indiana~~already have a lending presence. In ~~addition~~At December 31, 2015, we ~~established~~had a37 ~~mortgage~~active ~~loan~~participants ~~production~~within ~~office~~17 instates ~~St.~~with ~~Joseph,~~lines ~~Michigan~~ranging from $2 million to $30 million, ~~and~~which ~~serve~~can ~~that~~be ~~market~~increased by 20% with anBoard ~~experienced~~of Director approval. We also began a mortgage ~~originator~~warehouse ~~and~~participation anprogram ~~underwriter.~~in ~~These~~2015 ~~strategic~~which ~~additions~~allows ~~enabled~~other financial institutions to purchase portions of the loans originated under these lines of credit. The program allows us to ~~increase~~continue to accommodate both existing and new warehouse customers without increasing our ~~purchase~~outstanding mortgage ~~business~~warehouse ~~during~~loan ~~2014~~balances. Through this program, we are able to ~~reduce~~generate ~~the~~fee ~~impact~~income, ofincluding loan servicing and wire transfer fees, earned on the ~~decline~~participation activity. At December 31, 2015, we had three local financial institution participants in ~~mortgage~~this ~~refinances~~program with total commitments of $115 million and outstanding participated balances of $101 million.

We also provide financing to mortgage companies through our mortgage warehouse lending department, which is led by our Senior Vice President of Mortgage Warehouse Lending who has over 17 years of experience with this type of lending. Mortgage warehouse lending provides additional profitability through higher interest income and related fees but is subject to changes in mortgage purchase and refinancing activity from changes in mortgage interest rates and current market trends. In an effort to offset the impact of challenges within the mortgage industry and to lessen our reliance on a smaller number of larger lines, we continued to diversify geographically throughout the United States and also increased the number of warehouse lenders. During 2014, we added 15 new mortgage warehouse lines, 10 of which were in states where we did not already have a lending presence. At December 31, 2014, we had 29 active participants within 17 states with lines ranging from $2 million to $30 million. We anticipate that we will continue to add mortgage warehouse participants during 2015.

The volume of and risk associated with our loans are affected by general economic conditions, including the continued weakness in real estate values.

Loan Approval Procedures and Authority. Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by management and approved by the Board of Directors. Our lending policies are reviewed and updated at least annually, most recently in October 2014 for mortgage lending and December 2014 for commercial, mortgage warehouse, and consumer lending policies. The Board of Directors has granted loan approval authority to certain officers or groups of officers up to prescribed limits, based on the officer’s experience and tenure. In addition, our Executive Vice President and Chief Credit Officer has the authority to approve all commercial loans or lending relationships up to $500,000. Generally, all commercial loans or lending relationships greater than $500,000 but less than $1.25 million must be approved by our Officer Loan Committee, which is compromised of the Chief Executive Officer, President and Chief Financial Officer, Executive Vice President and Chief Credit Officer, Senior Vice President – Mortgage Warehousing, and Senior Vice President – Commercial Lending. Individual loans or lending relationships with aggregate exposure in excess of $1.25 million but less than $3.5 million must be approved by our Board of Directors Loan Committee, which includes five outside directors. Loans or lending relationships in excess of $3.5 million must be approved by the full Board of Directors.

Our mortgage warehouse loan approval process is intended to minimize potential risk by establishing desirable relationships with experienced and well-managed mortgage companies (participants). The Bank is relying primarily upon the mortgagor to repay the loan or extension of credit, but the mortgage participant and their principal owners must guarantee the performance of those loans or extensions of credit they have originated. All residential mortgage loans in excess of an individual mortgage warehouse staff member’s loan authority must be approved by two members of the Officer Loan Committee. We have also established limits on outstanding lines to each mortgage participant. A maximum limit of $30.0 million has been established for a single mortgage participant or for mortgage participants with common ownership. The Board of Directors has the authority to increase this limit up to 20%. However, each individual mortgage originated by a mortgage participant must be below our legal lending limit.

Loan ~~Portfolio~~Approval ~~Composition~~Procedures and Authority. ~~The~~Our ~~following~~lending ~~table~~activities ~~sets~~follow ~~forth~~written, ~~the~~non-discriminatory ~~composition~~underwriting ofstandards ~~our~~and loan ~~portfolio,~~origination procedures established by ~~type~~management and approved by the Board of ~~loan~~Directors. Our lending policies are reviewed and updated at least annually. The Board of Directors has granted loan approval authority to certain officers or groups of officers up to prescribed limits, based on the ~~dates~~officer’s ~~indicated~~experience ~~with~~and tenure. In addition, our Executive Vice President – Chief Credit Officer has the ~~exception~~authority ofto ~~mortgage~~approve all commercial loans ~~held~~or ~~for~~lending ~~sale~~relationships ~~totaling~~up to $~~763~~500,000. Generally, all commercial loans or lending relationships greater than $500,000 but less than $1.125 million must be approved by our Officer Loan Committee, which is compromised of the Chief Executive Officer, President and Chief Financial Officer, Executive Vice President – Chief Credit Officer, Senior Vice President – Mortgage Warehousing, and Senior Vice President – Commercial Lending. Individual loans or lending relationships with aggregate exposure in excess of $1.225 million, but less than $3.05 million must be approved by our Board of Directors Loan Committee, ~~and~~which includes five outside directors. Loans or lending relationships in excess of $43.25 million atmust ~~December 31,~~be ~~2014,~~approved ~~2013,~~by ~~2012,~~the ~~2011,~~full ~~and~~Board ~~2010,~~of ~~respectively~~Directors.

	At December 31,
	2014					2013					2012					2011					2010
	Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	17,415		5.63	%	$	17,640		5.94	%	$	20,179		6.35	%	$	18,017		6.03	%	$	17,977		6.49	%
Real estate	75,263			24.32		83,782			28.22		79,817			25.12		80,430			26.90		79,807			28.82
Five or more family	16,486			5.33		15,402			5.19		14,284			4.49		17,719			5.93		11,586			4.18
Construction	2,322			0.75		3,949			1.33		1,793			0.56		1,175			0.39		4,947			1.79
Land	6,826			2.20		8,149			2.74		8,490			2.67		9,218			3.08		10,397			3.76
Total commercial	118,312			38.23		128,922			43.42		124,563			39.20		126,559			42.33		124,714			45.04
One- to four-family	39,317			12.71		35,438			11.93		36,996			11.64		45,576			15.25		57,144			20.64
Mortgage warehouse	132,636			42.86		115,443			38.88		137,467			43.26		103,864			34.74		69,600			25.13
Residential construction:
Construction	1,472			0.48		503			0.17		1,108			0.35		2,631			0.88		1,885			0.68
Land	192			0.06		289			0.10		367			0.12		416			0.14		398			0.14
Total residential construction	1,664			0.54		792			0.27		1,475			0.46		3,047			1.02		2,283			0.82
Home equity	13,195			4.26		11,397			3.84		12,267			3.86		12,966			4.34		14,187			5.12
Consumer and other	4,325			1.40		4,920			1.66		5,018			1.58		6,942			2.32		8,985			3.25
Total loans	309,449			100.00	%	296,912			100.00	%	317,786			100.00	%	298,954			100.00	%	276,913			100.00	%
Net deferred loan costs	277					278					214					177					133
Allowance for loan losses	(3,595		)			(3,905		)			(4,308		)			(3,772		)			(3,943		)
Total loans, net	$	306,131				$	293,285				$	313,692				$	295,359				$	273,103

Our mortgage warehouse loan approval process is intended to minimize potential risk by establishing desirable relationships with experienced and well-managed mortgage companies. The Bank is relying primarily upon the mortgagor to repay the loan or extension of credit, but the mortgage company and their principal owners must guarantee the performance of those loans or extensions of credit they have originated. All residential mortgage loans in excess of an individual mortgage warehouse staff member’s loan authority must be approved by two members of the Officer Loan Committee or one member of the Officer Loan Committee and the Senior Vice President - Chief Accounting Officer. We have also established limits on outstanding lines to each mortgage company. A maximum limit of $30.0 million, up to an additional 20% with Board of Director approval, to be retained on our balance sheet has been established for a single mortgage company or for mortgage companies with common ownership. A maximum total funding limit to a mortgage warehouse company of $50.0 million may apply when taking into account the mortgage warehouse participant program as those amounts over our maximum balance sheet limit may be funded by the three participants. Each individual mortgage originated by a mortgage company must be below our legal lending limit.

Pursuant to the terms of the Merger Agreement, we are limited in our ability to make loans or extensions of credit, including a limitation on (1) ~~Includes~~making ~~$172,000,~~any ~~$508,000,~~new commercial loan in excess of $1.225 million, $(2.2) ~~million,~~making ~~and~~any ~~$3.4~~mortgage ~~million~~loan ofwith ~~indirect~~a ~~automobile~~loan ~~loans~~to atvalue ~~December~~in ~~31,~~excess ~~2014,~~of ~~2013,~~80% ~~2012,~~(unless ~~2011,~~private ~~and~~mortgage ~~2010,~~insurance ~~respectively.~~is ~~Includes~~obtained) ~~$4.2~~or ~~million,~~any ~~$4.4~~other ~~million,~~mortgage loan in excess of $417,000; (3.9) ~~million,~~making any consumer loan in excess of $75,000; (4.7) ~~million,~~making ~~and~~any home equity loan or line of credit in excess of $100,000; (5.) making any loan participation; (6) ~~million~~making ofany ~~direct~~agreement ~~automobile~~to purchase mortgage loans ~~and~~from ~~other~~any ~~loans~~third-party atoriginator; ~~December~~or ~~31,~~(7) ~~2014,~~making ~~2013,~~any ~~2012,~~warehouse ~~2011,~~agreement ~~and~~with ~~2010~~an existing or new borrower, ~~respectively~~without the consent of Horizon. Horizon has agreed not to unreasonably withhold such consent.

Loan Portfolio ~~Maturities and Yields~~Composition. The following table ~~summarizes~~sets forth the ~~scheduled~~composition ~~repayments~~ of our loan portfolio, by type of loan at ~~December 31,~~the ~~2014.~~dates ~~Demand~~indicated ~~loans,~~with the exception of mortgage loans ~~having~~held nofor ~~stated~~sale ~~repayment~~totaling ~~schedule~~$3.6 ormillion, ~~maturity~~$763,000, ~~and~~$1.1 ~~overdraft~~million, ~~loans~~$1.2 ~~are~~million, ~~reported~~and as$3.0 ~~being~~million ~~due~~at inDecember 31, ~~one~~2015, ~~year~~2014, or2013, ~~less~~2012, and 2011, respectively.

		Commercial and industrial						Commercial Real Estate						Five or More Family						Commercial Construction
	At December 31,
Due During the Years Ending December 31,		Amount			WeightedAverageRate			Amount			WeightedAverageRate			Amount			WeightedAverageRate			Amount			WeightedAverageRate
	2015						2014						2013						2012						2011
		(Dollars in thousands)
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
2015		$	5,042		4.41	%		$	10,422		5.72	%		$	3,754		6.50	%		$	2,322		4.16	%
	(Dollars in thousands)
2016		2,064			4.77			7,206			5.50			326			6.50			—			—
Commercial:
2017		4,114			4.71			7,044			5.22			1,009			4.71			—			—
Commercial and industrial	$	18,117		5.25	%		$	17,415		5.63	%		$	17,640		5.94	%		$	20,179		6.35	%		$	18,017		6.03	%
2018 to 2019		5,314			4.53			38,762			4.76			4,775			4.64			—			—
Real estate	92,300			26.76			75,263			24.32			83,782			28.22			79,817			25.12			80,430			26.90
2020 to 2024		881			5.18			6,807			5.37			6,471			4.45			—			—
Five or more family	22,692			6.58			16,486			5.33			15,402			5.19			14,284			4.49			17,719			5.93
2025 to 2029		—			—			1,773			5.72			—			—			—			—
Construction	11,082			3.21			2,322			0.75			3,949			1.33			1,793			0.56			1,175			0.39
2030 and beyond		—			—			3,249			4.84			151			6.63			—			—
Land	10,639			3.08			6,826			2.20			8,149			2.74			8,490			2.67			9,218			3.08
Total		$	17,415		4.60	%		$	75,263		5.09	%		$	16,486		5.05	%		$	2,322		4.16	%
Total commercial	154,830			44.88			118,312			38.23			128,922			43.42			124,563			39.20			126,559			42.33
One- to four-family	40,478			11.74			39,317			12.71			35,438			11.93			36,996			11.64			45,576			15.25
Mortgage warehouse	128,902			37.38			132,636			42.86			115,443			38.88			137,467			43.26			103,864			34.74
Residential construction:
Construction	2,423			0.70			1,472			0.48			503			0.17			1,108			0.35			2,631			0.88
Land	878			0.26			192			0.06			289			0.10			367			0.12			416			0.14
Total residential construction	3,301			0.96			1,664			0.54			792			0.27			1,475			0.46			3,047			1.02
Home equity	13,990			4.06			13,195			4.26			11,397			3.84			12,267			3.86			12,966			4.34
Consumer and other (1)	3,380			0.98			4,325			1.40			4,920			1.66			5,018			1.58			6,942			2.32
Total loans	344,881			100.00	%		309,449			100.00	%		296,912			100.00	%		317,786			100.00	%		298,954			100.00	%
Net deferred loan costs	305						277						278						214						177
Allowance for loan losses	(3,634		)				(3,595		)				(3,905		)				(4,308		)				(3,772		)
Total loans, net	$	341,552					$	306,131					$	293,285					$	313,692					$	295,359

	Commercial Land				One- to four-family				Mortgage Warehouse				Residential Construction
Due During the Years Ending December 31,	Amount		WeightedAverageRate		Amount		WeightedAverageRate		Amount		WeightedAverageRate		Amount		WeightedAverageRate
	(Dollars in thousands)
2015	$	2,765	5.42	%	$	598	5.49	%	$	132,636	4.05	%	$	1,472	4.32	%
2016	1,747		5.68		252		5.16		—		—		—		—
2017	1,085		5.25		447		6.21		—		—		—		—
2018 to 2019	1,022		5.48		1,150		5.41		—		—		—		—
2020 to 2024	207		5.19		2,826		5.75		—		—		—		—
2025 to 2029	—		—		7,603		4.38		—		—		—		—
2030 and beyond	—		—		26,441		5.07		—		—		—		—
Total	$	6,826	5.46	%	$	39,317	5.02	%	$	132,636	4.05	%	$	1,472	4.32	%


(1)	Includes $42,000, $172,000, $508,000, $1.2 million, and $2.2 million of indirect automobile loans at December 31, 2015, 2014, 2013, 2012, and 2011, respectively. Includes $3.3 million, $4.2 million, $4.4 million, $3.9 million, and $4.7 million of direct automobile loans and other loans at December 31, 2015, 2014, 2013, 2012, and 2011, respectively.

	Residential Land				Home Equity				Consumer and Other				Total
Due During the Years Ending December 31,	Amount		WeightedAverageRate		Amount		WeightedAverageRate		Amount		WeightedAverageRate		Amount		WeightedAverageRate
	(Dollars in thousands)
2015	$	3	3.13	%	$	1,088	4.26	%	$	519	3.43	%	$	160,621	4.26	%
2016	—		—		811		4.31		237		6.02		12,643		5.36
2017	—		—		1,634		4.20		488		5.14		15,821		4.98
2018 to 2019	1		3.13		3,617		4.00		1,894		3.53		56,535		4.66
2020 to 2024	13		7.75		3,407		4.72		1,137		5.70		21,749		5.05
2025 to 2029	—		—		325		6.16		50		8.97		9,751		4.70
2030 and beyond	175		6		2,313		4.07		—		—		32,329		4.99
Total	$	192	6.05	%	$	13,195	4.32	%	$	4,325	4.47	%	$	309,449	4.56	%

Loan Portfolio Maturities and Yields. The following table ~~sets~~summarizes ~~forth~~ the ~~contractual~~scheduled ~~maturities~~repayments of ~~fixed-~~our ~~and~~loan ~~adjustable-rate~~portfolio ~~loans~~ at December 31, ~~2014~~2015. ~~that~~Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due ~~after~~in ~~December 31,~~one ~~2015~~year or less.

	Due After December 31, 2015
		Commercial and industrial					Commercial Real Estate				Five or More Family				Commercial Construction
	Fixed			Adjustable			Total
Due During the Years Ending December 31,		Amount			WeightedAverageRate		Amount		WeightedAverageRate		Amount		WeightedAverageRate		Amount		WeightedAverageRate
	~~(Dollars in thousands)~~	(Dollars in thousands)
Commercial:
2016		$	4,515		4.44	%	$	7,910	5.20	%	$	520	5.00	%	$	8,062	4.36	%
Commercial and industrial	$	9,899		$	2,474		$	12,373
2017		2,818			4.71		8,089		5.66		151		4.50		432		4.25
Real estate	43,214			21,627			64,841
2018		3,163			4.30		20,154		4.54		7,095		4.79		—		—
Five or more family	12,706			26			12,732
2019 to 2020		5,731			4.39		35,649		4.78		10,994		4.63		2,588		4.27
Construction	—			—			—
2021 to 2025		1,890			4.69		16,722		4.61		3,932		4.57		—		—
Land	2,772			1,289			4,061
2026 to 2030		—			—		572		5.22		—		—		—		—
Total commercial loans	68,591			25,416			94,007
2031 and beyond		—			—		3,204		4.96		—		—		—		—
One- to four-family	20,736			17,983			38,719
Total		$	18,117		4.47	%	$	92,300	4.82	%	$	22,692	4.68	%	$	11,082	4.34	%
Mortgage warehouse	—			—			—
Residential construction:
Construction	—			—			—
Land	13			176			189
Total residential construction	13			176			189
Home equity	3,360			8,747			12,107
Consumer and other loans	3,711			95			3,806
Total loans	$	96,411		$	52,417		$	148,828

One- to Four-Family Residential Loans. At December 31, 2014, approximately $39.3 million, or 12.7% of our loan portfolio, consisted of one- to four-family residential loans. The majority of the one- to four-family residential mortgage loans we originate are conventional, but we also offer FHA, VA, and USDA loans. We do not, nor have we ever engaged in subprime lending, defined as mortgage loans to borrowers who do not qualify for market interest rates because of problems with their credit history. Our one- to four-family residential mortgage loans are currently originated in amounts up to 80% of the lesser of the appraised value or purchase price of the property, although loans may be made with higher loan-to-value ratios at a higher interest rate to compensate for the increased credit risk. Private mortgage insurance is generally required on loans with a loan-to-value ratio in excess of 80%.



	Commercial Land				One- to four-family				Mortgage Warehouse				Residential Construction
Due During the Years Ending December 31,	Amount		Weighted Average Rate		Amount		Weighted Average Rate		Amount		Weighted Average Rate		Amount		Weighted Average Rate
	(Dollars in thousands)
2016	$	1,896	5.50	%	$	69	5.19	%	$	128,902	4.57	%	$	2,423	3.76	%
2017	1,107		5.38		214		6.25		—		—		—		—
2018	2,626		4.11		554		5.38		—		—		—		—
2019 to 2020	4,973		5.01		308		6.45		—		—		—		—
2021 to 2025	37		8.00		1,979		5.47		—		—		—		—
2026 to 2030	—		—		9,594		4.25		—		—		—		—
2031 and beyond	—		—		27,760		4.85		—		—		—		—
Total	$	10,639	4.92	%	$	40,478	4.76	%	$	128,902	4.57	%	$	2,423	3.76	%



	Residential Land				Home Equity				Consumer and Other				Total
Due During the Years Ending December 31,	Amount		Weighted Average Rate		Amount		Weighted Average Rate		Amount		Weighted Average Rate		Amount		Weighted Average Rate
	(Dollars in thousands)
2016	$	—	—	%	$	640	4.35	%	$	360	4.01	%	$	155,297	4.58	%
2017	—		—		1,114		4.18		310		5.04		14,235		5.28
2018	—		—		1,047		4.51		430		3.99		35,069		4.54
2019 to 2020	—		—		2,668		3.79		1,679		3.61		64,590		4.65
2021 to 2025	—		—		3,005		4.65		583		5.91		28,148		4.71
2026 to 2030	298		3.63		560		6.49		18		9.75		11,042		4.40
2031 and beyond	580		4.57		4,956		4.18		—		—		36,500		4.76
Total	$	878	4.25	%	$	13,990	4.33	%	$	3,380	4.26	%	$	344,881	4.64	%

The following table sets forth the contractual maturities of fixed- and adjustable-rate loans at December 31, 2015 that are due after December 31, 2016.



	Due After December 31, 2016
	Fixed		Adjustable		Total
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	11,328	$	2,274	$	13,602
Real estate	59,125		25,265		84,390
Five or more family	22,152		20		22,172
Construction	3,020		—		3,020
Land	7,020		1,723		8,743
Total commercial loans	102,645		29,282		131,927
One- to four-family	20,069		20,340		40,409
Mortgage warehouse	—		—		—
Residential construction:
Construction	—		—		—
Land	—		878		878
Total residential construction	—		878		878
Home equity	3,622		9,728		13,350
Consumer and other loans	2,945		75		3,020
Total loans	$	129,281	$	60,303	$	189,584

One- to Four-Family Residential Loans. At December 31, 2015, approximately $40.5 million, or 11.7% of our loan portfolio, consisted of one- to four-family residential loans. The majority of the one- to four-family residential mortgage loans we originate are conventional, but we also offer FHA, VA, and USDA loans. We do not, nor have we ever engaged in subprime lending, defined as mortgage loans to borrowers who do not qualify for market interest rates because of problems with their credit history. Our one- to four-family residential mortgage loans are currently originated in amounts up to 80% of the lesser of the appraised value or purchase price of the property, although loans may be made with higher loan-to-value ratios at a higher interest rate to compensate for the increased credit risk. Private mortgage insurance is generally required on loans with a loan-to-value ratio in excess of 80%.

Fixed-rate loans are generally originated for terms between 10 and 30 years. Depending on market conditions, we sell a majority of fixed rate one- to four-family residential loans originated with maturities greater than 15 years as part of our asset/liability management strategy. We strategically retain a small portion of 10 to 15 year fixed-rate loans within our loan portfolio to offset the amortization of our current mortgage portfolio.

We also offer adjustable rate mortgage loans with fixed interest rate terms of five or seven years before converting to an annual adjustment schedule based on changes in the London Interbank Offered Rate or the designated United States Treasury index. We will either retain these adjustable rate mortgage loans or sell them on the secondary market. We originated $75.14 million of adjustable rate one- to four-family residential loans during the year ended December 31, ~~2014~~2015. The adjustable rate mortgage loans that we originate provide for maximum rate adjustments of 200 basis points per adjustment, with a lifetime maximum adjustment of 600 basis points, and amortize over terms of up to 30 years.

Adjustable rate mortgage loans help decrease the risk associated with changes in market interest rates based on their periodic repricing terms. However, adjustable rate mortgage loans involve other risks because, as interest rates increase, so do the interest payments on the loan, which may increase the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate is also limited by the maximum periodic and lifetime interest rate adjustments permitted by our loan documents, and therefore, is potentially limited in effectiveness during periods of rapidly rising interest rates. At December 31, ~~2014~~2015, $1820.03 million, or 4650.43%, of our one- to four-family residential loans contractually due after December 31, ~~2015~~2016 had adjustable rates of interest.

All one- to four-family residential mortgage loans that we originate include “due-on-sale” clauses, which give us the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid.

Regulations guide the amount that a savings bank may lend relative to the appraised value of the real estate securing the loan, as determined by an appraisal of the property at the time the loan is originated. For all loans, we utilize outside independent appraisers and/or appraisal management companies approved by the Board. All borrowers are required to obtain title insurance. We also require fire and casualty insurance and, where circumstances warrant, flood insurance.

Mortgage Warehouse Lending. We provide financing to approved mortgage companies for the origination and sale of residential mortgage loans. Each individual mortgage is assigned to us until the loan is sold to the secondary market by the mortgage company. We take possession of each original note, or in some instances, a third -party custodian takes possession, and forwards such note to the end investor once the mortgage company has sold the loan. These individual loans are typically sold by the mortgage company within 30 days and are seldom held ~~more~~longer than 90 days. Interest income is accrued during this period and fee income for each loan sold is collected when the loan is sold. Agency eligible, governmental (FHA insured or VA guaranteed), and jumbo residential mortgage loans that are secured by mortgages placed on existing one- to four-family dwellings may be purchased and placed in the mortgage warehouse line.

We have established several controls intended to minimize potential risks related to the approval of potential mortgage warehouse ~~participants~~companies. The Bank performs an on-site due diligence review of all potential ~~participants~~companies to ensure satisfactory controls are being performed as they relate to all aspects of the mortgage business, which may include a review performed by an independent third -party. We also obtain substantial reference checks on potential ~~participants~~companies from a variety of sources to ensure these companies have a satisfactory track record. Once these reviews are completed, the Senior Vice President – Mortgage Warehouse Lending prepares a “Request for Approval” summarizing this information and our Commercial Credit Administration department performs a detailed financial analysis of potential ~~participants~~companies. This information is then presented to the Board of Directors for approval.

We have also established several controls to minimize potential risks as they relate to approved mortgage warehouse ~~participants~~companies. The Bank has engaged an outside mortgage due diligence firm to perform on-site due diligence reviews of the ~~participants~~companies. Each ~~participant~~company is reviewed at least every three years; however, ~~participants~~companies with higher approved line limits are reviewed every other year, and in some cases annually. We may have a special review performed on any of our ~~participants~~companies at any time, if warranted. We maintain daily interaction with all of our ~~participants~~companies and also continue our own on-site visits. ~~Participants~~Companies are required to maintain errors and omission insurance and fidelity bond coverage.

In an effort to minimize potential risks as they relate to the individual mortgage loans originated by the mortgage warehouse ~~participants~~companies, we have established several controls. The Bank will not fund a mortgage loan unless there is a valid takeout commitment to purchase from an institutional secondary market investor on our approved investor list. The Bank may also fund conforming or government agency mortgage loans under approved hedging strategies for certain mortgage warehouse companies. We will only wire funds for the origination of a loan to title companies which are independent of the mortgage warehouse ~~participant~~company. We randomly select loans each month for internal verification purposes with results of the testing reported monthly to the Bank’s Officer Loan Committee. If a mortgage loan remains in the warehouse for more than 60 days, a principal curtailment payment is required from the warehouse ~~participant~~company, which results in the mortgage loan being paid off within 180 days of origination.

Lastly, the Bank maintains a financial institution’s ~~Third~~third-party ~~Party~~ Catastrophe Blanket Bond insurance policy. The policy provides coverage for any fraudulent acts committed by our mortgage warehouse ~~participants~~companies or any fraudulent acts committed by a third -party involved in the mortgage transaction. The limit of liability for this policy is $7.5 million, with a deductible of $1.0 million at December 31, ~~2014~~2015.

During ~~2014~~2015, we added 15eight new warehouse ~~participants~~companies with credit lines ranging between $23.0 million and $1030.0 million. We added the new ~~participants~~companies to provide additional warehouse activity, and to generate additional interest income, and fee income to offset the impact increased mortgage interest rates ~~has~~could have on our warehouse business. New ~~participants~~companies also ~~provided~~allow for geographical diversification byin17 ~~increasing our participants to 17~~ states ~~from seven states in 2013~~.

AtAlso ~~December 31,~~during ~~2014~~2015, we ~~had~~implemented ~~repurchase~~our ~~agreements~~mortgage ~~with~~warehouse 29participation ~~mortgage~~program ~~companies~~and ~~with~~added ~~lines~~three ~~ranging~~local ~~from~~financial ~~$2.0~~institutions ~~million~~ to ~~$30.0~~the ~~million~~program. ~~Our~~ ~~largest~~The ~~customer~~third-party ~~accounted~~participants ~~for~~purchase ~~17%~~participations ofin ~~our~~loans ~~outstanding~~originated ~~balances~~under ~~and~~the ~~22%~~mortgage ofwarehouse ~~our~~lines ~~volume~~of ~~in 2014~~credit. AtThese ~~December 31,~~participants ~~2014,~~provide weadditional ~~increased~~liquidity to ensure our mortgage warehouse ~~loans~~companies ~~outstanding~~have ~~balances~~the byability ~~14.9%~~ to ~~$132.6~~fund ~~million~~their ~~from~~business ~~$115.4~~without ~~million~~increasing atour ~~December 31,~~balances ~~2013.~~and ~~During~~adding ~~the~~risk. ~~year~~The ~~ended~~participations ~~December 31,~~have ~~2014,~~allowed weus ~~recorded~~to ~~interest~~realize ~~income~~increased oftransaction ~~$4.6 million~~activity, ~~mortgage~~which ~~warehouse~~leads ~~loan~~to ~~fees~~higher ofloan ~~$695,000~~fee ~~and~~income ~~wire~~as ~~transfer~~well ~~fees~~as ofincreased ~~$223,000. During the year ended December 31, 2013, we recorded~~ non-interest income ofthrough ~~$4.4 million, mortgage warehouse~~ loan ~~fees~~servicing ~~of $680,000~~ and wire transfer fees ~~of $239,000~~. ~~Management does not anticipate significant growth in the warehouse portfolio during 2015.~~

910

~~Commercial~~At ~~Real~~December 31, ~~Estate~~2015, we had repurchase agreements with 37 mortgage companies with lines ranging from $2.0 million to $30.0 million, with a maximum limit of $50.0 million when taking into account the mortgage warehouse participation program. Our largest customer accounted for 15.1% of our outstanding balances and ~~Five~~12.8% orof ~~More~~our ~~Family~~volume ~~Loans~~in 2015. At December 31, ~~2014~~2015, our mortgage warehouse loans outstanding balances decreased to $91128.79 million, or 292.68%, offrom ~~our~~$132.6 ~~total~~million ~~loan~~at ~~portfolio~~December 31, ~~consisted~~2014 primarily due to the implementation of ~~commercial~~the ~~real~~participation ~~estate~~program. ~~and~~At ~~five~~December or31, ~~more~~2015, ~~family~~the ~~loans.~~third-party ~~These~~participants ~~types~~had ofbalances ~~loans~~totaling ~~are~~$101.0 ~~secured~~million. byDuring ~~retail,~~the ~~industrial,~~year ~~warehouse~~ended December 31, ~~service~~2015, ~~medical~~we recorded interest income of $5.0 million, ~~residential~~mortgage ~~apartment~~warehouse ~~complexes~~loan fees of $1.1 million, ~~hotels~~wire transfer fees of $364,000, and ~~other~~loan ~~commercial~~servicing ~~properties~~income of $109,000. WeDuring ~~believe~~the ~~that~~year ~~these~~ended ~~types~~December 31, of2014, ~~loans~~we ~~can~~recorded beinterest aincome ~~helpful~~of ~~asset/liability~~$4.6 ~~management~~million, ~~tool~~mortgage ~~because~~warehouse onloan ~~average~~fees of $695,000 ~~these~~and ~~loans~~wire ~~have~~transfer afees ~~shorter~~of ~~term~~$223,000. Due to ~~repricing~~the ~~and~~Merger, amanagement ~~higher~~does ~~yield~~not ~~than~~anticipate ~~our~~significant ~~residential~~growth ~~loans~~in the warehouse portfolio during 2016.

WeCommercial ~~originate~~Real ~~both~~Estate ~~fixed-~~ and ~~adjustable-rate~~Five ~~commercial real estate and five~~ or ~~more~~More ~~family~~Family ~~loans, including partially guaranteed U~~Loans.S. ~~Small Business Administration loans.~~ At December 31, ~~2014~~2015, ~~we had~~ $2115.90 million, ofor U33.S.3%, ~~Small~~of ~~Business~~our ~~Administration~~total ~~loans~~loan ~~in this~~ portfolio. ~~Our~~consisted ~~originated~~of ~~fixed-rate~~ commercial real estate and five or more family loans. ~~generally~~These ~~have~~types ~~initial~~of ~~terms~~loans ofare upsecured toby ~~five~~retail, ~~years~~industrial, ~~with~~warehouse, aservice, ~~balloon~~medical, ~~payment~~residential atapartment ~~the~~complexes, ~~end~~hotels, ofand ~~the~~other ~~term. Our originated adjustable-rate~~ commercial ~~real~~properties. ~~estate~~We ~~and~~believe ~~five~~that orthese ~~more~~types ~~family~~of loans ~~generally~~can ~~have~~be ~~an initial term of three- to five-years and~~ a ~~repricing~~helpful ~~option.~~asset/liability ~~Our~~management ~~originated~~tool ~~commercial~~because ~~real~~on ~~estate~~average, ~~and~~these ~~five or more family~~ loans ~~generally~~have ~~amortize~~a ~~over~~shorter 15term to 20repricing ~~years~~and ~~with~~ a ~~maximum~~higher ~~loan-to-value~~yield ~~ratio~~than ofour ~~generally~~residential ~~80%~~loans.

We originate both fixed- and adjustable-rate commercial real estate and five or more family loans, including partially guaranteed U.S. Small Business Administration loans. At December 31, 2015, we had $9.8 million of U.S. Small Business Administration loans in this portfolio. Our originated fixed-rate commercial real estate and five or more family loans generally have initial terms of up to five years, with a balloon payment at the end of the term. Our originated adjustable-rate commercial real estate and five or more family loans generally have an initial term of three- to five-years and a repricing option. Our originated commercial real estate and five or more family loans generally amortize over 15 to 20 years with a maximum loan-to-value ratio of generally 80%.

We consider a number of factors in originating commercial real estate and five or more family loans. We evaluate the qualifications and financial condition of the borrower, including credit history, cash flows, and management expertise, as well as the value and condition of the mortgaged property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property, and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service, the ratio of the loan amount to the appraised value of the mortgaged property, and the debt service coverage ratio (the ratio of net operating income to debt service) to ensure that it is at least 1.20 times the annual debt service. It is our general policy to obtain personal guarantees from commercial real estate borrowers, although we may consider waiving this requirement based upon the loan-to-value ratio and the debt coverage ratio of the proposed loan. All purchase-money and mortgage refinance borrowers are required to obtain title insurance. We also require on-going financial reporting, fire, and casualty insurance and, where circumstances warrant, flood insurance.

Loans secured by commercial real estate generally are considered to present greater risk than one- to four-family residential loans. Commercial real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general, including declining real estate values. Accordingly, the nature of these loans makes them more difficult for management to monitor and evaluate and more vulnerable to adverse economic conditions.

The following table sets forth information regarding our commercial real estate and five or more family loans at December 31, 2014.

Industry Type	Number of Loans	Balance
		(Dollars in thousands)
Non-owner occupied real estate:
Commercial real estate	96	$	16,186
Five or more family	25	16,486
Owner occupied real estate:
Development and rental	30	6,006
Health care and social	11	3,485
Retail trade	26	5,179
Accommodation and food	26	18,743
Other services	37	4,571
Manufacturing	31	5,656
Construction	30	4,479
Arts, entertainment and recreation	6	5,478
Other miscellaneous	43	5,480
Total	361	$	91,749

Commercial Loans. At December 31, 2014, $17.4 million, or 5.6%, of our total loan portfolio consisted of commercial loans. Commercial credit is offered primarily to business customers, usually for asset acquisition, business expansion, or working capital purposes. We currently offer term loans with three- to five-year maturities and a balloon payment at the end of a term not to exceed 20 years without approval from the Bank’s Board of Directors. The maximum loan-to-value ratio of our current commercial loan originations is generally between 50% to 80%, depending on the type and marketability of the loan’s underlying collateral. The extension of a commercial credit is based on the ability and stability of management, whether cash flows support the proposed debt repayment, the borrower’s earnings projections and related assumptions, and the value and marketability of any underlying collateral.

The following table sets forth information regarding our commercial business (non-real estate) loans at December 31, 2014.

Industry Type	Number of Loans	Balance
		(Dollars in thousands)
Accommodation and food	8	$	3,236
Other commercial equipment rental and leasing	1	2,362
Manufacturing	22	2,902
Retail trade	56	1,253
Waste management and remediation services	9	2,242
Public administration	13	1,121
Transportation and warehousing	10	760
Other miscellaneous	60	3,539
Total	179	$	17,415

Commercial loans generally have a greater credit risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to repay based on their income and which are secured by real property whose value tends to be more easily ascertainable, commercial loans are typically made on the basis of the borrower’s ability to repay from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself, which may be highly vulnerable to changes in general economic conditions (including the weak economic environment experienced in recent years). Further, the collateral securing the loans may depreciate over time, be difficult to appraise, and fluctuate in value based on the success of the business. We seek to minimize these risks through our underwriting standards.

Home Equity Loans and Lines of Credit. At December 31, 2014, $13.2 million or 4.3% of our total loan portfolio consisted of home equity loans and lines of credit. We originate fixed home equity loans and variable rate home equity lines of credit secured by the borrower’s residence. The home equity products we originate generally are limited to 80-90% of the property value less any other mortgages depending on tiered credit requirements as established in our credit policy. The variable interest rates for home equity lines of credit are determined by a specified margin over the Wall Street Journal prime rate and may not exceed a designated maximum over the life of the loan. Our home equity lines of credit have an interest rate floor, and at December 31, 2014, the interest rates on the majority of these lines of credit were at their floor. We currently offer home equity loans with terms of up to 15 years with principal and interest paid monthly from the closing date. Our home equity lines of credit provide terms up to 20 years with an initial draw period of up to 10 years and a 10 year repayment period. Historically, our home equity products have monthly repayment requirements that include principal and interest calculated based on 2% of the outstanding principal balance. We previously offered interest-only home equity loans up to a five year term with payments of monthly interest. At the end of the initial term, the line must be paid in full or renewed.

Home equity lending is subject to the same risks as one- to four-family residential lending except that, since home equity loans and lines of credit tend to carry higher loan-to-value ratios and more household debt than one- to four-family residential loans, there is often a somewhat higher degree of credit risk, particularly in a period of economic difficulties such as those experienced in recent years.

~~Construction~~The ~~and~~following ~~Land~~table ~~Loans.~~sets Atforth ~~December 31,~~information ~~2014,~~regarding our ~~total loan portfolio included $9.1 million, or 3.0%, of~~ commercial ~~construction~~real ~~and~~estate ~~land development~~ and ~~$1.7~~five ~~million,~~ or ~~0.5%,~~more offamily ~~residential construction and land development~~ loans. Weat ~~make~~December 31, ~~both commercial land development and residential land loans~~2015. These loans generally have an interest-only phase during construction then convert to permanent financing. The maximum loan-to-value ratio applicable to these loans is generally 80% for commercial loans and 95% for residential.



Industry Type	Number of Loans	Balance
		(Dollars in thousands)
Non-owner occupied real estate:
Commercial real estate	105	$	33,755
Five or more family	25	22,692
Owner occupied real estate:
Accommodation and food services	27	17,332
Development and rental	25	5,928
Manufacturing	34	5,427
Arts, entertainment, and recreation	5	5,239
Other services	39	4,952
Retail trade	22	4,740
Construction	28	3,275
Wholesale trade	12	3,254
Health care and social assistance	9	3,236
Other miscellaneous	34	5,162
Total	365	$	114,992

Commercial Loans. At December 31, 2015, $18.1 million, or 5.3%, of our total loan portfolio consisted of commercial loans. Commercial credit is offered primarily to business customers, usually for asset acquisition, business expansion, or working capital purposes. We currently offer term loans with three- to five-year maturities and a balloon payment at the end of a term not to exceed 20 years without approval from the Bank’s Board of Directors. The maximum loan-to-value ratio of our current commercial loan originations is generally between 50% to 80%, depending on the type and marketability of the loan’s underlying collateral. The extension of a commercial credit is based on the ability and stability of management, whether cash flows support the proposed debt repayment, the borrower’s earnings projections and related assumptions, and the value and marketability of any underlying collateral.

The following table sets forth information regarding our commercial business (non-real estate) loans at December 31, 2015.



Industry Type	Number of Loans	Balance
		(Dollars in thousands)
Transportation and warehousing	16	$	4,227
Accommodation and food services	13	4,147
Manufacturing	18	1,917
Mining	1	1,665
Other commercial equipment rental and leasing	1	1,510
Retail trade	48	862
Public administration	11	812
Other miscellaneous	59	2,977
Total	167	$	18,117

Commercial loans generally have a greater credit risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to repay based on their income and which are secured by real property whose value tends to be more easily ascertainable, commercial loans are typically made on the basis of the borrower’s ability to repay from the cash flow of the their business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself, which may be highly vulnerable to changes in general economic conditions (including the weak economic environment experienced in recent years). Further, the collateral securing the loans may depreciate over time, be difficult to appraise, and fluctuate in value based on the success of the business. We seek to minimize these risks through our underwriting standards.

Home Equity Loans and Lines of Credit. At December 31, 2015, $14.0 million, or 4.1%, of our total loan portfolio consisted of home equity loans and lines of credit. We originate fixed home equity loans and variable rate home equity lines of credit secured by the borrower’s residence. The home equity products we originate generally are limited to 80-90% of the property value less any other mortgages depending on tiered credit requirements as established in our credit policy. The variable interest rates for home equity lines of credit are determined by a specified margin over the Wall Street Journal prime rate and may not exceed a designated maximum over the life of the loan. Our home equity lines of credit have an interest rate floor, and at December 31, 2015, the interest rates on the majority of these lines of credit were at their floor. We currently offer home equity loans with terms of up to 15 years with principal and interest paid monthly from the closing date. Our home equity lines of credit provide terms up to 20 years with an initial draw period and monthly interest-only payments of up to 10 years and a 10 year fully amortizing repayment period. We previously offered home equity products with monthly repayment requirements that included principal and interest calculated based on 2% of the outstanding principal balance. We also previously offered interest-only home equity loans up to a five year term with monthly interest-only payments. At the end of the initial term, these lines must be paid in full or renewed.

Construction and Land Loans. At December 31, 2015, our total loan portfolio included $21.8 million, or 6.3%, of commercial construction and land development and $3.3 million, or 1.0%, of residential construction and land development loans. We make both commercial land development and residential land loans. These loans generally have an interest-only phase during construction then convert to permanent financing. The maximum loan-to-value ratio applicable to these loans is generally 80% for commercial loans and 95% for residential.

We may also make commercial loans to builders and developers for the development of one- to four-family lots in our market area. Land loans are generally made in amounts up to a maximum loan-to-value ratio of 75% based upon an independent appraisal. It is our general policy to obtain personal guarantees from the builders and developers for our land loans.

We make construction loans for commercial development projects such as hospitality, apartment, small retail, hotel, and office buildings. These loans generally have an interest-only phase during construction then convert to permanent financing. Disbursements of construction loan funds are processed through a title company at our discretion based on the progress of construction. The maximum loan-to-value ratio limit applicable to these loans is generally 80%. At December 31, ~~2014~~2015, we had commercial construction loans with an outstanding aggregate balance of $19.63 million and $310.47 million of available commitments which were secured by commercial property.

The majority of our current commercial construction loans are subject to our normal underwriting procedures prior to being converted to permanent financing. Most of our current construction loans, once converted to permanent financing, repay over a period of 20 years. In addition, most of our current construction loans have interest -only payments during the construction period. Such loans are approved up to 80% of the lesser of the appraised value of the completed property or contract price plus value of the land improvements. Funds are disbursed based on our inspections in accordance with a projection completion schedule.

We have occasionally made loans to builders and developers “on speculation” to finance the construction of residential property where justified by an independent appraisal. Whether we are willing to provide permanent takeout financing to the purchaser of the home is determined independently of the construction loan by a separate underwriting process. At December 31, ~~2014~~2015, we had $~~686,000 and $~~1.18 million and $724,000 of available commitments for retail construction loans outstanding that were secured by one- to four-family residential property built on speculation.

We also make construction loans for the construction of residential properties. These loans typically carry fixed interest rates with most structured for permanent mortgage financing within our policy guidelines for one- to four-family residential loans once the construction is completed. Depending on the terms of the permanent mortgage loans, we may decide to sell the loan in the secondary market.

For all of our commercial and residential construction and land loans, we utilize outside independent appraisers approved by the Bank’s Officer Loan Committee. All borrowers are required to obtain title insurance. We also require builders risk insurance on construction loans and, where circumstances warrant, flood insurance on properties.

Construction and land lending generally affords us an opportunity to receive higher origination and other loan fees. In addition, such loans are generally made for relatively short terms. Nevertheless, construction and land lending to persons other than owner-occupants generally involve a higher level of credit risk than permanent one- to four-family residential lending due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on construction projects, real estate developers, and managers. In particular, a slow real estate market, as had been experienced in the past few years, will likely have a significant impact on the ability of the borrower to sell newly constructed units. In addition, the nature of these loans is such that they are more difficult to evaluate and monitor. Our risk of loss on a construction or land loan is dependent largely upon the accuracy of the initial estimate of the property’s value upon completion of the project (which may fluctuate based on market demand) and the estimated cost (including interest) of the project. If the estimate of value proves to be inaccurate, we may be confronted, at or prior to the maturity of the loan, with a project value that is insufficient to assure full repayment and/or the possibility of having to make substantial investments to complete and sell the project. Because defaults in repayment may not occur during the construction period, it may be difficult to identify problem loans at an early stage. When loan payments become due, the cash flow from the property may not be adequate to service the debt. In such cases, we may be required to modify the terms of the loan.

12The table below sets forth by type the amount of our construction and land loans, including the amount of such non-performing loans at December 31, 2015. All of the loans are secured by properties located within our market area.

The table below sets forth by type the amount of our construction and land loans, including the amount of such non-performing loans at December 31, 2014. All of the loans are secured by properties located within our market area.



	Net Principal Balance		Non-Performing
	(Dollars in thousands)
Commercial:
Commercial real estate construction	$	9,285	$	41
Commercial one- to four-family speculation construction	1,797		—
Commercial land	10,639		299
Total commercial construction and land	21,721		340
Residential:
One- to four-family construction	2,423		—
Residential land	878		—
Total residential construction and land	3,301		—
Total construction and land loans	$	25,022	$	340

	Net Principal Balance		Non-Performing
	(Dollars in thousands)
Commercial:
Commercial real estate construction	$	1,636	$	—
Commercial one- to four-family speculation construction	686		—
Commercial land	6,826		1,577
Total commercial construction and land	9,148		1,577
Residential:
One- to four-family construction	1,472		—
Residential land	192		—
Total residential construction and land	1,664		—
Total construction and land loans	$	10,812	$	1,577

Consumer and Other Loans. We offer a variety of loans that are secured by assets other than real estate such as deposits, recreational vehicles or boats, and automobiles. Our automobile loans are currently originated directly by us. At December 31, 2015, our consumer and other loans totaled $3.4 million, or 1.0%, of the total loan portfolio.

Consumer and Other Loans. We offer a variety of loans that are secured by assets other than real estate such as deposits, recreational vehicles or boats, and automobiles. Our automobile loans are currently originated directly by us. At December 31, 2014, our consumer and other loans totaled $4.3 million, or 1.4%, of the total loan portfolio.

The terms of our consumer and other loans vary according to the type of collateral, length of contract, and creditworthiness of the borrower. We generally will originate direct automobile loans for up to 110% of the retail value for a new automobile and 100% for a used automobile. The repayment schedule of loans covering both new and used vehicles is consistent with the expected life and normal depreciation of the vehicle. The majority of the loans for recreational vehicles and boats were originated by City Savings Bank prior to the City Savings Bank merger and were written for no more than 80% of the estimated sales price of the collateral, for a term that is consistent with the vehicle’s expected life and normal depreciation.

Consumer loans may entail greater credit risk than residential mortgage loans, particularly in the case of loans which are secured by rapidly depreciable assets, such as automobiles. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are likely to be affected by adverse personal circumstances and the overall economy, including the weak economic environment we have experienced in recent years. Furthermore, the application of various state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

Loan Originations, Purchases, and Sales. Our loan origination activities have been primarily concentrated in our local market area, however, we also consider opportunities for and originate commercial loans in other counties including Lake and St. Joseph Counties in Indiana, and Berrien County, Michigan, which are contiguous to the markets we serve. Commercial loans are primarily generated from our experienced commercial lenders, our business relationships, and customer referrals. Residential loans are generated primarily from local realtors, walk-in customers, customer referrals, and other parties with whom we do business, and from the efforts of commissioned residential mortgage originators and advertising. Both commercial loan and residential mortgage loan applications are underwritten and processed at our main office. Residential mortgage loan applications are also underwritten and processed at our St. Joseph, Michigan loan production office. All loans receive final approval at our main office.

We may also sell our originated residential mortgage loans in the secondary market. We generally make decisions regarding the amount of loans we wish to sell based on our portfolio size and amortization, interest rate, and/or credit risk management considerations. During 2014, we strategically retained approximately 30%, or $11.6 million, of our originated variable- and fixed-rate residential mortgage loans, with the fixed-rate loans having a maturity of 15 years or less. Of these loans retained in 2014, 67% were variable-rate loans with a weighted average term of 29.0 years and a weighted average rate of 4.17% and 33% were fixed-rate loans with a weighted average term of 15.0 years and a weighted average rate of 3.85%. During 2013, we sold the majority of our fixed-rate residential loan production as the lower interest rate environment made such loans attractive to consumers but unattractive to us as long-term investments. When selling residential mortgage loans to the secondary market, we make a decision on servicing residential mortgage loans based on customer preference and adjust the rate accordingly. If a customer wishes for us to service the residential mortgage loan, then we generally sell the loan to Freddie Mac with servicing retained, otherwise we generally sell the residential mortgage loan with servicing released to a private investor. At December 31, 2014, we serviced $61.3 million of loans for others, the majority of which were mortgage loans serviced for Freddie Mac.

In addition, we occasionally sell participation interests in our large, multi-family and commercial real estate loans in order to diversify our risk. During 2014, we originated $8.1 million in new loans to one existing five or more family lending relationship and sold $3.1 million of these loans as participations to other banks. The Bank will consider selling participations in the future based on credit risk and our legal lending limits.

Also during 2014, the Bank began developing a program to sell participation interests in our mortgage warehouse lines in order to be able to service an increase in the number of mortgage warehouse customers while keeping outstanding balances within our policy guidelines. This program, to begin in 2015, allows us to continue funding our customers' mortgage business during times of high volume, usually at month end, without exceeding our internal lending capacity guidelines. The program will allow us to retain a servicing fee as well as the majority of the fee income associated with our warehouse business.

The following table shows our loan origination, sale, and principal repayment activities during the years indicated.

	For the Years Ended December 31,
	2014			2013			2012
	(Dollars in thousands)
Total loans at beginning of year	$	296,912		$	317,786		$	298,954
Loans originated:
Commercial:
Commercial and other	5,051			4,805			9,285
Real estate	8,923			39,927			16,745
Five or more family	12,844			9,649			3,181
Construction	6,297			2,180			3,484
Land	490			795			211
One- to four-family	34,934			36,119			49,634
Mortgage warehouse	2,195,170			2,287,525			2,787,842
Residential construction:
Construction	2,718			946			1,998
Home equity	7,608			5,576			6,775
Consumer and other	1,776			2,072			852
Total loans originated	2,275,811			2,389,594			2,880,007
Loans sold:
Commercial:
Five or more family	(2,990		)	—			—
One- to four-family	(25,074		)	(30,056		)	(49,916		)
Total loans sold	(28,064		)	(30,056		)	(49,916		)
Deduct:
Principal repayments	(2,235,210		)	(2,380,412		)	(2,811,259		)
Net loan activity	12,537			(20,874		)	18,832
Total loans at end of year (excluding net deferred loan costs)	$	309,449		$	296,912		$	317,786

Loan Originations, Purchases, and Sales. Our loan origination activities have been primarily concentrated in our local market area and areas contiguous to those markets, such as Lake and St. Joseph Counties in Indiana and Berrien County in Michigan. We may also consider opportunities for and originate commercial loans in other areas based on our current lending relationships but do not actively seek new business outside of our focused market areas. Commercial loans are primarily generated from our experienced commercial lenders, our business relationships, and customer referrals. Residential loans are generated primarily from local realtors, walk-in customers, customer referrals, and other parties with whom we do business, and from the efforts of commissioned residential mortgage originators and advertising. Both commercial loan and residential mortgage loan applications are underwritten and processed at our main office. Residential mortgage loan applications are also underwritten and processed at our St. Joseph, Michigan loan production office. All loans receive final approval at our main office.

From time to time, we purchase loans from third parties to supplement loan production. In particular, we may purchase loans of a type that are not available, or that are not available with as favorable terms, in our own market area. We generally use the same underwriting standards in evaluating loan purchases as we do in originating loans. During 2015, we purchased $4.1 million of loans, primarily commercial construction and commercial real estate loans, through participations with third-party banks within our market areas. We made no loan purchases during 2014. At December 31, 2015, $5.0 million, or 1.5%, of our loan portfolio consisted of purchased loans with committed availability on construction loans totaling $7.4 million. All of our purchased participation loans were serviced by others.

We may also sell our originated residential mortgage loans in the secondary market. We generally make decisions regarding the amount of loans we wish to sell based on our portfolio size and amortization, interest rate, and/or credit risk management considerations. During 2015, we strategically retained approximately 25%, or $8.8 million, of our originated variable- and fixed-rate residential mortgage loans, with the fixed-rate loans having a maturity of 15 years or less. Of these loans retained in 2015, 66% were variable-rate loans with a weighted average term of 29.2 years and a weighted average rate of 3.97% and 34% were fixed-rate loans with a weighted average term of 14.8 years and a weighted average rate of 3.83%. During 2015, we sold the majority of our fixed-rate residential loan production for long term asset/liability management purposes. When selling residential mortgage loans to the secondary market, we make a decision on servicing residential mortgage loans based on customer preference and adjust the rate accordingly. If a customer wishes for us to service the residential mortgage loan, then we generally sell the loan to Freddie Mac with servicing retained, otherwise we generally sell the residential mortgage loan with servicing released to a private investor. At December 31, 2015, we serviced $58.6 million of loans for others, the majority of which were mortgage loans serviced for Freddie Mac.

In addition, we have occasionally sold participation interests in our large, multi-family and commercial real estate loans in order to diversify our risk. During 2015, we sold $1.7 million in commercial real estate loans as participations to other banks. At December 31, 2015, the balance of multi-family and commercial real estate loan participations sold to third-party banks totaled $4.5 million.

Also during 2015, the Bank began a program to sell participation interests in our mortgage warehouse lines of credit in order to be able to service an increase in the number of mortgage warehouse customers while keeping outstanding balances within our policy guidelines. This program allows us to continue funding our customers’ mortgage business during times of high volume, usually at month end, without exceeding our internal lending capacity guidelines. The program allows us to retain a servicing fee as well as the majority of the fee income associated with our warehouse business.

The following table shows our loan origination, sale, and principal repayment activities during the years indicated.



	For the Years Ended December 31,
	2015			2014			2013
	(Dollars in thousands)
Total loans at beginning of year	$	309,449		$	296,912		$	317,786
Loans originated:
Commercial:
Commercial and other	8,172			5,051			4,805
Real estate	37,437			8,923			39,927
Five or more family	12,521			12,844			9,649
Construction	6,105			6,297			2,180
Land	7,111			490			795
One- to four-family	35,322			34,934			36,119
Mortgage warehouse	3,633,087			2,195,170			2,287,525
Residential construction:
Construction	3,898			2,718			946
Land	418			—			—
Home equity	7,456			7,608			5,576
Consumer and other	1,301			1,776			2,072
Total loans originated	3,752,828			2,275,811			2,389,594
Loans purchased:
Commercial:
Construction (1)	4,146			—			—
Total loans purchased	4,146			—			—
Loans sold:
Commercial:
Real estate	(1,700		)	—			—
Five or more family	—			(2,990		)	—
One- to four-family	(24,786		)	(25,074		)	(30,056		)
Total loans sold	(26,486		)	(28,064		)	(30,056		)
Deduct:
Principal repayments	(3,695,056		)	(2,235,210		)	(2,380,412		)
Net loan activity	35,432			12,537			(20,874		)
Total loans at end of year (excluding net deferred loan costs)	$	344,881		$	309,449		$	296,912


(1)	Total committed availability on commercial construction loans purchased during 2015 totaled $7.4 million at December 31, 2015.

Nonperforming Loans and Assets. We use the accrual method of accounting for all performing loans. The accrual of interest income is generally discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectibility of principal or interest, even though the loan is currently performing. When a loan is placed on nonaccrual status, unpaid interest previously credited to income is reversed. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectibility of principal. Generally, loans are restored to accrual status when the obligation is performing for a reasonable period of time in accordance with the contractual terms and the ultimate collectibility of total contractual principal and interest is no longer in doubt. Loans considered to be troubled debt restructurings follow the same policy for accrual of interest income.

In our collection efforts, we will first attempt to cure any delinquent loan. If a real estate secured loan is placed on nonaccrual status, it will be subject to transfer to the other real estate owned (“OREO”) portfolio (properties acquired bythrough foreclosure or inthrough a deed-in-lieu of foreclosure), upon which our Executive Vice President ~~and~~– Chief Credit Officer will pursue the sale of the real estate. Prior to this transfer, the loan balance may be reduced, with a charge-off against the allowance for loan losses if necessary, to reflect its current market value less estimated costs to sell. Write downs of OREO that occur after the initial transfer from the loan portfolio and costs of holding the property are recorded as other operating expenses, except for significant improvements which are capitalized to the extent that the carrying value does not exceed estimated net realizable value.

Fair values for determining the value of collateral are estimated from various sources, such as real estate and equipment appraisals, financial statements, and any other reliable sources of available information. For those loans deemed to be impaired, collateral value is reduced for the estimated costs to sell. Reductions of collateral value are based on historical loss experience, current market data, and any other source of reliable information specific to the collateral.16

Fair values for determining the value of collateral are estimated from various sources, such as real estate and equipment appraisals, financial statements, and any other reliable sources of available information. For those loans deemed to be impaired, the collateral value is reduced for the estimated costs to sell. Reductions of collateral value are based on historical loss experience, current market data, and any other source of reliable information specific to the collateral.

This analysis process is inherently subjective, as it requires us to make estimates that are susceptible to revisions as more information becomes available. Although we believe that we have established the allowance for loan losses at levels to absorb probable incurred losses, future additions may be necessary if future economic or other conditions differ from the current environment.

The following table sets forth the amounts and categories of our nonperforming assets at the dates indicated. None of our mortgage warehouse loans have been considered nonperforming assets at the dates indicated.

	At December 31,
	2014			2013			2012			2011			2010
	2015			2014			2013			2012			2011
	(Dollars in thousands)
Nonaccrual loans:
Commercial:
Commercial and industrial	$	—		$	—		$	—		$	28—		$	—28
Real estate	~~825~~1,396			~~843~~825			~~2,642~~843			12,~~935~~642			21,~~819~~935
Land	1,577			2,748			2,985			2,800			2,248
Construction	41			—			—			—			—
Total commercial loans	2,402			3,591			5,627			4,763			5,067
Land	299			1,577			2,748			2,985			2,800
One- to four-family	1,252			1,044			1,831			1,325			1,224
Total commercial loans	1,736			2,402			3,591			5,627			4,763
Residential land	—			—			—			—			220
One- to four-family	590			1,252			1,044			1,831			1,325
Home equity	723			437			5343			1453			~~377~~14
Consumer and other	—			3—			53			85			48
Total nonaccruing troubled debt restructured loans (1)	~~762~~—			~~227~~762			~~842~~227			~~254~~842			—254
Total nonaccrual loans	42,~~423~~349			4,~~908~~423			84,~~358~~908			68,~~364~~358			6,~~892~~364
Loans greater than 90 days delinquent and still accruing	—			—			—			—			—
Total nonperforming loans	42,~~423~~349			4,~~908~~423			84,~~358~~908			68,~~364~~358			6,~~892~~364
Foreclosed assets:
Commercial:
Real estate	6772			~~646~~67			~~384~~646			~~365~~384			~~530~~365
Land	~~512~~1,789			~~205~~512			~~305~~205			~~390~~305			390
Total commercial loans	~~579~~1,861			~~851~~579			~~689~~851			~~755~~689			~~920~~755
One- to four-family	25339			~~281~~25			~~133~~281			~~140~~133			~~596~~140
Residential land	45—			5645			8056			~~117~~80			—117
Total foreclosed assets	~~649~~2,200			~~1,188~~649			~~902~~1,188			~~1,012~~902			1,~~516~~012
Total nonperforming assets	$	54,~~072~~549		$	65,~~096~~072		$	96,~~260~~096		$	79,~~376~~260		$	87,~~408~~376
Total accruing troubled debt restructured loans (2)	$	51,~~873~~720		$	15,~~949~~873		$	—1,949		$	—		$	—
Ratios:
Nonperforming loans to total loans	10.4368		%	1.6543		%	21.6365		%	2.1363		%	2.4913		%
Nonperforming assets to total assets	0.9884			10.1698			1.8816			1.5588			1.8955

(1) At December 31, 2014, $682,000 of one- to four-family residential loans, $53,000 commercial real estate loans, and $27,000 commercial loans were classified as nonaccruing troubled debt restructured loans. At December 31, 2013, $146,000 of one- to four-family residential loans, $54,000 commercial real estate loans, and $27,000 commercial loans were classified as nonaccuring troubled debt restructured loans.

(2) At December 31, ~~2014~~2015, $31.~~7 million of five or more family loans, $~~2.1 million of commercial real estate loans, $56489,000 of one- to four-family loans, and $2574,000 of ~~consumer~~home ~~and~~equity ~~other~~ loans were classified as accruing troubled debt restructured loans. At December 31, ~~2013~~2014, $13.97 million of five or more family loans, $2.1 million of commercial real estate loans, $5856,000 of one- to four-family loans, and $3225,000 of consumer and other loans were classified as accruing troubled debt restructured loans.

Total nonperforming loans decreased $485,000, or 9.9%, to $4.4 million at December 31, 2014 compared to $4.9 million at December 31, 2013. The decrease in nonperforming loans was primarily due to a decrease in nonperforming commercial land loans resulting from a partial paydown of $1.0 million on a $3.1 million nonperforming commercial real estate and commercial land relationship during 2014. In addition, nonperforming commercial land loans decreased due to $82,000 of paydowns received on two relationships and the repayment of $66,000 related to another commercial land relationship. Partially offsetting these decreases was a $208,000 increase in nonperforming residential mortgage loans due to the transfer of seven loans totaling $685,000 to nonaccrual status during 2014 which were offset by the transfer of four mortgage loans totaling $179,000 to OREO and paydowns totaling $52,000 on four other mortgage loans. The increase in nonaccruing troubled debt restructurings was due to four residential mortgage loans totaling $514,000 being restructured during 2014.

For the year ended December 31, 2014, contractual gross interest income of $315,000 would have been recorded on non-performing loans if those loans had been current in accordance with their original terms and been outstanding throughout the year or since origination. For the year ended December 31, 2014, gross interest income that was recorded related to such non-performing loans totaled $10,000.

Troubled Debt Restructured Loans. A loan is considered a troubled debt restructuring if we grant a concession to the borrower and the borrower is experiencing financial difficulties. According to our current loan policy, commercial loans and one- to four-family residential loans with a risk grade of five or higher which are in the process of being renewed, refinanced, modified, or the borrower is requesting a payment extension, the Loan Officer, Executive Vice President, and either the President/Chief Financial Officer or Chief Accounting Officer will review the request to determine if the loan should be considered a troubled debt restructuring. All other borrower-requested modifications are reviewed by the Executive Vice President and Chief Credit Officer to determine if the loan should be considered a troubled debt restructuring. The Finance Department may also be consulted when determining whether a loan should be considered a troubled debt restructuring. These loans may also be reviewed by the Officer Loan Committee. At December 31, 2014 and 2013, we had $6.6 million and $2.2 million, respectively, in loans classified as troubled debt restructurings. Of the total troubled debt restructurings at December 31, 2014, $762,000 were on nonaccrual status and included $682,000 of one- to four-family residential loans, $53,000 of commercial real estate loans, and $27,000 of commercial loans. The remaining $5.9 million of our troubled debt restructurings were performing in accordance with their revised agreements and included $3.7 million of five or more family loans, $2.1 million of commercial real estate loans, $56,000 of one- to four-family residential loans, and $25,000 of consumer and other loans.

For the year ended December 31, 2014 and 2013, gross interest income that would have been recorded had our nonperforming troubled debt restructurings been current in accordance with their original terms was $18,000 and $16,000, respectively. We did not record any gross interest income during the year ended December 31, 2014 and 2013 related to our nonperforming troubled debt restructurings.

Delinquencies and Problem Assets. After a real estate secured loan becomes 15 days late, or 10 days for consumer and commercial loans, we deliver a computer generated late charge notice to the borrower and will attempt to contact the borrower by telephone to make payment arrangements. We attempt to make satisfactory arrangements to bring the account current, including interviewing the borrower, until the loan is brought current or a determination is made to recommend foreclosure, deed-in-lieu of foreclosure, or other appropriate action. After a loan becomes delinquent between 20 and 30 days or more, we will generally refer the matter to the Management Collections Committee, comprised of the Executive Vice President and Chief Credit Officer, Assistant Vice President of Mortgage Warehousing, and the Collections Manager, which may authorize legal counsel to commence foreclosure proceedings.

All delinquent loans are reviewed on a regular basis and such loans are placed on nonaccrual status when they become more than 90 days delinquent with the only exception being with matured loans, in which full payment of principal and interest is expected. When loans are placed on nonaccrual status, unpaid accrued interest for the current year is reversed from interest income, any prior year unpaid accrued interest is charged-off against the allowance for loan losses. Further income is recognized only to the extent received, if there is no risk of loss of principal, in which case all payments are applied to principal.

Total nonperforming loans decreased $2.1 million, or 46.9%, to $2.3 million at December 31, 2015 compared to $4.4 million at December 31, 2014. The ~~following~~decrease ~~table~~in ~~sets~~nonperforming ~~forth~~loans ~~certain~~was ~~information~~primarily ~~with~~due ~~respect~~to the fourth quarter 2015 transfer to ~~our~~other ~~loan~~real ~~portfolio~~estate ~~delinquencies~~owned byof ~~type~~a $1.9 million commercial real estate and ~~amount~~commercial atland relationship upon the ~~years~~final ~~indicated~~settlement of the borrower’s bankruptcy through an auction. ~~None~~In addition to the properties held as collateral, the Bank also had judgment liens on unencumbered properties owned by the borrower. As such, those properties were also transferred to other real estate owned through the settlement, the fair value of ~~our~~which was more than the estimated losses on the fair value of the properties held as collateral. Thus, the Bank did not record any charge-offs related to the transfer. The Bank also transferred to other real estate owned a commercial and industrial and commercial real estate relationship totaling $80,000, a commercial real estate lending relationship totaling $46,000, and two residential mortgage ~~warehouse~~relationships totaling $391,000. In addition, seven residential mortgage relationships totaling $935,000 were transferred back to accrual status, and the Bank received $124,000 in payments and payoffs of other nonperforming loans. ~~have~~These ~~been~~decreases ~~delinquent~~were atpartially offset by loans being transferred to nonaccrual status during the ~~years~~year ~~indicated~~ended 2015, including a commercial real estate lending relationship totaling $1.3 million, which required a specific reserve of $665,000. Also, two residential mortgage relationships totaling $207,000, one commercial real estate relationship totaling $80,000, and two home equity relationships were transferred to nonaccrual status during 2015. All of the Company’s nonaccruing troubled debt restructurings were transferred to accrual status during 2015 due to continued repayment in accordance with the terms of the agreements.

	Loans Delinquent For
	30-59 Days			60-89 Days			90 Days and Over			Total
	Number	Amount		Number	Amount		Number	Amount		Number	Amount
	(Dollars in thousands)
At December 31, 2014:
Commercial:
Commercial and industrial	—	$	—	—	$	—	1	$	27	1	$	27
Real estate	1	72		—	—		6	822		7	894
Land	—	—		—	—		4	1,216		4	1,216
Total commercial	1	72		—	—		11	2,065		12	2,137
One- to four-family	5	454		2	203		8	920		15	1,577
Home equity	—	—		1	73		2	7		3	80
Consumer and other	2	19		—	—		—	—		2	19
Total	8	$	545	3	$	276	21	$	2,992	32	$	3,813
At December 31, 2013:
Commercial:
Commercial and industrial	1	$	2	—	$	—	1	$	27	2	$	29
Real estate	7	2,377		—	—		5	874		12	3,251
Five or more family	2	76		—	—		—	—		2	76
Land	—	—		—	—		5	2,317		5	2,317
Total commercial	10	2,455		—	—		11	3,218		21	5,673
One- to four-family	11	640		1	7		11	1,161		23	1,808
Home equity	1	4		—	—		2	12		3	16
Consumer and other	3	176		—	—		3	3		6	179
Total	25	$	3,275	1	$	7	27	$	4,394	53	$	7,676
At December 31, 2012:
Commercial:
Commercial and industrial	3	$	66	—	$	—	—	$	—	3	$	66
Real estate	5	1,019		1	24		14	2,642		20	3,685
Land	—	—		1	109		5	2,494		6	2,603
Total commercial	8	1,085		2	133		19	5,136		29	6,354
One- to four-family	11	524		3	283		12	1,469		26	2,276
Home equity	2	21		—	—		2	25		4	46
Consumer and other	3	13		—	—		3	5		6	18
Total	24	$	1,643	5	$	416	36	$	6,635	65	$	8,694

For the year ended December 31, 2015, contractual gross interest income of $285,000 would have been recorded on non-performing loans if those loans had been current in accordance with their original terms and been outstanding throughout the year or since origination. For the year ended December 31, 2015, gross interest income that was recorded related to such non-performing loans totaled $6,000.

Troubled Debt Restructured Loans. A loan is considered a troubled debt restructuring if the borrower is experiencing financial difficulties and we grant a concession to the borrower. According to our current loan policy, commercial loans and one- to four-family residential loans with a risk grade of five or higher which are in the process of being renewed, refinanced, modified, or the borrower is requesting a payment extension, the Loan Officer, Executive Vice President, and either the President/Chief Financial Officer or Chief Accounting Officer will review the request to determine if the loan should be considered a troubled debt restructuring. All other borrower-requested modifications are reviewed by the Executive Vice President – Chief Credit Officer to determine if the loan should be considered a troubled debt restructuring. The Finance Department may also be consulted when determining whether a loan should be considered a troubled debt restructuring. These loans may also be reviewed by the Officer Loan Committee. At December 31, 2015 and 2014, we had $1.7 million and $6.6 million, respectively, in loans classified as troubled debt restructurings. All of the total troubled debt restructurings at December 31, 2015 were performing in accordance with their revised agreements and included $1.2 million of commercial real estate loans, $489,000 of one- to four-family residential loans, and $74,000 of home equity loans.

For the year ended December 31, 2015 and 2014, gross interest income that would have been recorded had our nonperforming troubled debt restructurings been current in accordance with their original terms was $11,000 and $18,000, respectively. For the years ended December 31, 2015 and 2014, we recorded $2,000 and $0 in gross interest income, respectively, related to our nonperforming troubled debt restructurings.

Delinquencies and Problem Assets. After a real estate secured loan becomes 15 days late, or 10 days for consumer and commercial loans, we deliver a computer generated late charge notice to the borrower and will attempt to contact the borrower by telephone to make payment arrangements. We attempt to make satisfactory arrangements to bring the account current, including interviewing the borrower, until the loan is brought current or a determination is made to recommend foreclosure, deed-in-lieu of foreclosure, or other appropriate action. After a loan becomes delinquent between 20 and 30 days or more, we will generally refer the matter to the Management Collections Committee, comprised of the Executive Vice President – Chief Credit Officer and the Collections Manager, which may authorize legal counsel to commence foreclosure proceedings.

All delinquent loans are reviewed on a regular basis and such loans are placed on nonaccrual status when they become more than 90 days delinquent, except for matured loans in which full payment of principal and interest is expected. When loans are placed on nonaccrual status, unpaid accrued interest for the current year is reversed from interest income and any prior year unpaid accrued interest is charged-off against the allowance for loan losses. Further income is recognized only to the extent received, if there is no risk of loss of principal, in which case all payments are applied to principal.

	Loans Delinquent For
	30-59 Days			60-89 Days			90 Days and Over			Total
	Number	Amount		Number	Amount		Number	Amount		Number	Amount
	(Dollars in thousands)
At December 31, 2011:
Commercial:
Commercial and industrial	—	$	—	—	$	—	2	$	28	2	$	28
Real estate	3	1,058		2	127		9	1,589		14	2,774
Five or more family	1	43		—	—		—	—		1	43
Land	1	216		—	—		3	2,248		4	2,464
Total commercial	5	1,317		2	127		14	3,865		21	5,309
One- to four-family	14	1,292		1	55		9	1,115		24	2,462
Home equity	—	—		—	—		1	14		1	14
Consumer and other	3	27		1	14		3	8		7	49
Total	22	$	2,636	4	$	196	27	$	5,002	53	$	7,834
At December 31, 2010:
Commercial:
Commercial and industrial	—	$	—	1	$	35	—	$	—	1	$	35
Real estate	6	1,328		—	—		9	1,580		15	2,908
Five or more family	1	48		—	—		—	—		1	48
Land	—	—		—	—		1	132		1	132
Total commercial	7	1,376		1	35		10	1,712		18	3,123
One- to four-family	16	1,200		—	—		11	1,021		27	2,221
Residential land	1	44		—	—		1	88		2	132
Home equity	—	—		1	377		—	—		1	377
Consumer and other	7	184		—	—		3	4		10	188
Total	31	$	2,804	2	$	412	25	$	2,825	58	$	6,041

The following table sets forth certain information with respect to our loan portfolio delinquencies by type and amount at the years indicated. None of our mortgage warehouse loans have been delinquent at the years indicated.



	Loans Delinquent For
	30-59 Days			60-89 Days			90 Days and Over			Total
	Number	Amount		Number	Amount		Number	Amount		Number	Amount
	(Dollars in thousands)
At December 31, 2015:
Commercial:
Real estate	2	$	1,282	—	$	—	1	$	102	3	$	1,384
Five or more family	1	20		—	—		—	—		1	20
Construction	1	41		—	—		—	—		1	41
Total commercial	4	1,343		—	—		1	102		5	1,445
One- to four-family	3	176		—	—		7	495		10	671
Home equity	—	—		—	—		2	8		2	8
Total	7	$	1,519	—	$	—	10	$	605	17	$	2,124

At December 31, 2014:
Commercial:
Commercial and industrial	—	$	—	—	$	—	1	$	27	1	$	27
Real estate	1	72		—	—		6	822		7	894
Land	—	—		—	—		4	1,216		4	1,216
Total commercial	1	72		—	—		11	2,065		12	2,137
One- to four-family	5	454		2	203		8	920		15	1,577
Home equity	—	—		1	73		2	7		3	80
Consumer and other	2	19		—	—		—	—		2	19
Total	8	$	545	3	$	276	21	$	2,992	32	$	3,813

At December 31, 2013:
Commercial:
Commercial and industrial	1	$	2	—	$	—	1	$	27	2	$	29
Real estate	7	2,377		—	—		5	874		12	3,251
Five or more family	2	76		—	—		—	—		2	76
Land	—	—		—	—		5	2,317		5	2,317
Total commercial	10	2,455		—	—		11	3,218		21	5,673
One- to four-family	11	640		1	7		11	1,161		23	1,808
Home equity	1	4		—	—		2	12		3	16
Consumer and other	3	176		—	—		3	3		6	179
Total	25	$	3,275	1	$	7	27	$	4,394	53	$	7,676



	Loans Delinquent For
	30-59 Days			60-89 Days			90 Days and Over			Total
	Number	Amount		Number	Amount		Number	Amount		Number	Amount
	(Dollars in thousands)
At December 31, 2012:
Commercial:
Commercial and industrial	3	$	66	—	$	—	—	$	—	3	$	66
Real estate	5	1,019		1	24		14	2,642		20	3,685
Land	—	—		1	109		5	2,494		6	2,603
Total commercial	8	1,085		2	133		19	5,136		29	6,354
One- to four-family	11	524		3	283		12	1,469		26	2,276
Home equity	2	21		—	—		2	25		4	46
Consumer and other	3	13		—	—		3	5		6	18
Total	24	$	1,643	5	$	416	36	$	6,635	65	$	8,694

At December 31, 2011:
Commercial:
Commercial and industrial	—	$	—	—	$	—	2	$	28	2	$	28
Real estate	3	1,058		2	127		9	1,589		14	2,774
Five or more family	1	43		—	—		—	—		1	43
Land	1	216		—	—		3	2,248		4	2,464
Total commercial	5	1,317		2	127		14	3,865		21	5,309
One- to four-family	14	1,292		1	55		9	1,115		24	2,462
Home equity	—	—		—	—		1	14		1	14
Consumer and other	3	27		1	14		3	8		7	49
Total	22	$	2,636	4	$	196	27	$	5,002	53	$	7,834

Classified Assets. Banking regulations and our Asset Classification Policy provide that loans and other assets considered to be of lesser quality should be classified as “substandard,” “doubtful,” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor(s) or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. We classify an asset as “special mention” if the asset has a potential weakness that warrants management’s close attention. While such assets are not impaired, management has concluded that if the potential weakness in the asset is not addressed, the value of the asset may deteriorate, thereby adversely affecting the repayment of the asset.

An institution is required to establish specific allowances for loan losses in an amount deemed prudent by management for loans classified substandard or doubtful, as well as for other problem loans. General allowances represent loss allowances which have been established to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount. Our determination as to the classification of our assets and the amount of our valuation allowances are subject to review by the Indiana Department of Financial Institutions and the Federal Deposit Insurance Corporation, which can order the establishment of additional general or specific loss allowances.

The loan portfolio is reviewed on a regular basis to determine whether any loans require classification in accordance with applicable regulations. Not all classified assets constitute nonperforming assets.

1920

On the basis of this review of our assets, we had classified or identified as special mention the following assets as of the date indicated:

	At December 31,
	2014		2013		2012
	2015		2014		2013
	(Dollars in thousands)
Special mention	$	13,~~958~~488	$	71,~~995~~958	$	117,~~404~~995
Substandard	134,~~656~~081		13,~~098~~656		1213,~~712~~098
Doubtful	20—		2320		—23
Loss	—		—		—
Total classified and special mention assets	$	157,~~634~~569	$	2115,~~116~~634	$	2421,116

On the basis of management’s review of our assets, at December 31, ~~2014~~2015, we identified approximately $23.05 million ~~of our assets as~~ special mention loans and classified $134.71 million as substandard ~~and $20,000 as doubtful~~. Special mention loans ~~decreased~~increased $61.05 million at December 31, ~~2014~~2015 when compared to December 31, ~~2013~~2014 as ~~three~~two relationships totaling $32.82 million were upgraded ~~during~~from ~~2014~~substandard ~~based~~due ~~upon~~to ~~improved~~improving financial performance and ~~analysis~~two ofrelationships ~~the~~totaling ~~borrowers and a total of~~ $1.80 million ofwere ~~special~~downgraded ~~mention~~based ~~loans~~upon ~~were~~deteriorating ~~repaid~~financial ~~during~~performance ~~2014~~and analysis of the borrowers. These ~~decreases~~increases were partially offset by the ~~downgrade~~2015 ~~during~~payoff ~~2014~~ of ~~six~~one ~~relationships~~relationship totaling $~~2.3~~500,000 ~~million~~and the upgrade to ~~special~~a ~~mention~~pass credit rating of three relationships totaling $969,000. Substandard loans ~~increased~~decreased $~~558,000~~9.6 million at December 31, ~~2014~~2015 when compared to December 31, ~~2013~~2014 asprimarily adue ~~result~~to ofthe ~~$2.0~~aforementioned ~~million~~upgrades, oftransfers ~~loans~~to ~~being~~other ~~downgraded~~real ~~during~~estate ~~2014~~owned ~~which~~totaling ~~was partially offset by~~ $12.34 million, inand ~~paydowns~~payoffs ~~received~~and onprincipal ~~these~~paydowns ~~loans~~received ~~during~~totaling ~~2014~~$2.1 Ofmillion ~~these~~during ~~payments, $1~~2015.1 ~~million~~These ~~was~~decreases ~~related~~were topartially ~~partial~~offset ~~paydowns~~by oneight arelationships totaling $32.10 million ~~nonperforming~~being ~~commercial~~classified ~~real~~as ~~estate~~substandard ~~and~~during ~~commercial land relationship~~2015.

Other than as provided above, there are no potential problem loans that are accruing but where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with present loan repayment terms.

Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors.

A loan is impaired when full payment of principal and interest under the loan terms is not expected. All individually classified commercial and residential mortgage loans are evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the net realizable fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

We are subject to periodic examinations by our federal and state regulatory examiners and may be required by such regulators to recognize additions to the allowance for loan losses based on their assessment of credit information available to them at the time of their examinations. The process of assessing the adequacy of the allowance for loan losses is necessarily subjective. Further, and particularly in times of economic weakness, it is reasonably possible that future credit losses may exceed historical loss levels and may also exceed management’s current estimates of incurred credit losses inherent within the loan portfolio. As such, there can be no assurance that future charge-offs will not exceed management’s current estimate of what constitutes a reasonable allowance for loan losses.

20Pursuant to the terms of the Merger Agreement, we must not maintain an allowance for loan losses which is not adequate in all material respects under the requirements of GAAP to provide for possible losses, net of recoveries, relating to loans previously charged off, and on loans and leases outstanding, without the consent of Horizon. Horizon has agreed not to unreasonably withhold such consent.

While management uses available information to recognize probable and reasonably estimable loan losses, future loss provisions may be necessary based on changing economic conditions. Payments received on impaired loans that are on nonaccrual are applied first to principal until there is no risk of loss of the principal. The allowance for loan losses is maintained at a level that represents management’s best estimate of losses inherent in the loan portfolio that are both probable and reasonably estimable.

The following table sets forth activity in our allowance for loan losses for the years indicated. We have not experienced any charge-offs or recoveries in our five or more family real estate loans, mortgage warehouse, residential construction, or residential land portfolio for the years indicated.

	At or For the Years Ended December 31,
	2014			2013			2012			2011			2010
	2015			2014			2013			2012			2011
	(Dollars in thousands)
Balance at beginning of year	$	3,~~905~~595		$	43,~~308~~905		$	34,~~772~~308		$	3,~~943~~772		$	23,~~776~~943
Charge-offs:
Commercial:
Commercial and industrial	—			—			~~(13~~—		)	—(13		)	~~(313~~—		)
Real estate	—(20		)	~~(103~~—		)	(~~370~~103		)	(~~1,057~~370		)	(1,~~107~~057		)
Construction	—			—			—			—			~~(558~~—		)
Land	—			~~(102~~—		)	—(102		)	~~(27~~—		)	—(27		)
Total commercial	—(20		)	~~(205~~—		)	(~~383~~205		)	(~~1,084~~383		)	(1,~~978~~084		)
One- to four-family	(~~159~~78		)	(~~190~~159		)	(84190		)	(~~132~~84		)	(~~172~~132		)
Home equity	(1218		)	(2212		)	(3522		)	(5235		)	(~~105~~52		)
Consumer and other	(30122		)	(2630		)	(6726		)	(6267		)	(7862		)
Total charge-offs	(~~201~~238		)	(~~443~~201		)	(~~569~~443		)	(~~1,330~~569		)	(21,~~333~~330		)
Recoveries:
Commercial:
Commercial and industrial	—1			—			38—			—38			—
Real estate	—			—			8—			—8			—
Total commercial	—1			—			46—			—46			—
One- to four-family	21—			1921			219			—2			—
Home equity	51			—5			1—			21			—2
Consumer and other	1520			15			1915			2019			2820
Total recoveries	4122			3441			6834			2268			2822
Net (charge-offs) recoveries	(160		)	(409		)	(501		)	(1,308		)	(2,305		)
Net charge-offs	(216		)	(160		)	(409		)	(501		)	(1,308		)
Provision (credit) for loan losses	~~(150~~255		)	6(150		)	~~1,037~~6			1,~~137~~037			31,~~472~~137
Balance at end of year	$	3,~~595~~634		$	3,~~905~~595		$	43,~~308~~905		$	34,~~772~~308		$	3,~~943~~772
Ratios:
Net charge-offs to average loans outstanding	0.0607		%	0.1506		%	0.1715		%	0.5017		%	0.8750		%
Allowance for loan losses to nonperforming loans	81154.2870			7981.5628			5179.5456			5951.2754			5759.2127
Allowance for loan losses to total loans	1.1605			1.3116			1.3531			1.2635			1.4226

Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category, the total loan balances by category, and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

	At December 31,
	2014						2013
	Allowancefor LoanLosses		LoanBalances byCategory		Percent ofLoans inEachCategory toTotal Loans		Allowancefor LoanLosses		LoanBalances byCategory		Percent ofLoans inEachCategory toTotal Loans
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	49	$	17,415	5.63	%	$	69	$	17,640	5.94	%
Real estate	1,379		75,263		24.32		1,747		83,782		28.22
Five or more family	111		16,486		5.33		218		15,402		5.19
Construction	10		2,322		0.75		73		3,949		1.33
Land	567		6,826		2.20		618		8,149		2.74
Total commercial	2,116		118,312		38.23		2,725		128,922		43.42
One- to four-family	676		39,317		12.71		458		35,438		11.93
Mortgage warehouse	654		132,636		42.86		508		115,443		38.88
Residential construction:
Construction	4		1,472		0.48		—		503		0.17
Land	—		192		0.06		—		289		0.10
Total residential construction	4		1,664		0.54		—		792		0.27
Home equity	90		13,195		4.26		111		11,397		3.84
Consumer and other	55		4,325		1.40		83		4,920		1.66
Unallocated	—		—		—		20		—		—
Total loans (excluding net deferred loan costs)	$	3,595	$	309,449	100.00	%	$	3,905	$	296,912	100.00	%

	At December 31,
	2012						2011
	Allowancefor LoanLosses		LoanBalances byCategory		Percent ofLoans inEachCategory toTotal Loans		Allowancefor LoanLosses		LoanBalances byCategory		Percent ofLoans inEachCategory toTotal Loans
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	74	$	20,179	6.35	%	$	223	$	18,017	6.03	%
Real estate	1,867		79,816		25.12		1,868		80,430		26.90
Five or more family	279		14,284		4.49		422		17,719		5.93
Construction	35		1,793		0.56		28		1,175		0.39
Land	876		8,490		2.67		233		9,218		3.08
Total commercial	3,131		124,562		39.20		2,774		126,559		42.33
One- to four-family	401		36,996		11.64		374		45,576		15.25
Mortgage warehouse	601		137,467		43.26		393		103,864		34.74
Residential construction:
Construction	1		1,108		0.35		3		2,631		0.88
Land	1		367		0.12		—		416		0.14
Total residential construction	2		1,475		0.46		3		3,047		1.02
Home equity	130		12,267		3.86		119		12,966		4.34
Consumer and other	43		5,019		1.58		109		6,942		2.32
Total loans (excluding net deferred loan costs)	$	4,308	$	317,786	100.00	%	$	3,772	$	298,954	100.00	%

	At December 31, 2010
	At December 31,
	Allowancefor LoanLosses		LoanBalances byCategory		Percent ofLoans inEachCategory toTotal Loans
	2015						2014
	(Dollars in thousands)
	Allowancefor LoanLosses		LoanBalances byCategory		Percent ofLoans inEachCategory toTotal Loans		Allowancefor LoanLosses		LoanBalances byCategory		Percent ofLoans inEachCategory toTotal Loans
Commercial:
	(Dollars in thousands)
Commercial and industrial	$	344	$	17,977	6.49	%
Commercial:
Real estate	2,305		79,807		28.82
Commercial and industrial	$	55	$	18,117	5.25	%	$	49	$	17,415	5.63	%
Five or more family	216		11,586		4.18
Real estate	1,832		92,300		26.76		1,379		75,263		24.32
Construction	93		4,947		1.79
Five or more family	119		22,692		6.58		111		16,486		5.33
Land	183		10,397		3.76
Construction	87		11,082		3.21		10		2,322		0.75
Total commercial	3,141		124,714		45.04
Land	347		10,639		3.08		567		6,826		2.20
One- to four-family	394		57,144		20.64
Total commercial	2,440		154,830		44.88		2,116		118,312		38.23
Mortgage warehouse	139		69,600		25.13
One- to four-family	591		40,478		11.74		676		39,317		12.71
Residential construction:
Mortgage warehouse	460		128,902		37.38		654		132,636		42.86
Construction	15		1,885		0.68
Residential construction:
Land	2		398		0.14
Construction	4		2,423		0.70		4		1,472		0.48
Total residential construction	17		2,283		0.82
Land	—		878		0.26		—		192		0.06
Home equity	143		14,187		5.12
Total residential construction	4		3,301		0.96		4		1,664		0.54
Consumer and other	109		8,985		3.25
Home equity	93		13,990		4.06		90		13,195		4.26
Total loans (excluding net deferred loan costs)	$	3,943	$	276,913	100.00	%
Consumer and other	46		3,380		0.98		55		4,325		1.40
Total loans (excluding net deferred loan costs)	$	3,634	$	344,881	100.00	%	$	3,595	$	309,449	100.00	%



	At December 31,
	2013						2012
	Allowance for Loan Losses		Loan Balances by Category		Percent of Loans in Each Category to Total Loans		Allowance for Loan Losses		Loan Balances by Category		Percent of Loans in Each Category to Total Loans
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	69	$	17,640	5.94	%	$	74	$	20,179	6.35	%
Real estate	1,747		83,782		28.22		1,867		79,816		25.12
Five or more family	218		15,402		5.19		279		14,284		4.49
Construction	73		3,949		1.33		35		1,793		0.56
Land	618		8,149		2.74		876		8,490		2.67
Total commercial	2,725		128,922		43.42		3,131		124,562		39.20
One- to four-family	458		35,438		11.93		401		36,996		11.64
Mortgage warehouse	508		115,443		38.88		601		137,467		43.26
Residential construction:
Construction	—		503		0.17		1		1,108		0.35
Land	—		289		0.10		1		367		0.12
Total residential construction	—		792		0.27		2		1,475		0.46
Home equity	111		11,397		3.84		130		12,267		3.86
Consumer and other	83		4,920		1.66		43		5,019		1.58
Unallocated	20		—		—		—		—		1.58
Total loans (excluding net deferred loan costs)	$	3,905	$	296,912	100.00	%	$	4,308	$	317,786	100.00	%



	At December 31, 2011
	Allowance for Loan Losses		Loan Balances by Category		Percent of Loans in Each Category to Total Loans
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	223	$	18,017	6.03	%
Real estate	1,868		80,430		26.90
Five or more family	422		17,719		5.93
Construction	28		1,175		0.39
Land	233		9,218		3.08
Total commercial	2,774		126,559		42.33
One- to four-family	374		45,576		15.25
Mortgage warehouse	393		103,864		34.74
Residential construction:
Construction	3		2,631		0.88
Land	—		416		0.14
Total residential construction	3		3,047		1.02
Home equity	119		12,966		4.34
Consumer and other	109		6,942		2.32
Total loans (excluding net deferred loan costs)	$	3,772	$	298,954	100.00	%

Securities Activities

Our securities investment policy was established by our Board of Directors. This policy dictates that investment decisions be made based on the safety of the investment, liquidity requirements, potential returns, cash flow targets, and consistency with our interest rate risk management strategy.

Our investment policy is reviewed annually by our Board of Directors, and all policy changes recommended by management must be approved by the Board. Authority to make investments under the approved guidelines are delegated to appropriate officers. While general investment strategies are developed and authorized by the Board, the execution of specific actions with respect to securities held by the Bank rests with the Chief Executive Officer and the President and Chief Financial Officer who are authorized to execute investment transactions with respect to securities held by the Bank within the scope of the established investment policy.

WePursuant ~~have~~to ~~retained~~the anterms ~~independent~~of ~~financial~~the ~~institution~~Merger toAgreement, ~~provide~~and usexcept as consistent with ~~portfolio~~past ~~accounting~~practice, ~~services~~we ~~related~~are togenerally ~~our~~limited ~~securities~~in ~~portfolio,~~(1) ~~including~~purchasing aany ~~monthly~~investment ~~portfolio~~security ~~performance~~that ~~analysis~~exceeds $2.0 ~~These~~million ~~reports,~~individually; ~~together~~(2) ~~with~~purchasing ~~another~~any ~~quarterly~~security ~~third~~other ~~party~~than ~~review,~~U.S. ~~are~~Treasury ~~reviewed~~or byother ~~management~~governmental inobligations ~~making~~having ~~investment~~an ~~decisions.~~average ~~The~~remaining ~~Asset/Liability~~life ~~Management~~of ~~Committee~~three ~~and~~years ~~the~~or ~~Board~~less; ofor ~~Directors~~(3) ~~review~~selling aany ~~summary~~investment ofsecurity ~~these~~other ~~reports~~than onsales amade ~~monthly~~in ~~basis.~~the Weordinary ~~also~~course ~~use~~of ~~this~~business, ~~financial~~without ~~institution~~the ~~along~~consent ~~with~~of ~~other~~Horizon. ~~third~~Horizon ~~party~~has ~~brokers~~agreed not to ~~effect~~unreasonably ~~security~~withhold ~~purchases~~such ~~and sales~~consent.

~~The~~We ~~Bank's~~have ~~wholly-owned~~retained ~~subsidiary,~~an ~~LSB~~independent ~~Investments,~~financial ~~Inc.,~~institution ato ~~Nevada~~provide ~~corporation~~us ~~(“LSB~~with ~~Investments”),~~portfolio ~~holds~~accounting aservices ~~significant~~related ~~portion~~to ofour ~~the Bank’s investment~~ securities. ~~These~~portfolio, ~~securities~~including ~~consist~~a ~~primarily~~monthly ofportfolio ~~mortgage-backed~~performance ~~securities,~~analysis. ~~municipal~~These ~~bonds~~reports, ~~and~~together ~~agency~~with ~~securities~~another ~~and~~quarterly ~~interest~~third-~~earning~~party ~~time deposits. At December 31~~review, ~~2014,~~are ~~the~~reviewed ~~fair value of such securities held~~ by ~~LSB~~management ~~Investments~~in ~~was~~making ~~$64.7~~investment ~~million~~decisions. InThe ~~addition,~~Asset/Liability atManagement ~~December 31,~~Committee ~~2014,~~and ~~$5.6~~the ~~million~~Board of ~~interest-earning~~Directors ~~time~~review ~~deposits~~a ~~were~~summary ~~also~~of ~~held~~these byreports ~~LSB Investments. Because LSB Investments is located in Nevada and makes decisions independently from the Bank, the earnings attributable~~ on ~~such~~a ~~securities~~monthly ~~are~~basis. ~~not~~We ~~taxable~~also touse usthis ~~for~~financial ~~Indiana~~institution ~~state~~along ~~income tax purposes. Investment decisions~~ with ~~respect~~other ~~to LSB Investments are made by a~~ third -party ~~company~~brokers ~~based in Nevada, The Key State Companies, who have performed such services for over 20 years for other financial institutions. In general, The Key State Companies utilize investment guidelines similar~~ to ~~ours.~~effect ~~The~~security ~~Board~~purchases ~~of Directors of LSB Investments consists of two employees of The LaPorte Savings Bank~~ and ~~one employee of The Key State Companies to ensure effective oversight~~sales.

~~Our~~The ~~current~~Bank’s ~~investment~~wholly-owned ~~policy~~subsidiary, ~~generally~~LSB ~~permits~~Investments, ~~security~~Inc., ~~investments~~a inNevada ~~debt~~corporation ~~securities~~(“LSB ~~issued~~Investments”), byholds a significant portion of the UBank’s investment securities.S. ~~government~~These ~~and~~securities ~~its~~consist ~~agencies~~primarily of mortgage-backed securities, municipal bonds, ~~and~~agency ~~corporate~~securities, ~~debt~~and ~~obligations,~~interest-earning astime ~~well~~deposits. asAt ~~investments~~December 31, in2015, ~~common~~the ~~stock~~fair value of ~~the~~such ~~Federal~~securities ~~Home~~held ~~Loan~~by ~~Bank~~LSB ofInvestments ~~Indianapolis~~was $62.0 ~~The~~million. ~~policy~~In ~~permits~~addition, ~~investments~~at inDecember 31, ~~mortgage-backed securities~~2015, ~~including~~$6.9 ~~pass~~million of interest-~~through~~earning ~~securities~~time ~~issued~~deposits ~~and~~were ~~guaranteed~~also held by ~~Fannie~~LSB ~~Mae,~~Investments. ~~Freddie~~Because ~~Mac,~~LSB ~~Ginnie~~Investments ~~Mae,~~is located in Nevada and makes decisions independently from the ~~U.S.~~Bank, ~~Small~~the ~~Business~~earnings ~~Administration.~~attributable Inon ~~addition,~~such wesecurities ~~may~~are ~~invest~~not intaxable ~~Collateralized~~to ~~Mortgage~~us ~~Obligations~~for ~~(“CMOs”),~~Indiana ~~Real~~state ~~Estate~~income ~~Mortgage~~tax purposes. Investment ~~Conduits~~decisions ~~(“REMICs”)~~with ~~and~~respect ~~other~~to ~~mortgage-related~~LSB ~~products,~~Investments ~~corporate~~are ~~debt,~~made ~~interest~~by a third-~~earning~~party ~~time~~company ~~deposits~~based in Nevada, ~~and~~The ~~Community~~Key ~~Reinvestment~~State ~~Act~~Companies, ~~Qualified~~who ~~Investment~~have ~~Funds.~~performed ~~The~~such ~~Company~~services ~~has~~for ~~established~~over ~~guidelines~~20 ~~and~~years ~~limitations~~for inother ~~certain~~financial ~~sectors~~institutions. ofIn ~~the~~general, ~~securities~~The ~~portfolio~~Key ~~and~~State ~~any~~Companies ~~exceptions~~utilize ~~are~~investment ~~reported~~guidelines similar to ~~the~~ours. The Board of Directors. Atof ~~December 31,~~LSB ~~2014,~~Investments ~~there~~consists ~~were~~of notwo ~~exceptions~~employees toof ~~these~~The ~~guidelines~~LaPorte Savings Bank and ~~limitations~~one employee of The Key State Companies to ~~report~~ensure effective oversight.

Our current investment policy ~~outlines~~generally permits security investments in debt securities issued by the ~~pre-purchase~~U.S. ~~analysis~~government and its agencies, ~~credit~~municipal bonds, and ~~interest~~corporate ~~rate~~debt ~~risk~~obligations, ~~assessment~~as ~~guidelines~~well ~~and~~as ~~due~~investments ~~diligence~~in ~~documentation~~common ~~required~~stock ~~for~~of ~~all~~the ~~permissible~~Federal Home Loan Bank of Indianapolis. The policy permits investments in mortgage-backed securities, including pass-through securities issued and guaranteed by Fannie Mae, Freddie Mac, Ginnie Mae, and the U.S. Small Business Administration. In addition, ~~our~~we ~~policy~~may ~~requires~~invest ~~management~~in toCollateralized ~~routinely~~Mortgage ~~monitor~~Obligations ~~the~~(“CMOs”), ~~investment~~Real ~~portfolio~~Estate asMortgage ~~well~~Investment asConduits ~~the~~(“REMICs”) ~~markets~~and ~~for~~other ~~changes~~mortgage-related ~~which~~products, ~~may~~corporate ~~have~~debt, ainterest-earning ~~material~~time deposits, ~~negative~~and ~~impact~~Community onReinvestment ~~the~~Act ~~credit~~Qualified Investment Funds. The Company has established guidelines and limitations in certain sectors of ~~our~~the ~~holdings~~securities portfolio and any exceptions are reported to the Board of Directors. WeAt ~~engage~~December 31, an2015, ~~independent~~there ~~third~~were ~~party~~no exceptions to ~~review~~these ~~municipal~~guidelines and ~~corporate~~limitations ~~securities~~to ~~annually~~report.

AtOur ~~the~~investment ~~time~~policy ofoutlines the pre-purchase analysis, wecredit, ~~designate~~and ainterest ~~security~~rate asrisk ~~held-to-maturity,~~assessment ~~available-for-sale,~~guidelines orand ~~trading,~~due ~~depending~~diligence ondocumentation ~~our~~required ~~ability~~for ~~and~~all ~~intent~~permissible investments. ~~Securities~~In ~~available-for-sale~~addition, orour ~~trading~~policy ~~are~~requires ~~reported~~management atto ~~fair~~routinely ~~value,~~monitor ~~while~~the ~~securities~~investment ~~held-to-maturity~~portfolio ~~are~~as ~~reported~~well atas ~~amortized~~the ~~cost.~~markets Atfor ~~December 31,~~changes ~~2014~~which may have a material, ~~all~~negative impact on the credit of our ~~securities~~holdings. ~~are~~We ~~classified~~engage asan ~~available~~independent third-~~for-sale~~party to review municipal and corporate securities annually.

~~Some~~At of the ~~securities~~time weof ~~hold~~purchase, ~~are~~we ~~callable~~designate bya ~~the~~security ~~issuer.~~as ~~Although~~held-to-maturity, ~~these~~available-for-sale, ~~securities~~or ~~may~~trading, ~~have~~depending aon ~~yield~~our ~~somewhat~~ability ~~higher~~and ~~than~~intent. ~~the~~Securities ~~yield~~available-for-sale ofor ~~similar~~trading ~~securities~~are ~~without~~reported ~~such~~at ~~features~~fair value, ~~these~~while securities ~~are subject~~ held-to-maturity ~~the~~are ~~risk~~reported ~~that~~at ~~they~~amortized ~~may be redeemed by the issuer prior to maturing in the event general interest rates decline~~cost. At December 31, ~~2014~~2015, weall ~~had $41.8 million~~ of our securities ~~which~~are ~~were~~classified ~~subject~~as ~~to redemption by the issuer prior to their stated maturity~~available-for-sale.

WeSome ~~invest~~of inthe ~~state and municipal~~ securities ~~partly~~we ~~due~~hold ~~to their attractive after tax yields. Permissible municipal investments include both general obligation and revenue issues which~~ are ~~rated~~callable inby ~~one of~~ the ~~four~~issuer. ~~highest~~Although ~~rating~~these ~~categories~~securities bymay ahave ~~nationally recognized statistical rating organization and for which~~ a ~~pre-purchase~~yield ~~safety~~somewhat ~~and~~higher ~~soundness~~than ~~banking~~the ~~assessment~~yield isof ~~completed.~~similar ~~Investment~~securities inwithout ~~local~~such features, ~~state~~these ~~non-rated municipal~~ securities are ~~considered~~subject ~~only~~to ~~after~~ the ~~creditworthiness~~risk ofthat ~~the~~they ~~issuer~~may ~~has been analyzed and determined to~~ be aredeemed ~~prudent,~~by ~~safe,~~the ~~and~~issuer ~~sound~~prior ~~investment~~to asmaturing ~~outlined~~ in ~~our~~the ~~investment~~event ~~policy.~~general Weinterest ~~also~~rates ~~invest in taxable municipal securities~~decline. At December 31, ~~2014~~2015, we ~~held~~had $434.1 million inof ~~taxable~~securities ~~municipal~~which ~~securities~~were subject to redemption by the issuer prior to their stated maturity.

2425

We invest in state and municipal securities partly due to their attractive after tax yields. Permissible municipal investments include both general obligation and revenue issues which are rated in one of the four highest rating categories by a nationally recognized statistical rating organization and for which a pre-purchase safety and soundness banking assessment is completed. Investment in local, state non-rated municipal securities are considered only after the creditworthiness of the issuer has been analyzed and determined to be a prudent, safe, and sound investment as outlined in our investment policy. We also invest in taxable municipal securities. At December 31, 2015, we held $4.0 million in taxable municipal securities.

We purchase mortgage-backed securities in order to generate positive interest rate spreads with limited administrative expense, limited credit risk, and significant liquidity. We also use mortgage-backed securities to supplement our lending activities. Mortgage-backed securities are created by pooling mortgages and issuing a security collateralized by the pool of mortgages with an interest rate that is less than the interest rate on the underlying mortgages. Mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages, although most of our mortgage-backed securities are collateralized by single-family mortgages. The issuers of such securities (generally U.S. government agencies and U.S. government-sponsored enterprises, including Fannie Mae, Freddie Mac, and Ginnie Mae) pool and resell the participation interests in the form of securities to investors, such as the Bank, and guarantee the payment of principal and interest to these investors. Mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements. However, mortgage-backed securities are usually more liquid than individual mortgage loans and may be used to collateralize borrowings and other liabilities.

Investments in mortgage-backed securities involve a risk that actual prepayments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments, thereby affecting the net yield on such securities. We review prepayment estimates for our mortgage-backed securities at the time of purchase to ensure that prepayment assumptions are reasonable considering the underlying collateral for the securities at issue and current interest rates, and to determine the yield and estimated maturity of the mortgage-backed securities portfolio. Periodic reviews of current prepayment speeds are performed in order to ascertain whether prepayment estimates require modification that would cause amortization or accretion adjustments.

Collateralized mortgage obligations are also backed by mortgages; however, they differ from mortgage-backed securities because the principal and interest payments of the underlying mortgages are financially engineered to be paid to the security holders of pre-determined classes or tranches of these securities at a faster or slower pace. The receipt of these principal and interest payments, which depends on the proposed average life for each class, is contingent on a prepayment speed assumption assigned to the underlying mortgages. Variances between the assumed payment speed and actual payments can significantly alter the average lives of such securities. To quantify and mitigate this risk, we undertake a high level of payment analysis before purchasing these securities. We invest in collateralized mortgage obligations classes or tranches in which the payments on the underlying mortgages are passed along at a pace fast enough to provide an average life of two to five years with no change in market interest rates. At December 31, ~~2014~~2015, our collateralized mortgage obligations portfolio had a fair value of $6241.58 million and were issued by either a U.S. government-sponsored enterprise or the U.S. Small Business Administration.

We hold Federal Home Loan Bank of Indianapolis (“FHLB”) common stock to qualify for membership in the Federal Home Loan Bank System and to be eligible to borrow funds under the FHLB advance program. There is no trading market for ~~the~~ FHLB stock. The aggregate carrying value of our investment in FHLB stock at December 31, ~~2014~~2015 was $4.30 million based on its par value. No unrealized gains or losses have been recorded because we have determined that the par value of the FHLB stock represents its carrying value. However, there can be no assurance that the value of ~~such~~this ~~securities~~stock will not decline in the future.

We review equity and debt securities with significant declines in fair value on a periodic basis to determine whether they should be considered temporarily or other than temporarily impaired. In making these determinations, management considers: (1) the length of time and extent that fair value has been less than cost; (2) the financial condition and near term prospects of the issuer; (3) whether the market decline was affected by macroeconomic conditions; and (4) our intent not to sell the security and whether it is more likely than not that we will be required to sell the debt security before its anticipated recovery. For fixed maturity investments with unrealized losses due to interest rates where it is not more likely than not that we will be required to sell the debt security before its anticipated recovery, declines in value below cost are not assumed to be other than temporary. If a decline in the fair value of a security is determined to be other than temporary, the amount of impairment is split into two components as follows: (1) the portion of the other than temporary impairment that is related to credit loss, which must be recognized in the income statement, and (2) the portion of the other than temporary impairment related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows to be expected to be collected and the amortized cost basis. There were no charges related to other than temporary impairment on securities held by us during the years ended December 31, ~~2014~~2015 and ~~December 31, 2013~~2014.

All of our securities are classified as available-for-sale. The following table sets forth the composition of our investment securities portfolio at the dates indicated.

	At December 31,
	2014				2013				2012
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Securities available-for-sale:
U.S. Treasury and federal agency	$	7,447	$	7,395	$	6,249	$	6,150	$	8,045	$	8,405
State and municipal	54,298		56,847		54,892		55,723		42,161		45,614
Mortgage-backed securities—residential	27,391		27,488		28,197		27,938		11,819		12,385
Government agency sponsored collateralized mortgage obligations	63,140		62,530		74,417		72,311		54,070		55,156
Corporate debt securities	1,000		963		2,121		2,150		3,959		4,060
Total securities available-for-sale	$	153,276	$	155,223	$	165,876	$	164,272	$	120,054	$	125,620

At December 31, 2014, all of our mortgage-backed securities were issued by U.S. government-sponsored enterprises and all of our collateralized mortgage obligations were issued by either U.S. government-sponsored enterprises or the U.S. Small Business Administration.

At December 31, 2014, we had no investments in a single entity (other than U.S. government or agency sponsored securities) that had an aggregate book value in excess of 10% of our shareholders’ equity.

The composition and contractual maturities of the investment securities portfolio at December 31, 2014 are summarized in the following table. Mortgage-backed securities are anticipated to be repaid in advance of their contractual maturities as a result of projected mortgage loan prepayments. In addition, under the structure of some of our collateralized mortgage obligations, the short- and intermediate-tranche interests have repayment priority over the longer term tranches of the same underlying mortgage pool. As previously mentioned, some of our securities are callable at the option of the issuer.

	One Year or Less				More than OneYear through FiveYears				More than FiveYears through TenYears				More than TenYears				Total Securities
	AmortizedCost		WeightedAverageYield		AmortizedCost		WeightedAverageYield		AmortizedCost		WeightedAverageYield		AmortizedCost		WeightedAverageYield		AmortizedCost		FairValue		WeightedAverageYield
	(Dollars in thousands)
Securities available-for-sale:
U.S. federalagency	$	229	3.07	%	$	6,218	1.28	%	$	1,000	1.75	%	$	—	—	%	$	7,447	$	7,395	1.40	%
State andmunicipal	—		—		9,671		2.44		31,759		3.11		12,868		4.42		54,298		56,847		3.30
Mortgage-backed securities—residential	—		—		—		—		4,939		1.68		22,452		1.91		27,391		27,488		1.87
Government agency sponsored collateralized mortgage obligations	—		—		2,347		2.48		7,487		2.23		53,306		1.97		63,140		62,530		2.02
Corporate debt securities	—		—		—		—		1,000		2.00		—		—		1,000		963		2.00
Totalsecurities available-for-sale	$	229	3.07	%	$	18,236	2.05	%	$	46,185	2.76	%	$	88,626	2.31	%	$	153,276	$	155,223	2.42	%

All of our securities are classified as available-for-sale. The following table sets forth the composition of our investment securities portfolio at the dates indicated.



	At December 31,
	2015				2014				2013
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Securities available-for-sale:
U.S. Treasury and federal agency	$	9,442	$	9,372	$	7,447	$	7,395	$	6,249	$	6,150
State and municipal	50,020		52,400		54,298		56,847		54,892		55,723
Mortgage-backed securities—residential	17,671		17,696		27,391		27,488		28,197		27,938
Government agency sponsored collateralized mortgage obligations	42,376		41,836		63,140		62,530		74,417		72,311
Corporate debt securities	1,000		939		1,000		963		2,121		2,150
Total securities available-for-sale	$	120,509	$	122,243	$	153,276	$	155,223	$	165,876	$	164,272

At December 31, 2015, all of our mortgage-backed securities were issued by U.S. government-sponsored enterprises and all of our collateralized mortgage obligations were issued by either U.S. government-sponsored enterprises or the U.S. Small Business Administration.

At December 31, 2015, we had no investments in a single entity (other than U.S. government or agency sponsored securities) that had an aggregate book value in excess of 10% of our shareholders’ equity.

The composition and contractual maturities of the investment securities portfolio at December 31, 2015 are summarized in the following table. Mortgage-backed securities are anticipated to be repaid in advance of their contractual maturities as a result of projected mortgage loan prepayments. In addition, under the structure of some of our collateralized mortgage obligations, the short- and intermediate-tranche interests have repayment priority over the longer term tranches of the same underlying mortgage pool. As previously mentioned, some of our securities are callable at the option of the issuer.



	One Year or Less				More than One Year through Five Years				More than Five Years through Ten Years				More than Ten Years				Total Securities
	Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Fair Value		Weighted Average Yield
	(Dollars in thousands)
Securities available-for-sale:
U.S. federal agency	$	—	—	%	$	8,442	1.60	%	$	1,000	1.75	%	$	—	—	%	$	9,442	$	9,372	1.62	%
State and municipal	641		3.97		11,642		2.41		26,438		3.08		11,299		4.49		50,020		52,400		3.25
Mortgage- backed securities—residential	—		—		—		—		1,292		2.39		16,379		1.92		17,671		17,696		1.95
Government agency sponsored collateralized mortgage obligations	—		—		1,288		2.56		5,307		2.25		35,781		1.87		42,376		41,836		2.00
Corporate debt securities	—		—		—		—		1,000		2.00		—		—		1,000		939		1.94
Total securities available-for-sale	$	641	3.97	%	$	21,372	2.10	%	$	35,037	2.86	%	$	63,459	2.35	%	$	120,509	$	122,243	2.46	%

Sources of Funds

General. Deposits, borrowings, repayments and prepayments of loans and securities, proceeds from maturing securities, and cash flows from operations are the primary sources of our funds for use in lending, investing, and for other general purposes.

Deposits. We offer a variety of deposit accounts with a range of interest rates and terms. Our deposit accounts consist of savings accounts, health savings accounts, NOW accounts, checking accounts, money market accounts, certificates of deposit, and individual retirement accounts (“IRAs”). We also provide commercial checking accounts for businesses.

At December 31, ~~2014~~2015, our deposits totaled $~~340~~391.80 million. ~~Interest-~~Noninterest bearing ~~NOW,~~demand ~~regular, and other savings and money market~~ deposits totaled $~~178~~62.30 million ~~at December 31, 2014~~. AtInterest-bearing ~~December 31,~~transaction ~~2014~~accounts, wewhich ~~had~~include amoney ~~total~~market, ofNOW, ~~$109.4 million in certificates of deposit~~ and ~~IRAs.~~savings ~~Noninterest bearing demand~~ deposits totaled $53230.02 million. ~~A significant portion of our deposits are liquid money market accounts ($57.9 million, or 16.7%,~~ at December 31, ~~2014)~~2015. We ~~monitor~~also ~~activity~~had ~~on these accounts and, based on our historical experience and our current pricing strategy, we believe we will maintain~~ a ~~large~~total ~~portion~~ of ~~these accounts in the near future. However,~~ $3198.28 million ofin ~~these~~certificates ~~money~~of ~~market~~deposit ~~accounts~~and ~~are~~IRAs ~~public fund deposits~~ at December 31, ~~2014, which may be withdrawn with little notice~~2015.

~~Our~~At ~~deposits~~December ~~are~~31, ~~obtained~~2015, ~~predominantly~~our ~~from~~money ~~the~~market ~~areas~~and inNOW ~~which~~accounts ~~our~~increased ~~branch~~$48.5 ~~offices~~million, ~~are~~or ~~located~~41.8%, Weto ~~rely~~$164.4 onmillion ~~our~~from ~~favorable~~$116.0 ~~locations,~~million ~~customer~~at ~~service~~December 31, 2014. We monitor activity in these liquid accounts and, ~~competitive~~based ~~pricing~~on toour ~~attract~~historical experience and ~~retain~~our ~~these~~current ~~deposits.~~pricing ~~While~~strategy, we ~~accept~~believe ~~certificates~~we ofwill ~~deposit~~maintain ina ~~excess~~large portion of ~~$100,000~~these ~~for~~accounts ~~which~~in wethe ~~may~~near ~~provide~~future. ~~preferential~~A ~~rates,~~significant weportion ~~generally~~of dothese ~~not~~deposits ~~solicit~~are ~~such~~public fund deposits, aswhich ~~they~~may ~~are~~be ~~more~~withdrawn ~~difficult~~with tolittle ~~retain~~notice, ~~than~~totaling ~~core deposits~~$84.1 Atmillion at December 31, ~~2014~~2015, wewhich ~~held~~is an increase of $2624.92 million from December 31, 2014. The increase in ~~brokered~~public ~~certificates~~funds ofwas ~~deposits~~primarily ~~through~~due to three new public fund accounts from the ~~Certificate~~communities ofwe ~~Deposit~~serve ~~Registry~~that ~~Service~~were ~~(“CDARS”)~~opened during 2015. During 2015, we also created the mortgage warehouse participation program. ~~and~~As ~~pre~~part of that program, the third-~~approved~~party ~~brokers.~~financial Weinstitutions ~~utilize~~maintain ~~these~~an ~~deposits~~interest asbearing aNOW ~~short~~account ~~term~~in ~~funding~~our ~~source~~bank to provide the liquidity for ~~our~~funding their mortgage warehouse ~~loans~~participation balances. At the end of December 31, ~~2014~~2015, ~~all~~these ofparticipant-related ~~our~~accounts ~~brokered~~totaled ~~certificates~~$14.1 ofmillion, ~~deposit~~which ~~were~~could ~~purchased~~be ~~through~~used ~~CDARS~~to fund future mortgage warehouse loans.

Our deposits are obtained predominantly from the areas in which our branch offices are located. We rely on our favorable locations, customer service, and competitive pricing to attract and retain these deposits. While we accept certificates of deposit in excess of $100,000 for which we may provide preferential rates, we generally do not solicit such deposits as they are more difficult to retain than core deposits. At December 31, 2015, we held $22.4 million in brokered certificates of deposits through the Certificate of Deposit Registry Service (“CDARS”) program and pre-approved brokers. We utilize these deposits as a short term funding source for our mortgage warehouse loans. At December 31, 2015, all of our brokered certificates of deposit were purchased through CDARS.

The following table sets forth the distribution of total deposit accounts, by account type, at and for the dates indicated.

	At or for the Year Ended December 31,
	2014								2013
	2015								2014
	AverageBalance		Balance		Percent		WeightedAverageRate		AverageBalance		Balance		Percent		WeightedAverageRate
	(Dollars in thousands)
Noninterest-bearing demand	$	5358,~~263~~690	$	5362,~~030~~020	15.5686	%	—	%	$	5053,~~686~~263	$	5153,~~017~~030	1415.7156	%	—	%
Money market/NOW accounts	~~121~~126,~~463~~129		~~115~~164,~~960~~433		3442.0306		0.31		~~117~~121,~~334~~463		~~116~~115,~~830~~960		3334.7003		0.1331
Regular savings	6364,~~387~~702		6265,~~331~~747		1816.2982		0.06		5963,~~286~~387		6162,~~076~~331		1718.6229		0.06
Total transaction accounts	~~238~~249,~~113~~521		~~231~~292,~~321~~200		6774.8874		0.1517		~~227~~238,~~306~~113		~~228~~231,~~923~~321		6667.0388		0.0715
CDs and IRAs	~~107~~102,~~367~~046		~~109~~98,~~447~~759		3225.1226		0.8289		~~112~~107,~~436~~367		~~117~~109,~~778~~447		3332.9712		10.1682
Total deposits	$	~~345~~351,~~480~~567	$	~~340~~390,~~768~~959	100.00	%	0.3837	%	$	~~339~~345,~~742~~480	$	~~346~~340,~~701~~768	100.00	%	0.4538	%

	At or for the Year Ended December 31, 2012
	At or for the Year Ended December 31, 2013
	AverageBalance		Balance		Percent		WeightedAverageRate
	(Dollars in thousands)
Noninterest-bearing demand	$	4450,~~016~~686	$	5051,~~892~~017	14.5871	%	—	%
Money market/NOW accounts	~~111~~117,~~283~~334		116,~~666~~830		33.4370		0.4213
Regular savings	5459,~~058~~286		5661,~~581~~076		1617.2262		0.0506
Total transaction accounts	~~209~~227,~~357~~306		~~224~~228,~~139~~923		6466.2303		0.2307
CDs and IRAs	~~135~~112,~~334~~436		~~124~~117,~~831~~778		3533.7797		1.3916
Total deposits	$	~~344~~339,~~691~~742	$	~~348~~346,~~970~~701	100.00	%	0.6545	%

2728

As of December 31, ~~2014~~2015, the aggregate amount of our outstanding time certificates in amounts greater than or equal to $100,000 was approximately $4843.86 million. The following table sets forth the maturity of these certificates as of December 31, ~~2014~~2015.

	At December 31, 2014
	December 31, 2015
	(Dollars in thousands)
Three months or less	$	3014,~~668~~530
Over three months through six months	21,~~029~~794
Over six months through one year	62,~~912~~585
Over one year	924,~~193~~714
Total	$	4843,~~802~~623

Borrowings

From time to time we utilize short-term borrowings to fund loan demand, primarily mortgage warehouse demand. We have also used borrowings ~~where~~when market conditions permit us to purchase securities of a similar duration in order to increase our net interest income by the amount of the spread between the asset yield and the borrowing cost. Finally, from time to time, we have obtained advances with terms of three years or more to extend the term of our liabilities.

We may obtain advances from the FHLB which are collateralized by our investment in FHLB stock and certain of our mortgage, home equity, and commercial real estate loans and mortgage-backed securities. Such advances may be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. To the extent such borrowings have different maturities or repricing terms than our deposits, our interest rate risk profile may change.

The Company'’s available line of credit with the FHLB was $8599.95 million at December 31, ~~2014~~2015, of which $8455.90 million in FHLB advances were outstanding~~, including $10~~.0 ~~million in overnight borrowings.~~ The Company actively utilizes its borrowing capacity with the FHLB to manage liquidity and to provide a funding alternative to time deposits, if the FHLB’s rates and terms are more favorable. The ~~advances~~Company ~~from~~reduced ~~the~~its ~~FHLB~~total ~~can~~borrowing ~~have~~at ~~maturities from overnight to multiple years. At~~ December 31, ~~2014,~~2015 ~~$49.9 million of these advances were~~ due ~~within~~to ~~one year and $35.0 million had maturities greater than a year. At December 31, 2014, $24.9 million of~~ the ~~FHLB~~temporary ~~advances~~increases were variable-rate, of which $15.0 million are currently part of two interest rate swaps. One of the variable rate advances totaled $10.0 million and was swapped for a fixed rate of 3.69% which will mature in ~~July~~public ~~2016.~~funds ~~The other variable rate advance totaled $5.0 million~~ and ~~was~~mortgage ~~swapped~~warehouse ~~for~~participant adeposit ~~fixed rate of 3~~balances.~~54%~~ ~~and will mature in September 2015. The remaining $60.0 million in FHLB advances were at fixed rates.~~

The ~~Company~~advances ~~had~~from ~~additional~~the ~~securities~~FHLB ~~and~~can ~~certain~~have ~~approved~~maturities ~~real~~from ~~estate~~overnight ~~loans available~~ to ~~pledge~~multiple ~~as collateral in order to increase our lines of credit with the FHLB~~years. At December 31, ~~2014~~2015, ~~we had~~ $~~115~~30.0 million inof ~~unpledged~~these ~~securities~~advances ~~available-for-sale~~were due within one year and $25.0 ~~Based~~million onhad ~~our~~maturities ~~FHLB~~greater ~~stock~~than ~~ownership,~~a atyear. At December 31, ~~2014 and 2013~~2015, we$10.0 ~~had~~million ~~access~~of tothe ~~additional~~ FHLB advances ofwere upvariable-rate toand ~~$952,000~~swapped ~~and~~for ~~$223,000,~~a ~~respectively~~fixed rate of 3.69% Ifas wepart ~~increased~~of our ~~ownership~~interest inrate ~~FHLB~~swap ~~stock~~strategy. toThis ~~the~~advance ~~maximum~~will ~~allowable~~mature ~~and~~in ~~increased~~July ~~our~~2016. ~~pledged~~The ~~collateral~~remaining ~~accordingly,~~$45.0 wemillion ~~could~~in ~~borrow~~FHLB anadvances ~~additional~~were at fixed rates, of which $920.50 million ~~from~~was ~~the~~also ~~FHLB~~part atof ~~December 31,~~our ~~2014.~~interest rate swap strategy.

The Company ~~has~~had anadditional ~~accommodation~~securities ~~from~~and ~~First~~certain ~~Tennessee~~approved ~~Bank~~real ~~National~~estate ~~Association~~loans ~~(“FTN”)~~available to ~~borrow~~pledge ~~federal~~as ~~funds~~collateral upin order to ~~$15.0~~increase ~~million~~our lines of credit with the FHLB. ~~This~~At ~~federal~~December 31, ~~funds~~2015, ~~accommodation~~we ishad ~~not~~$79.2 amillion ~~confirmed~~in ~~line~~unpledged orsecurities ~~loan,~~available-for-sale. ~~and~~Based ~~FTN~~upon ~~may~~the ~~cancel~~Board ~~such~~resolution ~~accommodation~~amount at ~~any~~December 31, ~~time~~2015, inwe ~~whole~~had oraccess into ~~part,~~additional ~~without~~FHLB ~~cause~~advances orof ~~notice,~~up into ~~its~~$44.5 ~~sole discretion~~million. At December 31, 2014, ~~the~~we ~~Company~~had ~~did~~access ~~not~~to ~~have~~additional anFHLB ~~outstanding~~advances ~~balance~~based onupon ~~this~~our ~~line.~~level of FHLB stock ownership of up to $952,000.

The Company ~~also~~ has an ~~agreement~~accommodation ~~with~~from ~~Zions~~ First ~~National~~Tennessee Bank National Association (“~~Zions~~FTN”) ~~for an unsecured line of credit~~ to borrow federal funds up to $915.0 million. This ~~line~~federal offunds ~~credit~~accommodation ~~was~~is ~~established~~not ata ~~the~~confirmed ~~discretion~~line ofor ~~Zions~~loan, and FTN may becancel ~~terminated~~such accommodation at any time, in whole or in part, without cause or notice, in its sole discretion. At December 31, ~~2014~~2015, the Company did not have an outstanding balance on this line.

28The Company also has an agreement with Zions First National Bank (“Zions”) for an unsecured line of credit to borrow federal funds up to $9.0 million. This line of credit was established at the discretion of Zions and may be terminated at any time in its sole discretion. At December 31, 2015, the Company did not have an outstanding balance on this line.

~~The~~Pursuant ~~following~~to ~~table~~the ~~sets~~terms ~~forth~~of ~~information~~the ~~concerning~~Merger ~~balances~~Agreement, and except ~~interest~~for ~~rates~~actions onconsistent ~~our~~with ~~borrowings~~past atpractice in the ~~dates~~ordinary ~~and~~course ~~for~~of business, generally the ~~periods~~Company ~~indicated.~~may ~~For~~not ~~additional~~incur ~~information,~~short-term ~~see~~FHLB ~~Notes~~advances 10or ~~and~~borrow 11any ofmoney or incur any similar indebtedness in an aggregate amount exceeding $100,000, without the ~~Notes~~consent of Horizon. Horizon has agreed not to ~~our~~unreasonably ~~Consolidated~~withhold ~~Financial~~such ~~Statements~~consent.

	At or For the Years Ended December 31,
	2014			2013			2012
	(Dollars in thousands)
FHLB Advances:
Balance at end of year	$	84,919		$	86,777		$	49,009
Average balance during year	72,911			50,097			53,292
Maximum outstanding at any month end	84,992			86,777			74,510
Weighted average interest rate at end of year	0.87		%	0.77		%	1.15		%
Average interest rate during year	1.60			1.93			2.27
FTN Borrowings:
Balance at end of year	$	—		$	—		$	—
Average balance during year	45			—			100
Maximum outstanding at any month end	4,200			—			8,986
Weighted average interest rate at end of year	—		%	—		%	—		%
Average interest rate during year	1.02			—			1.00
Zions Bank Advance:
Balance at end of year	$	—		$	2,415		$	—
Average balance during year	660			642			134
Maximum outstanding at any month end	8,995			8,200			9,000
Weighted average interest rate at end of year	—		%	0.41		%	—		%
Average interest rate during year	0.40			0.47			0.75

In 2007, the Company assumed subordinated debentures as a result of the City Savings Financial Corporation acquisition. In 2003, City Savings Financial Corporation formed the City Savings Bank Statutory Trust I (the “Trust”) and the trust issued 5,000 floating Trust Preferred Securities (the “Securities”) with a liquidation amount of $1,000 per preferred security in a private placement to an offshore entity for an aggregate offering price of $5,000,000. The proceeds of the $5,000,000 were used by the Trust to purchase $5,155,000 in Floating Rate Subordinated Debentures (the “Debentures”) from City Savings Financial Corporation. The Debentures and Securities have a term of 30 years and carry an interest rate adjusted quarterly of three month LIBOR plus 3.10%. At December 31, 2014, this rate was 3.35%.

On April 15, 2009, the Company executed an interest rate swap against the $5.0 million floating rate debentures for five years at an effective fixed rate of 5.54%. This swap matured in April 2014.

In February 2010, The LaPorte Savings Bank executed two interest rate swaps against $15.0 million in maturing FHLB advances. The first interest rate swap was against a $10.0 million adjustable rate advance tied to the three month LIBOR plus 0.25% for six years at an effective fixed rate of 3.69% and began in July 2010. The second interest rate swap was against a $5.0 million adjustable rate advance tied to the three month LIBOR plus 0.22% for five years with an effective fixed rate of 3.54% and began in September 2010.

In August 2014, the Company executed three forward starting interest rate swaps with notional amounts totaling $30.0 million of maturing FHLB advances. The notional amount of each of these interest rate swaps was $10.0 million and were against adjustable rate FHLB advances tied to the one month LIBOR. The first interest rate swap will begin in March 2015 for five years with an effective fixed rate of 2.085%. The second interest rate swap will begin in June 2015 for five years with an effective fixed rate of 2.228%. The third interest rate swap will begin in March 2016 for five years with an effective fixed rate of 2.618%

The following table sets forth information concerning balances and interest rates on our borrowings at the dates and for the periods indicated. For additional information, see Notes 10 and 11 of the Notes to our Consolidated Financial Statements.



	At or For the Years Ended December 31,
	2015			2014			2013
	(Dollars in thousands)
FHLB Advances:
Balance at end of year	$	55,000		$	84,919		$	86,777
Average balance during year	68,311			72,911			50,097
Maximum outstanding at any month end	91,957			84,992			86,777
Weighted average interest rate at end of year	0.92		%	0.87		%	0.77		%
Average interest rate during year	1.81			1.60			1.93
FTN Borrowings:
Balance at end of year	$	—		$	—		$	—
Average balance during year	30			45			—
Maximum outstanding at any month end	10,918			4,200			—
Weighted average interest rate at end of year	—		%	—		%	—		%
Average interest rate during year	1.01			1.02			—
Zions Bank Advance:
Balance at end of year	$	—		$	—		$	2,415
Average balance during year	910			660			642
Maximum outstanding at any month end	8,990			8,995			8,200
Weighted average interest rate at end of year	—		%	—		%	0.41		%
Average interest rate during year	0.42			0.40			0.47

In February 2010, The LaPorte Savings Bank executed two interest rate swaps against $15.0 million in maturing FHLB advances. The first interest rate swap was against a $10.0 million adjustable rate advance tied to the three month LIBOR plus 0.25% for six years at an effective fixed rate of 3.69% and began in July 2010 and will mature in July 2016. The second interest rate swap was against a $5.0 million adjustable rate advance tied to the three month LIBOR plus 0.22% for five years with an effective fixed rate of 3.54% and began in September 2010 and matured in September 2015.

In August 2014, the Company executed three forward starting interest rate swaps with notional amounts totaling $30.0 million of maturing FHLB advances. The notional amount of each of these interest rate swaps was $10.0 million against adjustable rate FHLB advances tied to the one month LIBOR. The first interest rate swap began in March 2015 for five years with an effective fixed rate of 2.085%. The second interest rate swap began in June 2015 for five years with an effective fixed rate of 2.228%. The third interest rate swap began March 15, 2016 for five years with an effective fixed rate of 2.618%

Subsidiary Activities

The Company has three subsidiaries, The LaPorte Savings Bank; City Savings Statutory Trust I; and LSB Risk Management LLC, a Nevada corporation established through a $250,000 capital contribution in December 2013 to participate in a pooled captive insurance company. LSB Risk Management LLC provides the Company and all of its subsidiaries with additional insurance coverage that includes coverage for insurance deductibles related to our current insurance policies. The insurance premiums paid by the Company and its subsidiaries are recognized as premium income at LSB Risk Management LLC.

The LaPorte Savings Bank has one subsidiary, LSB Investments, Inc. During ~~the first quarter of~~ 2013, the Company established LSB Real Estate, Inc. which is a subsidiary of LSB Investments, Inc. LSB Real Estate, Inc. invests primarily in ~~assets~~loans originated by The LaPorte Savings Bank which are secured by residential or commercial real estate properties.

Employees

As of December 31, ~~2014~~2015, we had 100 full-time employees and 1119 part-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have good working relations with our employees.

SUPERVISION AND REGULATION

General

The LaPorte Savings Bank is an Indiana-chartered savings bank that is regulated, examined, and supervised by the Indiana Department of Financial Institutions and the Federal Deposit Insurance Corporation (the “FDIC”). This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the FDIC’s deposit insurance fund and depositors, and not for the protection of security holders. Under this system of state and federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. The Bank ~~also~~ is also regulated to a lesser extent by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) governing reserves to be maintained against deposits and other matters. The FDIC and the Indiana Department of Financial Institutions examine the Bank and prepares reports for the consideration of its Board of Directors on any operating deficiencies. The Bank’s relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts and the form and content of the Bank’s loan documents. The Bank is also a member of and owns stock in the Federal Home Loan Bank of Indianapolis, which is one of the twelve regional banks in the Federal Home Loan Bank System.

As a savings and loan holding company, the Company is required to comply with the rules and regulations of the Federal Reserve Board. It is required to file certain reports with and is subject to examination by and the enforcement authority of the Federal Reserve Board. The Company is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

Any change in applicable laws or regulations, whether by the FDIC, the Indiana Department of Financial Institutions, the Federal Reserve Board or Congress, could have a material adverse impact on the Company and the Bank and their operations.

Set forth below is a brief description of material regulatory requirements that are applicable to the Bank and the Company. The description is limited to certain material aspects of the statutes and regulations addressed and is not intended to be a complete description of such statutes and regulations and their effects on the Bank and the Company.

Dodd-Frank Act

The Dodd-Frank Act significantly changed the bank regulatory structure and is affecting the lending, investment, trading and operating activities of depository institutions and their holding companies. As of July 21, 2011, the Federal Reserve Board assumed regulatory jurisdiction from the Office of Thrift Supervision over savings and loan holding companies, such as the Company, in addition to its role of supervising bank holding companies.

The Dodd-Frank Act also created a new Consumer Financial Protection Bureau (“CFPB”) with expansive powers to supervise and enforce consumer protection laws. The ~~Consumer~~CFPB ~~Financial Protection Bureau~~ has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The ~~Consumer~~CFPB ~~Financial Protection Bureau~~ has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, such as the Bank, ~~will~~ continue to be examined by their applicable federal bank regulators for compliance with such regulations. In addition, the Consumer Financial Protection Bureau has finalized a rule implementing the “Ability to Pay” requirements of the Dodd-Frank Act. The regulations generally require creditors to make a reasonable, good faith determination as to a borrower’s ability to repay most residential mortgage loans. The final rule establishes a safe harbor for certain “Qualified Mortgages,” which contain certain features deemed less risky and omit certain other characteristics considered to enhance risk. The Ability to Repay final rules were effective January 1, 2014. In addition, on October 3, 2015, the new TILA-RESPA Integrated Disclosure (TRID) rules for mortgage closings took effect for new loan applications. These new loan forms may have the effect of lengthening the time it takes to approve mortgage loans in the short term following implementation of the rule. The legislation gives state attorneys general the ability to enforce applicable federal consumer protection laws.

3031

The Dodd-Frank Act also broadened the base for FDIC assessments for deposit insurance and permanently increased the maximum amount of deposit insurance to $250,000. The legislation also, among other things, ~~requires~~required originators of certain securitized loans to retain a portion of the credit risk, stipulates regulatory rate-setting for certain debit card interchange fees, repealed restrictions on the payment of interest on commercial demand deposits and ~~contains~~contained a number of reforms related to mortgage originations. The Dodd-Frank Act increased shareholder influence over boards of directors by requiring companies to give shareholders a non-binding vote on executive compensation and so-called “golden parachute” payments. ~~The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to company executives, regardless of whether the company is publicly traded or not.~~

The ~~Dodd-Frank~~legislation ~~Act~~also ~~contained~~directed the ~~so-called~~Federal ~~“Volcker~~Reserve ~~Rule,”~~Board ~~which~~to ~~generally~~promulgate ~~prohibits~~rules ~~banking~~prohibiting ~~organizations~~excessive ~~from~~compensation ~~engaging~~paid into ~~proprietary~~company ~~trading and from investing in~~executives, ~~sponsoring~~regardless orof ~~having~~whether ~~certain relationships with hedge or private equity funds (“covered funds”). On December 13, 2013, federal agencies issued a final rule implementing~~ the ~~Volcker~~company ~~Rule~~is ~~which,~~publicly ~~among~~traded ~~other~~or ~~things, requires banking organizations to restructure and limit certain of their investments in and relationships with covered funds~~not.

In addition, the Consumer Financial Protection Bureau has finalized a rule implementing the “Ability to Pay” requirements of the Dodd-Frank Act. The regulations generally require creditors to make a reasonable, good faith determination as to a borrower’s ability to repay most residential mortgage loans. The final rule establishes a safe harbor for certain “Qualified Mortgages,” which contain certain features deemed less risky and omit certain other characteristics considered to enhance risk. The Ability to Repay final rules were effective January 1, 2014.

Many of the provisions of the Dodd-Frank Act are subject to delayed effective dates and/or require the issuance of implementing regulations. Their impact on operations cannot yet fully be assessed. However, there is a significant possibility that the Dodd-Frank Act will, in the long run, increase regulatory burden, compliance costs and interest expense for the Bank and the Company.

Savings Bank Regulation

As an Indiana-chartered savings bank, the Bank is subject to federal regulation and supervision by the FDIC and to state regulation and supervision by the Indiana Department of Financial Institutions. The Bank’s deposit accounts are insured by the Deposit Insurance Fund, which is administered by the FDIC. The Bank is not a member of the Federal Reserve System.

Both federal and Indiana law extensively regulate various aspects of the banking business such as reserve requirements, truth-in-lending and truth-in-savings disclosures, equal credit opportunity, fair credit reporting, trading in securities and other aspects of banking operations. Current federal law also requires savings banks, among other things, to make deposited funds available within specified time periods.

Under FDIC regulations, an insured state-chartered bank, such as the Bank, is prohibited from making equity investments that are not permissible for national banks. Such a savings bank is also prohibited from engaging as principal in activities that are not permitted for national banks, unless: (i) the FDIC determines that the activity would pose no significant risk to the Deposit Insurance Fund and (ii) the Bank is, and continues to be, in compliance with all applicable capital standards.

Branching and Interstate Banking

The establishment of branches by the Bank is subject to approval of the Indiana Department of Financial Institutions and FDIC and geographic limits established by state laws. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”), as amended by the Dodd-Frank Act, facilitates the interstate expansion and consolidation of banking organizations by permitting, among other things, (i) bank holding companies that are adequately capitalized and managed to acquire banks located in states outside their home state regardless of whether such acquisitions are authorized under the law of the host state, (ii) the interstate merger of banks, subject to the right of individual states to have “opted out” of this authority, and (iii) banks to establish new branches on an interstate basis provided that the proposed branch would be permitted for a state bank chartered in the target state.

Loans-to-One-Borrower

We generally may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of our unimpaired capital and unimpaired surplus. An additional amount may be lent, equal to 10% of unimpaired capital and unimpaired surplus, if the loan is secured by readily marketable collateral, which is defined to include certain financial instruments and bullion, but generally does not include real estate. As of December 31, ~~2014~~2015, we were in compliance with our loans-to-one-borrower limitations.

3132

Standards for Safety and Soundness

Federal law requires each federal banking agency to prescribe for insured depository institutions under its jurisdiction standards relating to, among other things, internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, employee compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to submit or implement an acceptable plan, the appropriate federal banking agency may issue an enforceable order requiring correction of the deficiencies.

Capital Requirements

~~Under~~Federal ~~FDIC~~ regulations ~~applicable~~require inFDIC-insured ~~2014,~~depository ~~state~~institutions ~~chartered banks that are not members of the Federal Reserve System, such as the Bank, were required~~ to ~~maintain~~meet aseveral minimum ~~leverage~~ capital ~~requirement consisting of~~ standards: a ~~ratio~~common ofequity Tier 1 capital to ~~total~~risk-based assets ratio of 34.5%, ifa ~~the~~Tier ~~FDIC~~1 ~~determined~~capital ~~that~~to ~~the~~risk-based ~~institution~~assets isratio ~~not~~of ~~anticipating or experiencing significant growth and had well-diversified risk~~6.0%, ~~including~~a nototal ~~undue~~capital ~~interest~~to ~~rate~~ risk-based ~~exposure,~~assets ~~excellent~~of ~~asset quality~~8%, ~~high liquidity, good earnings,~~ and ~~in general, is~~ a ~~strong~~4% ~~banking~~Tier ~~organization, rated composite~~ 1 ~~under~~capital ~~the~~to ~~Uniform~~total ~~Financial~~assets Institutions Rating System (the CAMELS rating system) established by the Federal Financial Institutions Examination Council. For all but the most highly rated institutions meeting the conditions set forth above, the minimum leverage ~~capital~~ ratio ~~was at least 4%~~. ~~Tier~~The 1existing capital isrequirements ~~the~~were ~~sum~~effective ofJanuary ~~common shareholders’ equity~~1, ~~noncumulative~~2015 ~~perpetual preferred stock (including any related surplus)~~ and ~~minority~~are ~~interests~~the inresult ~~consolidated~~of ~~subsidiaries,~~a ~~minus~~final ~~all~~rule ~~intangible~~implementing ~~assets~~regulatory ~~(other~~amendments ~~than~~based ~~certain~~on ~~mortgage~~recommendations ~~servicing~~of ~~assets,~~the ~~purchased~~Basel ~~credit~~Committee ~~card~~on ~~relationships,~~Banking ~~credit-enhancing~~Supervision ~~interest-only strips~~ and certain ~~deferred~~requirements ~~tax~~of ~~assets),~~the ~~identified losses, investments in certain financial subsidiaries and non~~Dodd-~~financial~~Frank ~~equity investments~~Act.

InFor ~~addition~~purposes toof the ~~leverage~~regulatory capital ~~ratio~~requirements, ~~(the~~common ~~ratio~~equity ofTier 1 capital is generally defined as common shareholders’ equity and retained earnings. Tier I1 capital tois ~~total~~generally ~~assets),~~defined ~~state~~as ~~chartered~~common ~~nonmember~~equity ~~banks~~Tier ~~were~~1 ~~required~~and toadditional ~~maintain~~Tier a1 ~~minimum~~capital. ~~ratio~~Additional ofTier ~~qualifying~~1 ~~total~~ capital toincludes ~~risk-weighted~~certain ~~assets~~noncumulative ofperpetual atpreferred ~~least~~stock ~~8%,~~and ofrelated ~~which~~surplus atand ~~least~~minority ~~half~~interests ~~must~~in beequity ~~Tier~~accounts 1of ~~capital~~consolidated subsidiaries. ~~Qualifying~~Total ~~total~~ capital ~~consists~~includes of Tier 1 capital ~~plus~~(common equity Tier 21 capital ~~(also~~plus ~~referred~~additional toTier as1 ~~supplementary~~ capital) ~~items.~~and Tier 2 capital. ~~items~~Tier ~~include~~2 ~~allowances~~capital ~~for~~is ~~loan~~comprised ~~losses~~of incapital aninstruments ~~amount~~and ofrelated upsurplus, tomeeting ~~1.25%~~specified ofrequirements, ~~risk-weighted~~and ~~assets,~~may include cumulative preferred stock and long-term perpetual preferred stock, ~~with~~mandatory aconvertible ~~maturity~~securities, ofintermediate ~~over~~preferred ~~20 years~~stock, ~~certain other capital instruments~~ and upsubordinated todebt. ~~45%~~Also ofincluded ~~pre-tax~~in ~~net~~Tier ~~unrealized~~2 ~~holding~~capital ~~gains~~is onthe ~~equity~~allowance ~~securities.~~for ~~The~~loan ~~includable~~and ~~amount~~lease oflosses ~~Tier~~limited 2to ~~capital~~a ~~could~~maximum ~~not~~of ~~exceed the institution’s Tier~~ 1 ~~capital~~.25% ~~Under~~of ~~the FDIC~~ risk-weighted ~~system~~assets and, ~~all~~for ofinstitutions athat ~~bank’s~~have ~~balance~~exercised ~~sheet~~an ~~assets~~opt-out ~~and~~election regarding the ~~credit~~treatment ~~equivalent amounts~~ of ~~certain~~Accumulated ~~off-balance~~Other ~~sheet~~Comprehensive ~~items~~Income ~~are~~(“AOCI”), ~~assigned~~up to ~~one~~45% of ~~four~~net ~~broad~~unrealized ~~risk-weight~~gains ~~categories~~on ~~from~~available-for-sale 0%equity tosecurities ~~100%,~~with ~~based~~readily ondeterminable ~~the~~fair ~~risks~~market ~~inherent~~values. inInstitutions ~~the~~that ~~type~~have ofnot ~~assets~~exercised orthe ~~item.~~AOCI ~~The~~opt-out ~~aggregate~~have ~~dollar~~AOCI ~~amount~~incorporated ofinto ~~each~~common ~~category~~equity isTier ~~multiplied~~1 bycapital ~~the~~(including ~~risk~~unrealized ~~weight~~gains ~~assigned~~and tolosses ~~that~~on ~~category~~available-for-sale-securities). ~~The~~Calculation ~~sum~~of all types of ~~these~~regulatory ~~weighted~~capital ~~values~~is ~~equals~~subject ~~the~~to ~~bank’s~~deductions ~~risk-weighted~~and ~~assets~~adjustments specified in the regulations.

AtIn ~~December 31~~determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, ~~2014~~all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the ~~Bank~~regulations ~~met~~based ~~each~~on the risks believed inherent in the type of ~~its~~asset. Higher levels of capital ~~requirements~~are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one to four- family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans, and a risk weight of between 0% and 600% is assigned to permissible equity interests, depending on certain specified factors.

In ~~July~~addition ~~2013,~~to ~~the~~establishing ~~FDIC and~~ the ~~other~~minimum ~~federal bank~~ regulatory ~~agencies issued a final rule to revise their leverage and risk-based~~ capital requirements, ~~and~~ the ~~method~~regulations ~~for~~limit ~~calculating~~capital ~~risk-weighted~~distributions ~~assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision~~ and certain ~~provisions~~discretionary ofbonus ~~the~~payments ~~Dodd-Frank~~to ~~Act. Among~~management ~~other~~if ~~things,~~ the ~~new~~institution ~~rule~~does ~~establishes~~not hold a ~~new~~“capital ~~common~~conservation ~~equity~~buffer” ~~Tier~~consisting 1of ~~minimum capital requirement (4~~2.5% of ~~risk-weighted~~common ~~assets),~~equity ~~establishes a uniform minimum leverage ratio of 4%, increases the minimum~~ Tier 1 capital to risk-~~based assets requirement (from 4% to 6% of risk-~~weighted ~~assets)~~asset ~~and~~above ~~assigns~~the aamount ~~higher~~necessary ~~risk weight (150%)~~ to ~~exposures~~meet ~~that~~its ~~are~~minimum more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development, or construction of real property. The final rule also requires unrealized gains and losses on certain availablerisk-~~for-sale~~based ~~securities investments to be included for purposes of calculating regulatory~~ capital requirements ~~unless a one-time opt-in or opt-out is exercised~~. The ~~rule limits a banking organization’s~~ capital ~~distributions~~conservation ~~and~~buffer ~~certain~~requirement ~~discretionary~~is ~~bonus~~being ~~payments~~phased ifin ~~the~~beginning ~~banking~~January ~~organization~~1, ~~does~~2016 ~~not~~at ~~hold a “capital conservation buffer” consisting of 2~~0.5625% of ~~common equity Tier 1 capital to~~ risk-weighted assets inand ~~addition~~increasing toeach ~~the~~year ~~amount~~until ~~necessary~~fully toimplemented ~~meet~~at ~~its~~2.5% ~~minimum~~on ~~risk-based~~January ~~capital~~1, ~~requirements~~2019.

~~The~~In ~~final~~assessing ~~rule~~an ~~became~~institution’s ~~effective~~capital ~~for~~adequacy, the ~~Bank~~FDIC ~~and~~takes ~~the~~into ~~Company on January 1~~consideration, ~~2015. The~~not ~~capital~~only ~~conservation~~these ~~buffer~~numeric ~~requirement~~factors, ~~will~~but bequalitative ~~phased~~factors inas ~~beginning January 1~~well, ~~2016~~ and ~~ending~~has ~~January~~the 1,authority ~~2019,~~to ~~when~~establish ~~the~~higher ~~full~~ capital ~~conservation~~requirements ~~buffer~~for ~~requirement~~individual ~~will~~institutions bewhere ~~effective~~deemed necessary.

32At December 31, 2015, the Bank met each of its capital requirements.

Prompt Corrective Regulatory Action

~~Under~~Federal ~~the~~law requires, among other things, that federal bank regulators take “prompt corrective action” ~~statute~~with respect to institutions that do not meet minimum capital requirements. For this purpose, the ~~FDIC~~law isestablishes ~~required~~five tocapital ~~take~~categories: well ~~supervisory~~capitalized, ~~actions~~adequately ~~against~~capitalized, undercapitalized, ~~savings~~significantly ~~institutions~~undercapitalized ~~under~~and ~~its~~critically ~~jurisdiction,~~undercapitalized. The applicable FDIC regulations were amended to incorporate the ~~severity~~previously ofmentioned ~~which~~increased ~~depends~~regulatory ~~upon~~capital standards that were effective January 1, 2015. Under the amended regulations, an institution’s ~~level~~is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% ~~For~~or ~~2014~~greater, a ~~savings~~leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution ~~that~~is ~~had~~“adequately capitalized” if it has a total risk-based capital ratio of ~~less~~8.0% ~~than~~or 8greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio ~~that~~of ~~generally~~less ~~was~~than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is ~~considered~~deemed to be “significantly undercapitalized.” Aif ~~savings~~it ~~institution~~has ~~that~~a ~~had~~ total risk-based capital ratio of less than 6.0%, a Tier 1 ~~core~~ risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a ~~leverage~~common ~~ratio~~equity ~~that~~Tier is1 ratio of less than 3.0%. ~~was~~An institution is considered to be “~~significantly~~critically undercapitalized.” Aif ~~savings~~it ~~institution~~has ~~that~~a ~~had~~ratio aof tangible ~~capital~~equity (as defined in the regulations) to total assets ~~ratio~~that is equal to or less than 2.0% ~~was deemed to be “critically undercapitalized~~.”

Generally a receiver or conservator must be appointed for a savings institution that is “critically undercapitalized” within specific time frames. The regulations also provide that a capital restoration plan must be filed with the FDIC within 45 days of the date a savings institution receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Any holding company for the savings institution required to submit a capital restoration plan must guarantee the lesser of an amount equal to 5% of the savings institution’s assets at the time it was notified or deemed to be undercapitalized by the FDIC, or the amount necessary to restore the savings institution to adequately capitalized status. This guarantee remains in place until the FDIC notifies the savings institution that it has maintained adequately capitalized status for each of four consecutive calendar quarters, and the FDIC has the authority to require payment and collect payment under the guarantee. Various restrictions, such as on capital distributions and growth, also apply to “undercapitalized” institutions. The FDIC may also take any one of a number of discretionary supervisory actions against undercapitalized institutions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

In connection with the final capital rule described earlier, the federal banking agencies have adopted amendments, effective January 1, 2015, to the prompt corrective action framework. The various categories have been revised to incorporate the new common equity Tier 1 capital requirement as well as the increases in the Tier 1 to risk-based assets requirement and other revisions.

Capital Distributions

Under Indiana law, the Bank may pay capital distributions of so much of its undivided profits (generally, earnings less losses, bad debts, taxes and other operating expenses) as is considered expedient by the Bank’s board. However, the Bank must obtain the approval of the Indiana Department of Financial Institutions for the payment of a capital distribution if the total of all distributions declared by the Bank during the current year, including the proposed distribution, would exceed the sum of retained net income for the year to date plus its retained net income for the previous two years. For this purpose, “retained net income” means net income as calculated for call report purposes, less all dividends declared for the applicable period. Also, the FDIC has the authority to prohibit the Bank from paying a capital distribution if, in its opinion, the payment of the distribution would constitute an unsafe or unsound practice in light of the financial condition of the Bank. Capital distributions are also prohibited if the institution would fail any regulatory capital requirement after the distribution. In addition, as a subsidiary of a savings and loan holding company, the Bank must file a notice with the Federal Reserve Board at least 30 days before the board declares a capital distribution and receive the Federal Reserve Board’s non-objection to pay the dividend.

Transactions with Related Parties

A savings institution’s authority to engage in transactions with related parties or “affiliates” is limited by Sections 23A and 23B of the Federal Reserve Act and its implementing regulation, Federal Reserve Board Regulation W. The term “affiliate” generally means any company that controls or is under common control with an institution, including the Company and its non-savings institution subsidiaries. Applicable law limits the aggregate amount of “covered” transactions with any individual affiliate, including loans to the affiliate, to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution’s capital and surplus. Certain covered transactions with affiliates, such as loans to or guarantees issued on behalf of affiliates, are required to be secured by specified amounts of collateral. Purchasing low quality assets from affiliates is generally prohibited. Regulation W also provides that transactions with affiliates, including covered transactions, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited by law from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary.

3334

Our authority to extend credit to executive officers, directors and 10% or greater shareholders (“insiders”), as well as entities controlled by these persons, is governed by Sections 22(g) and 22(h) of the Federal Reserve Act and its implementing regulation, the Federal Reserve Board’s Regulation O. Among other things, loans to insiders must be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for bank-wide lending programs that do not discriminate in favor of insiders. Regulation O also places individual and aggregate limits on the amount of loans that may be made to insiders based, in part, on the institution’s capital position, and requires that certain prior board approval procedures be followed. Extensions of credit to executive officers are subject to additional restrictions on the types and amounts of loans that may be made. At December 31, ~~2014~~2015, we were in compliance with these regulations.

Enforcement

The Indiana Department of Financial Institutions has authority to take a variety of actions to enforce applicable laws and regulations and prevent unsafe or unsound practices. These include authority to issue cease and desist orders and civil penalties. The Indiana Department of Financial Institutions also has the authority to appoint a receiver or conservator for Indiana-chartered savings banks under certain circumstances. The FDIC has primary federal enforcement responsibility over Indiana-chartered savings banks, including the authority to bring enforcement action against “institution-related parties,” such as officers, directors, certain shareholders, and attorneys, appraisers and accountants, who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution, receivership, conservatorship or the termination of deposit insurance. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1.0 million per day.

Deposit Insurance

The Bank is a member of the Deposit Insurance Fund, which is administered by the FDIC. Deposit accounts in the Bank are insured up to a maximum of $250,000 for each separately insured depositor.

The FDIC imposes an assessment for deposit insurance on all depository institutions. Under the FDIC’s risk-based assessment system, insured institutions are assigned to risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned and certain adjustments specified by FDIC regulations, with less risky institutions paying lower rates. Assessment rates (inclusive of possible adjustments) currently range from 2¹/2 to 45 basis points of each institution’s total assets less tangible capital. The FDIC may increase or decrease the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment rulemaking. The FDIC’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s volume of deposits.

In addition to the FDIC assessments, the Financing Corporation is authorized to impose and collect, through the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the Financing Corporation in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the Financing Corporation are due to mature in 2017 through 2019. For the quarter ended December 31, ~~2014~~2015, the annualized Financing Corporation assessment was equal to 0.6260 of a basis point of total assets less tangible capital.

The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC and the FDIC has exercised that discretion by establishing a long-term fund ratio of 2%.

The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what assessment rates will be in the future.

Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Management of the Bank does not know of any practice, condition or violation that may lead to termination of our deposit insurance.

3435

Federal Home Loan Bank System

The Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of Indianapolis, we are required to acquire and hold a specified amount of shares of capital stock in the Federal Home Loan Bank.

Community Reinvestment Act and Fair Lending Laws

Savings institutions have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. An institution’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in an inability to receive regulatory approval for certain activities such as branching and acquisitions. The Bank received a “Satisfactory” Community Reinvestment Act rating in its most recent examination.

Other Regulations

Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s operations are also subject to federal laws applicable to credit transactions, such as the:


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


•	Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one- to four-family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services;


•	Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;


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


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


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


•	Truth in Savings Act; and


•	Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

The operations of the Bank also 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;


•	Electronic Funds Transfer Act, which governs 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;


•	Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

•

The USA PATRIOT Act, which requires banks and savings institutions to, among other things, establish broadened anti-money laundering compliance programs and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement pre-existing compliance requirements that apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and

•

The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties and requires all financial institutions offering products or services to retail customers to provide such customers with the financial institution’s privacy policy and allow such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.

3536

Holding Company Regulation

The Company is a unitary savings and loan holding company subject to regulation and supervision by the Federal Reserve Board, which replaced the Office of Thrift Supervision in that capacity due to the Dodd-Frank Act regulatory restructuring. The Federal Reserve Board has enforcement authority over the Company and its non-savings institution subsidiaries. Among other things, that authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a risk to the Bank.

As a savings and loan holding company, the Company’s activities are limited to those activities permissible by law for financial holding companies, bank holding companies under section 4(c)(8) of the Bank Holding Company Act of 1956, as amended, or multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, incidental to financial activities or complementary to a financial activity. Such activities include lending activities, insurance and underwriting equity securities. A savings and loan holding company must elect such status in order to engage in activities permissible for a financial holding company, meet the qualitative requirements for a bank holding company to qualify as a financial holding company and conduct the activities in accordance with the requirements that would apply to a financial holding company’s conduct of the activity. In December 2013, the Company elected financial holding company status in order to establish its wholly-owned subsidiary, LSB Risk Management, LLC, which was formed to participate in a pooled captive insurance company.

Federal law prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or savings and loan holding company without prior written approval of the Federal Reserve Board and from acquiring or retaining control of any depository not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider such things as the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors. An acquisition by a savings and loan holding company of a savings institution in another state to be held as a separate subsidiary may not be approved unless it is a supervisory acquisition under Section 13(k) of the Federal Deposit Insurance Act or the law of the state in which the target is located authorizes such acquisitions by out-of-state companies.

To be regulated as a savings and loan holding company by the Federal Reserve Board, we are required to satisfy a qualified thrift lender (“QTL”) test, under which we either must qualify as a “domestic building and loan” association as defined by the Internal Revenue Code or maintain at least 65% of our “portfolio assets” in “qualified thrift investments.” “Qualified thrift investments” consist primarily of residential mortgages and related investments, including mortgage-backed and related securities. “Portfolio assets” generally means total assets less specified liquid assets up to 20% of total assets, goodwill and other intangible assets and the value of property used to conduct business. A savings institution that fails the QTL test must operate under specified restrictions. The Dodd-Frank Act made noncompliance with the QTL test also subject to agency enforcement action for a violation of law. AsWe ofmet ~~December 31,~~the ~~2014,~~QTL wetest ~~maintained~~as ~~67.2%~~ of ~~our portfolio assets in qualified thrift investments and~~December 31, ~~therefore, we met the qualified thrift lender test~~2015.

Savings and loan holding companies have not historically been subjected to consolidated regulatory capital requirements. The Dodd-Frank Act, ~~however,~~ required the FRB to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to their subsidiary depository institutions. Instruments such as cumulative preferred stock and trust-preferred securities, which are currently includable within Tier 1 capital by bank holding companies within certain limits, would no longer be includable as Tier 1 capital, subject to certain grandfathering. The previously discussed final rule regarding regulatory capital requirements ~~implements~~implemented ~~the~~these Dodd-Frank Act ~~as to savings and loan holding companies. Consolidated regulatory capital~~ requirements ~~identical to those applicable to the subsidiary depository institutions will apply to savings and loan holding companies as of January 1, 2015~~. As is the case with institutions themselves, the capital conservation buffer will be phased in between 2016 and 2019. ~~Legislation~~However, legislation was enacted in December 2014 which ~~requires~~required the FRB to amend its “Small Bank Holding Company” ~~Policy~~exemption ~~Statement~~from consolidated holding company capital requirements to (i) extend ~~the~~its applicability to ~~bank and~~ savings and loan holding companies ofand up(ii) raise the threshold for the exemption from $500 million to $1 billion in consolidated assets. ~~That~~Regulations ~~will~~doing ~~exempt~~so ~~such~~were ~~holding~~effective ~~companies~~May ~~from~~15, ~~the~~2015. ~~consolidated~~Consequently, ~~holding~~both ~~company~~bank ~~capital~~and ~~requirements.~~savings ~~Although~~and ~~the~~loan ~~Company~~holding iscompanies ~~currently~~with ~~within~~under ~~the~~$1 ~~asset~~billion ~~size~~in ~~threshold,~~consolidated itassets isare ~~uncertain~~exempt ~~when~~from the ~~FRB~~consolidated ~~will~~regulatory ~~act~~capital ~~and~~requirements ~~whether~~unless the ~~Company~~FRB ~~would~~determines ~~qualify~~otherwise ~~for~~on ~~the~~a ~~exemption~~case ~~under~~by ~~other~~case ~~conditions that may apply~~basis.

The Dodd-Frank Act ~~extends~~extended the “source of strength” doctrine to savings and loan holding companies. The Federal Reserve Board promulgated regulations implementing the “source of strength” policy that requires holding companies act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.

3637

The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies that it has made applicable to savings and loan holding companies as well. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends’ previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The policy statement also provides for regulatory consultation prior to a holding company redeeming or repurchasing regulatory capital instruments when the holding company is experiencing financial weaknesses or redeeming or repurchasing common stock or perpetual preferred stock that would result in a net reduction as of the end of a quarter in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies could affect the ability of the Company to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.

Federal Securities Laws

The Company’s common stock is registered with the Securities and Exchange Commission. The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

The registration under the Securities Act of 1933 of shares of common stock issued in the Company’s public offering does not cover the resale of those shares. Shares of common stock purchased by persons who are not affiliates of the Company may be resold without registration. Shares purchased by an affiliate of the Company will be subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If the Company meets the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of the Company that complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of the outstanding shares of the Company, or the average weekly volume of trading in the shares during the preceding four calendar weeks. In the future, the Company may permit affiliates to have their shares registered for sale under the Securities Act of 1933.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Chief Financial Officer are required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain disclosures to our auditors and the audit committee of the board of directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting. We have existing policies, procedures and systems designed to comply with these regulations, and we are further enhancing and documenting such policies, procedures and systems to ensure continued compliance with these regulations.

Change in Control Regulations

Under the Change in Bank Control Act, no person may acquire control of a savings and loan holding company such as the Company unless the Federal Reserve Board has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the institution’s directors, or a determination by the regulator that the acquiror has the power to direct, or directly or indirectly to exercise a controlling influence over, the management or policies of the institution. Acquisition of more than 10% of any class of a savings and loan holding company’s voting stock constitutes a rebuttable determination of control under the regulations under certain circumstances including where, as is the case with the Company, the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.

3738

TAXATION

The Company and the Bank are subject to income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal and state taxation is intended only to summarize certain pertinent income tax matters and is not a comprehensive description of the tax rules applicable to the Company, or the Bank.

Federal Taxation

General. The Bank’s federal tax returns are not currently under audit, and have not been audited during the past five years.

Method of Accounting. For federal income tax purposes, the Company currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31 for filing its federal and state income tax returns.

Bad Debt Reserves. Prior to 1996, savings institutions that qualified were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. Pursuant to the Small Business Protection Act of 1996 (the “1996 Act”), savings institutions were required to recapture any excess reserves over those established as of October 31, 1988 (base year reserve).

At December 31, ~~2014~~2015, our total federal pre-1988 base year reserve was $2.7 million. However, under current law, pre-1988 base year reserves remain subject to recapture should the Bank make certain non-dividend distributions, repurchase any of its stock, pay dividends in excess of tax earnings and profits, or cease to maintain a bank charter.

Alternative Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax (“AMT”) at a rate of 20% on a base of regular taxable income plus certain tax preferences (“alternative minimum taxable income” or “AMTI”). The AMT is payable to the extent such AMTI is in excess of an exemption amount and the AMT exceeds the regular income tax. Net operating losses can offset no more than 90% of AMTI. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years.

Net Operating Loss Carryovers. A financial institution may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. At December 31, ~~2014~~2015, the Bank had no net operating loss carryforwards for federal income tax purposes and had an Indiana net operating loss carryforward of approximately $3.3 million which will begin to expire in 2028, if not used.

Capital Loss Carryovers. A financial institution may carry back capital losses to the preceding three taxable years and forward to the succeeding five taxable years. AtThe ~~December 31, 2013, the~~ Bank ~~had~~has ~~$1.9~~no ~~million in~~ capital loss carryforwards ~~for~~at ~~state~~December ~~income~~31, ~~tax purposes which expired in 2014~~2015.

Corporate Dividends-Received Deduction. The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is 80% in the case of dividends received from corporations in which a corporate recipient owns more than 20% of the stock of a corporation distributing a dividend, and corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct only 70% of dividends received or accrued on their behalf.

State Taxation

As a Maryland business corporation, the Company is required to file an annual report with and pay franchise taxes to the state of Maryland. The Company also pays tax in various states in which it operates, including California, Florida, and Michigan.

The Bank is subject to Indiana’s Financial Institutions Tax (“FIT”), which is imposed at a flat rate of 87.5% on “adjusted gross income,” which for purposes of FIT, begins with taxable income as defined by Section 63 of the Code and, thus, incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several Indiana modifications. Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes.

In the last five years, the Bank’s state income tax returns have not been subject to any other examination by a taxing authority.

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Filing Compare · LaPorte Bancorp, Inc.