-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FvfnWP9ItzCQdgji1J1DZsXeS3uBY1K0k66VdBrLHr8w+WgKtsH2JjjLFiHFq77e GeYqW3TgwB9enDupttfMNg== 0000950137-09-001551.txt : 20090305 0000950137-09-001551.hdr.sgml : 20090305 20090305154234 ACCESSION NUMBER: 0000950137-09-001551 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20081231 FILED AS OF DATE: 20090305 DATE AS OF CHANGE: 20090305 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANK MUTUAL CORP CENTRAL INDEX KEY: 0001123270 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 392004336 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-31207 FILM NUMBER: 09658844 BUSINESS ADDRESS: STREET 1: 4949 W. BROWN DEER RD CITY: BROWN DEER STATE: WI ZIP: 53223 BUSINESS PHONE: 4143626113 MAIL ADDRESS: STREET 1: 4949 W. BROWN DEER RD CITY: BROWN DEER STATE: WI ZIP: 53223 10-K 1 c49816e10vk.htm 10-K e10vk
Table of Contents

 
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
Commission file number: 000-31207
BANK MUTUAL CORPORATION
(Exact name of registrant as specified in its charter)
     
Wisconsin   39-2004336
     
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
4949 West Brown Deer Road, Milwaukee, Wisconsin   53223
     
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code: (414) 354-1500
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 o                     No þ
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 o                     No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ                     No o
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. o
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 o    Accelerated filer þ    Non-accelerated filer   o
(Do not check if a smaller reporting company)		   Smaller reporting company o 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the act).
Yes o                     No þ
As of February 27, 2009, 47,188,528 shares of Common Stock were validly issued and outstanding. The aggregate market value of the Common Stock (based upon the $10.04 last sale price on The NASDAQ Global Select Market on June 30, 2008, the last trading of the Company’s second fiscal quarter) held by non-affiliates (excluding outstanding shares reported as beneficially owned by directors and executive officers and unallocated shares of the Employee Stock Ownership Plan; does not constitute an admission as to affiliate status) was approximately $436.9 million.
DOCUMENTS INCORPORATED BY REFERENCE
     
    Part of Form 10-K Into Which
Document   Portions of Document are Incorporated
     
Current Report on Form 8-K dated March 7, 2008   Part II
     
Proxy Statement for Annual Meeting of    
Shareholders on May 4, 2009   Part III
 
 

 

BANK MUTUAL CORPORATION
FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 2008
TABLE OF CONTENTS
                 
ITEM       PAGE
PART I  
 
        
       
 
        
1.       3  
1A.       33  
1B.       37  
2.       37  
3.       37  
4.       37  
       
 
        
PART II  
 
        
       
 
        
5.       38  
6.       40  
7.       42  
7A.       55  
8.       59  
9.       97  
9A.       97  
9B.       99  
       
 
        
PART III  
 
        
       
 
        
10.       100  
11.       100  
12.       100  
13.       100  
14.       100  
       
 
        
PART IV  
 
        
       
 
        
15.       101  
       
 
        
SIGNATURES  
 
     102  
 EX-21.1
 EX-23.1
 EX-23.2
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

2

Table of Contents

Part I
Item 1. Business
General
Bank Mutual Corporation (the “Company”) is a Wisconsin corporation headquartered in Milwaukee, Wisconsin. The Company was formed in 2000 as a mutual holding company, but converted to full public ownership in 2003. The Company owns 100% of the common stock of Bank Mutual (the “Bank”) and currently engages in no substantial activities other than its ownership of such stock. Consequently, the Company’s net income and cash flows are derived primarily from the Bank’s operations and capital distributions. The Company is regulated as a savings and loan holding company by the Office of Thrift Supervision (“OTS”). The Company’s common stock trades on The NASDAQ Global Select Market under the symbol BKMU.
The Bank was founded in 1892 and is a federally-chartered savings bank headquartered in Milwaukee, Wisconsin. It is regulated by the OTS and its deposits are insured within limits established by the Federal Deposit Insurance Corporation (“FDIC”). The Bank’s primary business is community banking, which includes attracting deposits from and making loans to the general public and private businesses, as well as governmental and non-profit entities. In addition to deposits, the Bank obtains funds through borrowings from the Federal Home Loan Bank (“FHLB”) of Chicago. These funding sources are principally used to originate loans, including one- to four-family residential loans, multi-family residential loans, commercial real estate loans, commercial business loans and lines of credit, and consumer loans and lines of credit. From time-to-time the Bank also purchases and/or participates in loans from third-party financial institutions and is an active seller of residential loans in the secondary market. It also invests in mortgage-related and other investment securities.
The Company’s principal executive office is located at 4949 Brown Deer Road, Milwaukee, Wisconsin, 53223, and its telephone number at that location is (414) 354-1500. The Company’s website is www.bankmutualcorp.com. The Company will make available through that website, free of charge, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, as soon as reasonably practical after the Company files those reports with, or furnishes them to, the Securities and Exchange Commission (“SEC”). Also available on the Company’s website are various documents relating to the corporate governance of the Company, including its Code of Ethics and its Code of Conduct.
Cautionary Statement
This Form 10-K contains or incorporates by reference various forward-looking statements concerning the Company’s prospects that are based on the current expectations and beliefs of management. Forward-looking statements may also be made by the Company from time to time in other reports and documents as well as oral presentations. When used in written documents or oral statements, the words “anticipate,” “believe,” “estimate,” “expect,” “objective,” “projection” and similar expressions or use of verbs in the future tense, are intended to identify forward-looking statements, and any discussions of periods after the date for which this report is filed, are also forward-looking statements. The statements contained herein and such future statements involve or may involve certain assumptions, risks, and uncertainties, many of which are beyond the Company’s control, that could cause the Company’s actual results and performance to differ materially from what is expected. In addition to the assumptions and other factors referenced specifically in connection with such statements, the following factors could impact the business and financial prospects of the Company: general economic conditions, including the significant instability in credit, lending, and financial markets; softness and declines in the real estate market, which can affect both collateral values and loan activity; negative developments affecting particular borrowers, which could adversely impact loan repayments; negative developments affecting particular investment securities and mortgage-related securities, which could adversely impact the fair value of and/or cash flows from such securities; legislative and regulatory initiatives, including action taken, or that may be taken, in response to the current financial market crisis and/or which could negatively affect the right of creditors; monetary and fiscal policies of the federal government; increased competition and/or disintermediation within the financial services industry; the effects of further regulation and consolidation within the financial services industry; changes in tax rates, deductions and/or policies; changes in deposit flows; changes in the cost of funds; fluctuations in general market rates of interest and/or yields or rates on competing loans, investments, and sources of funds; demand for loan or deposit products; demand for other financial services; changes in accounting policies or guidelines; and acts of terrorism and developments in the war on terrorism. Refer to Item 1A, “Risk Factors,” below, as well as the factors discussed in

3

Table of Contents

Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for additional discussion.
Market Area
At February 27, 2009, the Company had 78 banking offices in Wisconsin and one in Minnesota. At June 30, 2008, the Company had a 1.87% market share of all deposits held by FDIC-insured institutions in Wisconsin. The Company is the fifth largest financial institution headquartered in Wisconsin, based on deposit market share. The 31 Wisconsin counties in which the Company operates include approximately 75% of the population of the state.
The largest concentration of the Company’s offices is in the Milwaukee Metropolitan Statistical Area (“MSA”), the Racine MSA, and the Kenosha and Lake County, Illinois MSA. There are currently 26 offices in these MSAs. These MSAs contain the largest population and commercial base in Wisconsin, representing approximately 34% of Wisconsin’s population. The Milwaukee area has traditionally had an extensive manufacturing base, which is diversifying into service and technology based businesses.
The Company has four offices in the Madison MSA. Madison is the state capital of Wisconsin and is the second largest metropolitan area in Wisconsin representing approximately 8% of the state’s population. The Company’s eight other south central and southeastern Wisconsin offices are located in smaller cities that have industry concentrations consisting principally of manufacturing and agriculture.
The Company operates 21 banking offices in nine northeastern counties of Wisconsin that make up approximately 15% of the state’s population including the Green Bay MSA. The greater Green Bay area has an economic base of paper and other manufacturing, health care, insurance, and gaming, and is diversifying into technology based businesses. Two of the offices in this region are near the Michigan border; therefore, the Company also draws customers from northern Michigan.
The Company has 19 offices in the northwestern part of Wisconsin. This part of the state has medium-sized to smaller cities and towns. Industry includes medium-sized and small businesses, with a significant agricultural component. The counties in which the northwest region offices are located contain approximately 8% of Wisconsin’s population. Finally, the Company has one office in Woodbury, Minnesota, which is located near the Wisconsin state border on the eastern edge of the Minneapolis-St. Paul metropolitan area.
Competition
The Company faces significant competition in making loans and attracting deposits. Wisconsin has many banks, savings banks, and savings and loan associations, which offer the same types of banking products as the Company. Wisconsin also has an extensive tax-exempt credit union industry, whose expanded powers have resulted in increased competition within the financial services industry.
Many of the Company’s competitors have greater resources and/or offer services that the Company currently does not provide. For example, the Company does not offer trust services. However, the Company does offer mutual fund investments, tax deferred annuities, credit life and disability insurance, property and casualty insurance, brokerage services, and investment advisory services through a subsidiary, BancMutual Financial & Insurance Services, Inc. In addition, the banking business in the Milwaukee area, the Company’s largest market, tends to be dominated by the two largest commercial banks in the state, which together had approximately 52% of all deposits held by FDIC-insured institutions in the Milwaukee area at June 30, 2008.
Most of the Company’s competition for loans traditionally has come from commercial banks, savings banks, savings and loan associations, and credit unions. Increasingly, other types of companies, such as mortgage brokerage firms, finance companies, insurance companies, and other providers of financial services also compete for these products. For deposits, the Company competes with traditional financial institutions, mutual funds (particularly short-term money market funds), brokerage firms, and insurance companies. The recent increase in electronic commerce also increases competition from institutions and other entities outside of Wisconsin.

4

Table of Contents

Lending Activities
Loan Portfolio Composition The Company’s loan portfolio consists primarily of mortgage loans, which includes permanent loans secured by one- to four-family residences, multi-family properties, and commercial real estate properties, as well as construction loans secured by the same types of properties. To a lesser degree, the loan portfolio includes consumer loans consisting principally of home equity lines of credit, fixed and adjustable rate home equity loans, student loans, and automobile loans. Finally, the Company’s loan portfolio also contains commercial business loans. At December 31, 2008, the Company’s total loans receivable was $1.8 billion or 52.4% of total assets.
The nature, type, and terms of loans originated or purchased by the Company are subject to federal and state laws and regulations. The interest rates the Company receives on its loans are affected principally by the demand for loans, the cost and supply of money available for lending purposes, and the interest rates offered by competitors. These factors are in turn affected by, among other things, economic conditions, fiscal and monetary policies of the federal government, and legislative tax policies.

5

Table of Contents

The following table presents the composition of the Company’s loan portfolio in dollar amounts and in percentages of the total portfolio at the dates indicated.
                                                                                 
    At December 31  
    2008     2007     2006     2005     2004  
            Percent             Percent             Percent             Percent             Percent  
            of             of             of             of             of  
    Amount     Total     Amount     Total     Amount     Total     Amount     Total     Amount     Total  
    (Dollars in thousands)  
Mortgage loans:
                                                                                
Permanent mortgage loans:
                                                                                
One- to four-family
   $ 881,288       46.51 %   $ 1,059,307       51.12 %   $ 1,123,905       53.03 %   $ 1,048,881       50.94 %   $ 903,498       46.34 %
Multi-family
     190,497       10.06       206,640       9.97       157,768       7.44       155,908       7.57       161,641       8.29  
Commercial real estate
     275,802       14.56       202,528       9.77       167,089       7.88       175,090       8.50       195,708       10.04  
     
Total permanent mortgages
     1,347,587       71.13       1,468,475       70.86       1,448,762       68.35       1,379,879       67.01       1,260,847       64.67  
     
Construction and development:
                                                                                
One- to four-family
     17,349       0.92       35,040       1.69       53,861       2.54       71,247       3.46       47,130       2.42  
Multi-family
     71,208       3.76       58,712       2.83       90,955       4.29       30,240       1.47       48,163       2.47  
Commercial real estate
     70,612       3.73       76,649       3.70       42,507       2.01       53,718       2.61       46,101       2.36  
     
Total construction and development loans
     159,169       8.41       170,401       8.22       187,323       8.84       155,205       7.54       141,394       7.25  
     
Total mortgage loans
     1,506,756       79.54       1,638,876       79.08       1,636,085       77.19       1,535,084       74.55       1,402,241       71.92  
     
Consumer loans:
                                                                                
Fixed-term equity
     173,104       9.14       199,161       9.62       227,811       10.75       246,460       11.97       266,635       13.67  
Home equity lines of credit
     86,962       4.59       90,631       4.37       91,730       4.33       88,266       4.29       88,444       4.54  
Student
     21,469       1.13       21,845       1.05       20,404       0.96       19,821       0.96       20,519       1.05  
Home improvement
     36,023       1.90       33,604       1.62       33,287       1.57       30,067       1.46       24,293       1.25  
Automobile
     11,775       0.62       24,878       1.20       46,752       2.21       69,237       3.36       61,469       3.15  
Other
     8,740       0.46       9,439       0.46       11,262       0.53       12,944       0.63       15,911       0.82  
     
Total consumer loans
     338,073       17.84       379,558       18.32       431,246       20.35       466,795       22.67       477,271       24.48  
     
Commercial business loans
     49,623       2.62       53,784       2.60       52,056       2.46       57,247       2.78       70,170       3.60  
     
Gross loans receivable
     1,894,452       100.00 %     2,072,218       100.00 %     2,119,387       100.00 %     2,059,126       100.00 %     1,949,682       100.00 %
 
                                                                    
Undisbursed loan proceeds
     (54,187 )             (68,457 )             (85,897 )             (60,014 )             (60,653 )        
Allowance for loan losses
     (12,208 )             (11,774 )             (12,574 )             (12,090 )             (13,923 )        
Deferred costs and discounts, net
     996               2,569               3,409               3,470               779          
 
                                                                  
Total loans receivable, net
   $ 1,829,053             $ 1,994,556             $ 2,024,325             $ 1,990,492             $ 1,875,885          
 
                                                                  

6

Table of Contents

At December 31, 2008, substantially all of the Company’s one- to four-family mortgage loans and selected multi-family mortgage loans were pledged as collateral under a blanket pledge to the FHLB of Chicago. As of December 31, 2008, there were no other significant concentrations of loans such as loans to a number of borrowers engaged in similar activities. The Company’s mortgage loans, fixed-term equity loans, home equity lines of credit, and home improvement loans are primarily secured by properties located in its local lending areas.
Selected Loan Maturities The following table presents the contractual maturity of the Company’s construction and development loans and its commercial business loans at December 31, 2008. The table does not include the effect of prepayments or scheduled principal amortization.
                         
    At December 31, 2008
            Construction and    
    Commercial   Development    
    Business Loans   Loans   Total
            (Dollars in thousands)
Amounts due:
                        
Within one year or less
   $ 15,276     $ 24,593     $ 39,869  
     
After one year through five years
     29,420       72,282       101,702  
After five years
     4,927       62,294       67,221  
     
Total due after one year
     34,347       134,576       168,923  
     
 
                        
Total commercial and construction loans
   $ 49,623     $ 159,169     $ 208,792  
     
The following table presents, as of December 31, 2008, the dollar amount of the Company’s construction and development loans and its commercial loans due after one year and whether these loans have fixed interest rates or adjustable interest rates.
                         
    Due After One Year
            Adjustable    
    Fixed Rate   Rate   Total
    (Dollars in thousands)
Commercial business loans
   $ 26,085     $ 8,262     $ 34,347  
Construction and development loans
     78,579       55,997       134,576  
     
 
                        
Total loans due after one year
   $ 104,664     $ 64,259     $ 168,923  
     
Loan Activity The following table presents a summary of the Company’s lending activity for the periods indicated.
                         
    For the year ended December 31
    2008   2007   2006
    (Dollars in thousands)
Balance outstanding at beginning of period
   $ 2,080,170     $ 2,123,184     $ 2,061,438  
Originations:
                        
Mortgage loans
     407,576       396,227       347,296  
Consumer loans
     108,584       119,319       158,690  
Commercial business loans
     34,467       45,862       42,888  
     
Total originations
     550,627       561,408       548,874  
     
Purchases of one- to four-family mortgage loans
     26,138       76,619       157,399  
     
Less principal payments and repayments:
                        
Mortgage loans
     422,209       359,323       311,267  
Consumer loans
     150,069       171,007       194,239  
Commercial business loans
     38,628       44,134       48,079  
     
Total principal payments and repayments
     610,906       574,464       553,585  
     
Less transfers to foreclosed properties, real estate owned, and repossessed assets
     3,719       3,724       1,429  
Less sales of one- to four-family mortgage loans
     128,828       102,853       89,513  
     
Total loans receivable and loans held-for-sale
   $ 1,913,482     $ 2,080,170     $ 2,123,184  
     

7

Table of Contents

Residential Mortgage Lending The Company originates and purchases first mortgage loans secured by one- to four-family properties located in its primary market areas. Most of these loans are owner-occupied; however, the Company also originates first mortgage loans secured by second homes, seasonal homes, and investment properties. The Company reviews most of the loans it purchases from third-party originators for compliance with its internal underwriting standards. In certain instances the Company has delegated loan approval authority to the third-party originators provided such originators utilize the Federal National Mortgage Association (“Fannie Mae”) Desktop Underwriting system. In such cases, the Company reviews 20% of the mortgage loans purchased from these third-party originators for compliance with the Company’s underwriting standards.
The Company originates primarily conventional fixed rate mortgage loans and adjustable rate mortgage (“ARM”) loans with maturity dates up to 30 years. Such loans generally are underwritten to Fannie Mae standards. In general, ARM loans are retained by the Company in its loan portfolio. Fixed rate mortgage loans are generally sold in the secondary market without recourse, although the Company typically retains the servicing rights to such loans. From time-to-time, the Company may elect to retain in its loan portfolio conventional fixed rate loans with maturities of up to 15 years, as well as certain loans with maturities up to 30 years. As a result of market competition in recent years, the Company has generally not charged loan origination fees. The interest rates charged on mortgage loan originations at any given date will vary, depending upon conditions in the local and secondary markets.
The Company also originates “jumbo single family mortgage loans” in excess of the Fannie Mae maximum loan amount, which was $417,000 for one- to four-family homes in 2008. Fannie Mae has higher limits for two-, three- and four-family homes. Beginning in 2006, the Company began to retain certain fixed rate jumbo mortgage loans in its portfolio. ARM jumbo mortgage loans are underwritten in accordance with the Company’s underwriting guidelines and are retained in its loan portfolio.
The Company also originates loans under programs administered by the State Veteran’s Administration (“State VA”), the Wisconsin Housing and Economic Development Authority (“WHEDA”), the U.S. Department of Agriculture (“USDA”) Guaranteed Rural Housing Program, and beginning in 2008, the Federal Housing Administration (“FHA”). Loans originated under State VA, WHEDA, and USDA programs are not held by the Company in its loan portfolio, although the Company retains the servicing rights for such loans. In the case of FHA loans, the Company receives a fee for its origination services, but does not retain the loan or the servicing rights for such loans. The Company also originates fixed rate mortgage loans under special programs for low- to moderate-income households and first-time home buyers. These programs are offered for Community Reinvestment Act (“CRA”) purposes and are retained by the Company in its loan portfolio. Among the features of these programs are lower down payments, no mortgage insurance, and generally less restrictive requirements for qualification compared to the Company’s conventional one- to four-family mortgage loans. For instance, certain of these programs currently provide for loans with up to 97% loan-to-value ratios without private mortgage insurance. These loans generally have maturities up to 30 years.
The average size of one- to four-family mortgage loans originated by the Company in 2008 was $151,574, and in 2007 and 2006 was $155,436 and $147,232, respectively.
ARM loans pose credit risks different from the risks inherent in fixed rate loans, primarily because as interest rates rise, the underlying payments from the borrowers increase, which increases the potential for payment default. At the same time, the marketability and/or value of the underlying property may be adversely affected by higher interest rates. ARM loans originated by the Company are typically adjusted by a maximum of 200 basis points per adjustment period. The adjustments are usually annual, after the initial interest rate lock period. The Company originates ARM loans with lifetime caps set at 6% above the origination rate. Monthly payments of principal and interest are adjusted when the interest rate adjusts. The Company does not offer ARM loans with negative amortization. The initial rates offered on ARM loans fluctuate with general interest rate changes and are determined by competitive conditions and the Company’s yield requirements. The Company currently utilizes the monthly average yield on United States treasury securities, adjusted to a constant maturity of one year (“constant maturity treasury index”) as the index to determine the interest rate payable upon the adjustment date of ARM loans. Some of the ARM loans are granted with conversion options that provide terms under which the borrower may convert the mortgage loan to a fixed rate mortgage loan for a limited period early in the term (normally in the first five years) of the ARM loan. The terms at which the ARM loan may be converted to a fixed rate loan are established at the date of loan origination and are set at a level allowing the Company to sell the loan into the secondary market upon conversion. In addition, some ARM loans are granted on an interest-only basis whereby the borrower pays interest-only during the initial one, two, three, or five year interest rate lock period. Upon the first interest rate adjustment,

8

Table of Contents

principal amortization begins for the remaining term of the loan. At December 31, 2008, 14.8% of the Company’s one- to four-family mortgage loan portfolio consisted of interest-only mortgage loans.
The volume and types of ARM loans the Company originates have been affected by the level of market interest rates, competition, consumer preferences, and the availability of funds. Although the Company will continue to offer ARM loans, it cannot guarantee that it will be able to originate a sufficient volume of ARM loans to increase or maintain the proportion that these loans bear to the Company’s total loans. ARM loans are susceptible to early prepayment during periods of lower interest rates as borrowers refinance into fixed rate loans.
Residential mortgage loan originations are solicited from real estate brokers, builders, existing customers, community groups, other referral sources, and residents of the local communities located in the Company’s primary market areas through its loan origination staff. The Company also advertises its residential mortgage loan products through local media, internal customer communications, and its website. Most residential mortgage loans are processed under the Fannie Mae alternative documentation programs. For reduced documentation loans, the Company requires applicants to complete a Fannie Mae loan application and requests income, asset and debt information from the borrower. In addition to obtaining outside vendor credit reports on all borrowers, the Company also looks at other information to ascertain the creditworthiness of the borrower. In most instances, the Company utilizes Fannie Mae’s Desktop Underwriter automated underwriting process to further reduce the necessary documentation. For example, a telephone verification of employment may be used instead of written verification of employment. Loans that are processed with reduced documentation conform to secondary market standards and generally may be sold on the secondary market. Alternative documentation should not be confused with no documentation loans (“no doc loans”). No doc loans, as the name implies, do not require verification of employment, instead stated income is used. The Company does not offer no doc loans, nor does it originate or purchase subprime loans.
Normally, an appraisal of the real estate to secure a mortgage loan is required, which must be performed by a certified appraiser approved by the board of directors. The Company may also utilize a streamlined process in certain circumstances on existing mortgage loans that refinance with the Company. In such instances, the Company may rely on the original appraisal and in essence the only items that are modified are the rate and term. A title insurance policy is required for all real estate first mortgage loans. Evidence of adequate hazard insurance and flood insurance, if applicable, is required prior to closing. Borrowers are required to make monthly payments to fund principal and interest (except for the interest-only ARM mortgage loans) as well as private mortgage insurance and flood insurance, if applicable. With some exceptions for lower loan-to-value ratio loans, borrowers are also generally required to escrow in advance for real estate taxes. If borrowers with loans having a lower loan-to-value ratio want to handle their taxes and insurance themselves, an escrow waiver fee is charged. The Company makes disbursements for these items from the escrow account as the obligations become due. With respect to escrowed real estate taxes, the Company generally makes this disbursement directly to the borrower.
The Company’s staff underwriters review all pertinent information prior to making a credit decision to approve or deny an application. All recommendations to deny are reviewed by a designated senior officer of the Company, in addition to staff underwriters, prior to the final disposition of the loan application. The Company’s lending policies generally limit the maximum loan-to-value ratio on one- to four-family mortgage loans secured by owner-occupied properties to 100% of the lesser of the appraised value or purchase price of the property. Loans above 80% loan-to-value ratios are subject to private mortgage insurance. Coverage is required to reduce the Company’s exposure to less than 80% of value except for certain low to moderate income loan program loans.
In addition to servicing the loans in its own portfolio, the Company continues to service most of the loans that it sells to Fannie Mae and other third-party investors (commonly referred to as “loans serviced for others”). Servicing mortgage loans, whether for its own portfolio or for others, includes such functions as collecting monthly principal and interest payments from borrowers, maintaining escrow accounts for real estate taxes and insurance, and making such payments on behalf of borrowers when they are due (or in the case of escrowed real estate taxes, making payments directly to the borrowers). When necessary, servicing of mortgage loans also includes functions related to the collection of delinquent principal and interest payments, loan foreclosure proceedings, and disposition of foreclosed real estate. As of December 31, 2008, loans serviced for others amounted to $728.4 million compared to $707.5 million at the end of the previous year. These loans are not reflected in the Company’s Consolidated Statements of Financial Condition.
When the Company services loans for others, it is compensated for these services through the retention of a servicing fee from borrowers’ monthly payments. The Company pays the third-party investors an agreed-upon yield on the loans, which is generally less than the interest agreed to be paid by the borrowers. The difference, typically

9

Table of Contents

25 basis points or more, is retained by the Company and recognized as servicing fee income over the lives of the loans, net of amortization of capitalized mortgage servicing rights (“MSRs”). The Company also receives fees and interest income from ancillary sources such as delinquency charges and float on escrow and other funds.
Management believes that servicing mortgage loans for third parties provides a natural hedge against other risks inherent in the Company’s mortgage banking operations. For example, fluctuations in volumes of mortgage loan originations and resulting gains on sales of such loans caused by changes in market interest rates will be offset to a certain extent by opposite changes in the amortization of the MSRs. These fluctuations are usually the result of actual loan prepayment activity and/or changes in management expectations for future prepayment activity, which impacts the amount of MSRs amortized in a given period. However, fluctuations in the recorded value of MSRs may also be caused by valuation adjustments required to be recognized under generally accepted accounting principles (“GAAP”). That is, the value of servicing rights may fluctuate because of changes in the future prepayment assumptions or discount rates used to periodically value the MSRs. Although management believes that most of the Company’s loans that prepay are replaced by a new loan to the same customer or even a different customer (thus preserving the future servicing cash flow), GAAP requires impairment losses resulting from a change in future prepayment assumptions to be recorded in the period in which the change occurs. However, the offsetting gain on the sale of the new loan, if any, cannot be recorded under GAAP until the customer actually prepays the old loan and the new loan is sold in the secondary market. Mortgage servicing rights are particularly susceptible to impairment losses during periods of declining interest rates during which prepayment activity typically accelerates to levels above that which had been anticipated when the servicing rights were originally recorded. Alternatively, in periods of increasing interest rates, during which prepayment activity typically declines, the Company could potentially recapture through earnings all or a portion of a previously established valuation allowance for impairment. As of December 31, 2008, the net carrying value of the Company’s MSRs was $3.7 million compared to $4.7 million at December 31, 2007. For additional discussion, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as Notes 1 and 4 of the Company’s Consolidated Financial Statements.
Consumer Loans In recent periods, the Company has emphasized consumer loan originations because they generally offer higher yields and because the Company has experienced relatively low delinquency and few losses on such products. In addition, the Company believes that offering consumer loan products helps to expand and create stronger ties to its existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities. Consumer loan products offered within the Company’s market areas include fixed term home equity loans, home equity lines of credit, home improvement loans, automobile loans, recreational vehicle loans, marine loans, deposit account loans, overdraft protection lines of credit, unsecured consumer loans, and to a lesser extent, unsecured consumer loans through credit card programs that are administered by third parties. In 2008 the Company ceased offering student loans through programs guaranteed by the federal government due to a lack of profitability. Student loans that continue to be held by the Company are administered by a third party.
The Company’s primary focus in consumer lending has been the origination of home equity loans, home improvement loans, and home equity lines of credit. Underwriting procedures for the home equity and home equity lines of credit loans include a comprehensive review of the loan application, an acceptable credit score, verification of the value of the equity in the home, and verification of the borrower’s income. The loan-to-value ratio and the total debt-to-income ratio are two of the most important determining factors in the underwriting process. Home equity loan and home improvement loan originations are developed through the use of direct mail, cross-sales to existing customers, advertisements in local media, and the Bank’s website.
The Company originates both fixed rate and variable rate home equity loans and home improvement loans with combined loan-to-value ratios up to 89.9%. Pricing on fixed rate home equity and home improvement loans is periodically reviewed by management. Generally, loan terms are in the three to fifteen year range in order to minimize interest rate risk. During 2008, the Company originated $50.6 million of fixed rate home equity or home improvement loans; these loans carry a weighted average written term of approximately 11.2 years and a fixed rate ranging from 4.99% to 13.99%. During 2007, the Company originated approximately $47.6 million of fixed rate home equity or home improvement loans, carrying a weighted average written term of approximately 10.2 years and a fixed rate ranging from 5.49% to 11.95%. The Company also offers adjustable rate home equity and home improvement loans. At December 31, 2008, $23.1 million or 11.1% of the Company’s fixed term home equity and home improvement loan portfolio carried an adjustable rate. The adjustable rate loans have an initial fixed rate for one to three years then adjust annually or monthly depending upon the offering, with terms of up to 20 years.
Total disbursed home equity credit line loans were $87.0 million, or 25.7% of total consumer loans at December 31, 2008. These are adjustable rate loans secured by a first or second mortgage on owner-occupied one- to four-family

10

Table of Contents

residences and second homes located primarily in the state of Wisconsin. Current interest rates on home equity credit lines are tied to the prime rate, adjust monthly after an initial interest rate lock period, and range from prime rate minus 26 basis points to prime rate plus 275 basis points, depending on the loan-to-value ratio. These loans generally have a floor of 4.99%. Home equity line of credit loans are made for terms up to 10 years and require a minimum monthly payment of interest only with a minimum payment of $50. An annual fee is charged on home equity lines of credit.
Prior to May 2006, the Company made indirect automobile, boat, and recreational vehicle loans through applications taken by selected automobile dealerships on application forms approved by the Company. The Company discontinued such indirect loan originations as a result of the reduced profitability of these loans.
Consumer loans generally have shorter terms and higher rates of interest than conventional mortgage loans, but typically involve more credit risk than such loans because of the nature of the collateral and, in some instances, the absence of collateral. In general, consumer loans are more dependent upon the borrower’s continuing financial stability, more likely to be affected by adverse personal circumstances, and often secured by rapidly depreciating personal property such as automobiles. In addition, various laws, including bankruptcy and insolvency laws, may limit the amount that may be recovered from a borrower. However, such risks are mitigated to some extent in the case of home equity loans and lines of credit. These types of loans are secured by a first or second mortgage on the borrower’s residence for which the total principal balance outstanding (including the first mortgage) does not generally exceed 89.9% of the property’s value at the time of the loan.
The Company believes that the higher yields earned on consumer loans compensate for the increased risk associated with such loans and that consumer loans are important to the Company’s efforts to increase the interest rate sensitivity and shorten the average maturity of its loan portfolio. Furthermore, the Company’s net charge-offs on consumer loans as a percentage of gross loans have not been significant in recent years, despite the risks inherent in consumer lending.
In conjunction with its consumer lending activities, the Company offers customers credit life and disability insurance products underwritten and administered by an independent insurance provider. The Company receives commission revenue related to the sales of these products, although such amounts are not a material source of revenue for the Company.
Multi-family and Commercial Real Estate Loans The Company’s multi-family and commercial real estate loan portfolios consist of fixed rate and adjustable rate loans originated at prevailing market rates usually tied to various treasury indices. This portfolio generally consists of loans secured by apartment buildings, office buildings, warehouses, industrial buildings, and retail centers. These loans typically do not exceed 80% of the lesser of the purchase price or an appraisal by an appraiser designated by us. Loans originated with balloon maturities are generally amortized on a 25 to 30 year basis with a typical balloon term of 3 to 5 years.
Loans secured by multi-family and commercial real estate are granted based on the income producing potential of the property and the financial strength of the borrower. The net operating income, which is the income derived from the operation of the property or from the business in an owner-occupied property, must be sufficient to cover the payments relating to the outstanding debt. In most cases, the Company obtains joint and several personal guarantees from the principals involved. The Company generally requires an assignment of rents or leases in order to be assured that the cash flow from the property will be used to repay the debt. Appraisals on properties securing multi-family and larger commercial real estate loans are performed by independent state certified fee appraisers approved by the board of directors. Title and hazard insurance are required as well as flood insurance, if applicable. Environmental assessments are performed on certain multi-family and commercial real estate loans in excess of $1.0 million, as well as all loans secured by certain properties that the Company considers to be “environmentally sensitive.” In addition, an annual review is performed on non-owner-occupied multi-family and commercial real estate loans over $1.0 million.
At December 31, 2008, the largest outstanding loan on a multi-family property was $10.1 million on an apartment/retail project located in Madison, Wisconsin. At the same date, the largest commercial real estate loan outstanding was a $22.0 million short-term bridge loan secured by four medical office buildings located in the Milwaukee area. The second largest commercial real estate loan outstanding was a $16.7 million permanent mortgage loan on a medical office complex located in the Milwaukee area. At December 31, 2008, these loans were current and performing in accordance with their terms. These loans are substantially below the Bank’s legal lending limit to a single borrower, which was approximately $56.8 million at December 31, 2008. However, the

11

Table of Contents

Bank has an internal lending limit that is adjusted from time-to-time and which is substantially lower than its legal lending limit.
Loans secured by multi-family and commercial real estate properties are generally larger and involve a greater degree of credit risk than one- to four-family residential mortgage loans. Such loans typically involve large balances to single borrowers or groups of related borrowers. Because payments on loans secured by multi-family and commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project decreases, or if leases are not obtained or renewed, the borrower’s ability to repay the loan may be impaired.
Construction and Development Loans The Company’s construction and development loans typically have terms of 18 to 24 months, are interest-only, and carry variable interest rates tied to the prime rate. Disbursements on these loans are based on draw requests supported by appropriate lien waivers. As a general matter, construction and development loans convert to permanent loans and remain in the Company’s loan portfolio upon the completion of the project. Construction loans are generally considered to involve a higher degree of risk than mortgage loans on completed properties. The Company’s risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property’s value at completion of construction, the estimated cost of construction, and the borrower’s ability to advance additional construction funds if such should become necessary. In addition, in the event a borrower defaults on the loan during its construction phase, the construction project often needs to be completed before the full value of the collateral can be realized by the Company.
Commercial Business Loans The Company’s commercial loan portfolio consists of loans to businesses for equipment purchases, working capital term loans and lines of credit, debt refinancing, Small Business Administration (“SBA”) loans, and domestic standby letters of credit. Typically, these loans are secured by general business security agreements, real estate, and personal guarantees. The Company offers variable, adjustable, and fixed rate loans. Approximately 30.5% of the Company’s commercial business loans have an interest rate that adjusts daily or monthly with an interest rate floor, with the majority based on the prevailing prime rate plus a margin. The Company also has commercial business loans that have an initial period where interest rates are fixed, generally one to five years, and thereafter are adjustable based on various indexes. Fixed rate loans are priced at either a margin over the yield on U.S. Treasury issues with maturities that correspond to the maturities of the notes or to match competitive conditions and yield requirements. Term loans are generally amortized over a three to seven year period and line-of-credit commercial business loans generally have a term of one year and, in the case of small lines of credit, up to five years. All borrowers having an exposure to the Company of $500,000 or more are reviewed annually, unless it is an investment real estate loan at which point the annual review occurs for loans over $1.0 million. The largest commercial business loan at December 31, 2008, was to a leasing company located in the Milwaukee area and had an outstanding balance of $4.4 million. This loan was secured by equipment and an assignment of leases.
Loan Approval Authority For one- to four-family residential loans intended for sale into the secondary market, the Company’s staff underwriters are authorized by the board of directors to approve loans processed through the Fannie Mae Desktop Underwriter automated underwriting system up to the Fannie Mae conforming loan limits (in 2008, $417,000 for single-family residential units; higher limits for two-, three-, and four-family units). For residential loans intended to be held in the Company’s loan portfolio, staff underwriters are authorized to approve loans processed through the Fannie Mae Desktop Underwriter automated underwriting system of $500,000 or less, provided the loan-to-value ratio is 80% or less (and up to 90% with mortgage insurance) and the loan meets other specific underwriting criteria. All loan relationships in excess of $500,000, with a loan-to-value greater than 80% (with mortgage insurance, 90% or less), or failing to meet other specific underwriting criteria, must be approved by a senior officer of the Company.
The Company has delegated lending authority of $650,000 or less to third-party originators approved under the Company’s correspondent loan program whose loans are to be purchased by the Company. That approval is made in conjunction with the loan receiving an “approve” from Fannie Mae’s Desktop Underwriter automated underwriting system or the Federal Home Loan Mortgage Corporation’s (“Freddie Mac”) Loan Prospector system and an approval from the correspondent’s underwriter only after the Company has reviewed a minimum of 50 loans submitted to the Company for purchase. For those correspondents that have been delegated lending authority, the Company selects for review a sample of 20% of the loans being submitted by the correspondent for purchase by the Company.

12

Table of Contents

Consumer loan underwriters have individual approval authority for secured loans ranging from $25,000 to $150,000 provided that the loan-to-value ratio on real estate does not exceed 80%, or 90% on personal property, and that the loan meets other specific underwriting criteria. All consumer loans in excess of $150,000, with a loan-to-value ratio greater than 80% on real estate, 90% on personal property, or failing to meet other specific underwriting criteria must be approved by a senior officer. Consumer loan underwriters have individual approval authority for unsecured loans ranging from $10,000 to $25,000 provided the loan meets other specific underwriting criteria. All unsecured consumer loans in excess of $25,000, or not meeting specific underwriting criteria, must be approved by a senior officer.
Certain individual lenders and senior officers in the multi-family and commercial real estate department have lending authority of $500,000 or less for both existing and proposed construction of multi-family and commercial real estate properties. Two senior officers together have lending authority of $750,000 or less and three senior officers together have lending authority of $1,000,000 or less for multi-family and commercial real estate loans. All multi-family and commercial real estate loans over $1,000,000 require approval of the executive committee of the board of directors.
Individual lenders in the commercial banking department have individual lending authority ranging from $50,000 to $250,000 for secured commercial business loans. Senior officers have individual lending authority of $250,000 or less and two senior officers together have lending authority of $500,000 or less for secured commercial business loans. Three senior officers together have lending authority of $1,000,000 or less for secured commercial business loans. All secured business loans over $1,000,000 require approval of the executive committee of the board of directors. Individual lenders in the commercial banking department have individual lending authority ranging from $10,000 to $25,000 for unsecured commercial business loans. Senior officers have individual lending authority of $50,000 or less and two senior officers together have lending authority of $150,000 or less for unsecured commercial business loans. Three senior officers together have lending authority of $250,000 or less for unsecured commercial business loans. All unsecured business loans over $250,000 require approval of the executive committee of the board of directors.
All loans approved by individuals and senior officers must be ratified by the executive committee of the board of directors at its next meeting following the approval.
Asset Quality
One of the Company’s key operating objectives has been and continues to be the maintenance of a high level of asset quality. Through a variety of strategies, including but not limited to, early intervention, borrower workout arrangements, and aggressive marketing of foreclosed properties and repossessed assets, the Company has been proactive in addressing problem and non-performing assets. These strategies, as well as continued emphasis on quality loan underwriting, maintenance of sound credit standards for new loan originations, and annual evaluation of large credits have generally resulted in delinquency and non-performing asset ratios below the national norm, although there can be no assurances that this will continue.
Delinquent Loans and Foreclosed Assets When a borrower fails to make required payments on a loan, the Company takes a number of steps to induce the borrower to cure the delinquency and restore the loan to a current status. In the case of one- to four-family mortgage loans, the Company’s loan servicing department is responsible for collection procedures from the 15th day of delinquency through the completion of foreclosure. Specific procedures include a late charge notice being sent at the time a payment is over 15 days past due with a second notice (in the form of a billing coupon) being sent before the payment becomes 30 days past due. Once the account is 30 days past due, the Company attempts telephone contact with the borrower. Letters are sent if contact has not been established by the 45th day of delinquency. On the 60th day of delinquency, attempts at telephone contact continue and stronger letters, including foreclosure notices, are sent. If telephone contact cannot be made, the Company sends either a qualified third party inspector or a loan officer to the property in an effort to contact the borrower.
When contact is made with the borrower, the Company attempts to obtain full payment or work out a repayment schedule to avoid foreclosure. All properties are inspected prior to foreclosure approval. Most borrowers pay before the agreed upon payment deadline and it is not necessary to start a foreclosure action. Foreclosure action generally starts when the loan is between the 90th and 120th day of delinquency following review by a senior officer. In conjunction with commencing a foreclosure action, the Company evaluates the borrower and collateral to determine any potential loss. If there is a potential loss, a specific loan loss allowance is developed or an

13

Table of Contents

appropriate charge-off is taken to bring the loan balance in line with the value of the liquidated real estate. Loan charge-offs are reported to the board of directors. If the loan is deemed to be uncollectible, the Company seeks the shortest redemption period possible thus waiving its right to collect any deficiency from the borrower. If the Company obtains the property at the foreclosure sale, it holds the property as real estate owned, which is a component of other assets on the Company’s Consolidated Statements of Financial Condition. The Company obtains a market evaluation of the property to determine that its carrying balance is consistent with the market value of the property. Marketing of the property begins immediately following the Company taking title to the property. The marketing is usually undertaken by a realtor knowledgeable with the particular market. Mortgage insurance claims are filed if the loan had mortgage insurance coverage. It is marketed after a market evaluation is obtained and any mortgage insurance claims are filed. The collection procedures and guidelines as outlined by Fannie Mae, Freddie Mac, State VA, WHEDA, and Guaranteed Rural Housing are followed by the Company.
Management personnel review delinquent consumer loans on a regular basis. The collection procedures for consumer loans, excluding student loans, indirect consumer loans and credit card loans, include sending periodic late notices to a borrower once a loan is 5 to 15 days past due depending upon the grace period associated with a loan. The Company attempts to make direct contact with a borrower once a loan becomes 30 days past due. If collection activity is unsuccessful, the Company may pursue legal remedies itself, refer the matter to legal counsel for further collection effort, or charge-off the loan. Loans the Company deems to be uncollectible, or partially uncollectible, are charged off or a specific loan loss allowance is established so that the carrying balance approximates the value of the collateral. A charge-off of consumer loans requires the approval of a senior officer and is reported to the board of directors. All student loans are serviced by a third party, which guarantees its servicing to comply with all U.S. Department of Education guidelines. The Company’s student loan portfolio is guaranteed under programs sponsored by the U.S. government. Credit card loans are serviced by a third party administrator and indirect consumer loans are serviced by Savings Financial Corporation (“SFC”), a 50% owned subsidiary of the Bank.
The collection procedures for multi-family, commercial real estate, and commercial business loans include sending periodic late notices to a borrower once a loan is past due. The Company attempts to make direct contact with a borrower once a loan becomes 15 days past due. The Company’s managers of the multi-family and commercial real estate loan areas review loans 10 days or more delinquent on a regular basis. If collection activity is unsuccessful, the Company may refer the matter to legal counsel for further collection effort. After 90 days, loans that are delinquent are typically proposed for repossession or foreclosure, a specific reserve may be allocated to that loan, or partial or full charge-offs are taken to bring the loan balance in line with the expected collectibility of the loans. Legal action requires the approval of the Company’s board of directors, and charge-offs are reported to the board.
The Company’s policies require that management continuously monitor the status of the loan portfolio and report to the board of directors on a monthly basis. These reports include information on delinquent loans and foreclosed real estate.

14

Table of Contents

The following table presents information regarding non-accrual mortgage, consumer loans, commercial business loans, accruing loans delinquent 90 days or more, and foreclosed properties and repossessed assets as of the dates indicated.
                                         
    At December 31
    2008   2007   2006   2005   2004
    (Dollars in thousands)
Non-accrual mortgage loans
   $ 29,860     $ 11,251     $ 11,504     $ 2,214     $ 1,485  
Non-accrual consumer loans
     1,159       930       803       616       619  
Non-accrual commercial business loans
     1,494       159       1,625       2,517       3,579  
Accruing loans delinquent 90 days or more
     576       602       565       487       586  
     
Total non-performing loans
     33,089     $ 12,942     $ 14,497       5,834       6,269  
Foreclosed properties, real estate owned and repossessed assets, net
     4,768       3,687       1,231       708       1,621  
     
Total non-performing assets
   $ 37,857     $ 16,629     $ 15,728     $ 6,542     $ 7,890  
     
Non-performing loans to total loans
     1.81 %     0.65 %     0.72 %     0.29 %     0.33 %
     
Non-performing assets to total assets
     1.08 %     0.48 %     0.46 %     0.19 %     0.23 %
     
Interest income that would have been recognized if non-accrual loans had been current
   $ 2,519     $ 1,002     $ 652     $ 1,159     $ 831  
     
Total non-performing loans increased as of December 31, 2008, compared to December 31, 2007, due in part to a $9.1 million loan secured by a completed condominium development project that defaulted during the year. The Company recorded a $1.3 million loss provision related to this loan in 2008, but continues to work with the developer to dispose of the condominium units. Management is uncertain at this time whether the Company will ultimately foreclose on the project and/or whether additional losses may be recorded in the future as a result of further deterioration in the value of the condominium units.
Also contributing to the increase in non-performing loans in 2008 was a general deterioration in economic conditions which resulted in a $5.4 million increase in non-performing one- to four-family mortgage loans, as well as increases in non-performing consumer and commercial business loans. Management believes non-performing loans and assets, expressed as a percentage of total loans and assets, compare favorably with national averages for financial institutions, due in part to the Company’s conservative loan underwriting standards. In addition, management believes real estate values in Wisconsin have not been as negatively impacted as certain other regions of the United States.
With the exception of mortgage loans insured or guaranteed by the State VA, Guaranteed Rural Housing, and student loans, the Company generally stops accruing income on loans when interest or principal payments are greater than 90 days in arrears or earlier when the timely collectibility of such interest or principal is doubtful. The Company designates loans on which it stops accruing income as non-accrual loans and generally, it establishes a reserve for outstanding interest that was previously credited to income. The Company may recognize income in the period that it collects such income when the ultimate collectibility of principal is no longer in doubt. The Company returns a non-accrual loan to accrual status when factors indicating doubtful collection no longer exist.
All commercial business and commercial real estate loans which are greater than 90 days past due are considered to be potentially impaired. In addition, the Company may declare a loan impaired prior to a loan being 90 days past due, if it determines there is a question as to the collectibility of principal. Impaired loans are individually assessed to determine whether a loan’s carrying value is in excess of the fair value of the collateral or the present value of the loan’s cash flows discounted at the loan’s effective interest rate and if the carrying value is in excess, a loan loss allowance will be established.
Loans considered to be impaired as defined in Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan” (“SFAS 114”), at December 31, 2008, totaled $33.1 million as compared to $20.2 million at December 31, 2007, $17.3 million at December 31, 2006, $9.7 million at December 31, 2005, and $8.7 million at December 31, 2004. The average of impaired loans for the year ended December 31, 2008, was $21.4 million and the interest received and recognized on these loans was $117,000.

15

Table of Contents

Foreclosed real estate, which is included in other assets on the Company’s Consolidated Statements of Financial Condition, consists of property the Company acquired through foreclosure or deed in lieu of foreclosure. Foreclosed properties increased in 2008 as compared to 2007 primarily as a result of a general deterioration in economic conditions which resulted in increased home foreclosure activity. Contributing to a lesser extent were foreclosures related to certain small commercial real estate loans. Foreclosed real estate properties are initially recorded at the lower of the recorded investment in the loan or fair value. Thereafter, the Company carries foreclosed real estate at fair value less estimated selling costs (typically about 10%). Foreclosed real estate is inspected periodically. Additional outside appraisals are obtained as deemed necessary. Additional write-downs may occur if the property value deteriorates further after it is acquired. These additional write-downs are charged to the Company’s results of operations as they occur.
Charge-offs The Company will typically charge-off a loan at foreclosure, repossession, or liquidation and/or when the loan is otherwise deemed uncollectible. The amount of the charge-off will depend on the fair market value of the underlying collateral and may be zero if the fair market value exceeds the loan amount. All charge-offs are recorded as a reduction to allowance for loan losses.
Allowance for Loan Losses The following table presents the activity in the Company’s allowance for loan losses at or for the periods indicated.
                                         
    At or for the Years Ended December 31
    2008   2007   2006   2005   2004
            (Dollars in thousands)        
Balance at beginning of period
   $ 11,774     $ 12,574     $ 12,090     $ 13,923     $ 13,771  
Provision for (recovery of) loan losses
     1,447       (272 )     632       541       1,330  
Charge-offs:
                                        
Mortgage loans
     (613 )     (178 )     (44 )     —       (64 )
Consumer loans
     (411 )     (412 )     (271 )     (327 )     (373 )
Commercial business loans
     (34 )     (33 )     (52 )     (2,104 )     (816 )
     
Total charge-offs
     (1,058 )     (623 )     (367 )     (2,431 )     (1,253 )
     
Recoveries:
                                        
Mortgage loans
     —       —       —       —       9  
Consumer loans
     45       95       81       49       66  
Commercial business loans
     —       —       138       8       —  
     
Total recoveries
     45       95       219       57       75  
     
Net charge-offs recoveries
     (1,013 )     (528 )     (148 )     (2,374 )     (1,178 )
     
Balance at end of period
   $ 12,208     $ 11,774     $ 12,574     $ 12,090     $ 13,923  
     
 
                                        
Net charge-offs to average loans
     0.05 %     0.03 %     0.01 %     0.12 %     0.07 %
Allowance for loan losses to total loans
     0.67 %     0.59 %     0.62 %     0.61 %     0.74 %
Allowance for loan losses to non-performing loans
     36.89 %     90.98 %     86.74 %     207.23 %     222.09 %
The allowance for loan losses has been determined in accordance with GAAP. The Company is responsible for the timely and periodic determination of the amount of the allowance required. Management of the Company believes that the allowance for loan losses is adequate to cover specifically identifiable loan losses, as well as estimated losses inherent in the loan portfolio for which certain losses are probable, but not specifically identifiable.
Loan loss allowances are reviewed monthly. General allowances are maintained by the following categories for performing loans to provide for unidentified inherent losses in the portfolios: (1) one- to four-family residential mortgage loans, (2) consumer loans, (3) multi-family and commercial real estate loans, and (4) commercial business loans.
Various factors are taken into consideration in establishing the loan loss allowance including: historical loss experience, loan-to-value ratio and/or collateral coverage ratio, economic factors, and other factors, that, in management’s judgment would affect the collectibility of the portfolio as of the evaluation date. Adjustments to the allowance for loan losses are charged against operations as provision for loan losses.
The appropriateness of the allowance is reviewed by senior management based upon its evaluation of then-existing economic and business conditions affecting the key lending areas of the Company. Other outside factors such as

16

Table of Contents

credit quality trends, collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments, and recent loss experience in particular segments of the portfolio that existed as of the balance sheet date and the impact that such conditions were believed to have had on the collectibility of the loan, are also considered by management.
Although the Company has established and maintained the allowance for loan losses at an amount that reflects management’s best estimate of the amount necessary to provide for probable and estimable losses on loans, future additions may be necessary if economic and other conditions in the future differ substantially from the current operating environment and as the loan portfolio grows and its composition changes. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s loan and foreclosed real estate portfolios and the related allowance for loan losses and valuation allowance for foreclosed real estate. One or more of these agencies, specifically the OTS, may require the Company to increase the allowance for loan losses or the valuation allowance for foreclosed real estate based on their judgments of information available to them at the time of their examination, thereby adversely affecting the Company’s results of operations. For additional discussion refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The following table represents the Company’s allocation of its allowance for loan losses by loan category on the dates indicated:
                                                                                 
    At December 31
    2008   2007   2006   2005   2004
            Percentage           Percentage           Percentage           Percentage           Percentage
            of Loans           of Loans           of Loans           of Loans           of Loans
            in Category           in Category           in Category           in Category           in Category
            to Total           to Total           to Total           to Total           to Total
    Amount   Loans   Amount   Loans   Amount   Loans   Amount   Loans   Amount   Loans
    (Dollars in thousands)
Loan category:
                                                                                
Mortgage loans:
                                                                                
One- to four-family
   $ 3,038       47.43 %   $ 3,324       51.12 %   $ 3,531       53.03 %   $ 3,294       50.94 %   $ 2,488       46.34 %
Other mortgage loans
     5,710       32.11       4,040       27.96       3,049       24.16       2,424       23.61       3,222       25.58  
     
Total mortgage loans
     8,748       79.54       7,364       79.08       6,580       77.19       5,718       74.55       5,710       71.92  
Home equity lines
     473       4.59       496       4.37       496       4.33       483       4.29       663       4.54  
Consumer
     1,652       13.25       1,770       13.95       2,060       16.02       2,118       18.38       2,929       19.94  
Commercial loans
     1,335       2.62       2,144       2.60       3,438       2.46       3,771       2.78       4,621       3.60  
     
Total allowance for loan losses
   $ 12,208       100.00 %   $ 11,774       100.00 %   $ 12,574       100.00 %   $ 12,090       100.00 %   $ 13,923       100.00 %
     
Investment Activities
General The Company’s board of directors reviews and approves its investment policy on an annual basis. Senior officers, as authorized by the board of directors, implement this policy. The board of directors reviews investment activity on a monthly basis.
The Company’s investment objectives are to meet liquidity requirements and to generate a favorable return on investments without compromising objectives relating to overall risk exposure, including interest rate risk, credit risk, and investment portfolio concentrations. Federally-chartered savings banks have authority to invest in various types of assets, including U.S. Treasury obligations, securities of various federal agencies, state and municipal obligations, mortgage-related securities, mortgage derivative securities, certain certificates of deposit of insured banks and savings institutions, certain bankers’ acceptances, repurchase agreements, loans of federal funds, commercial paper, mutual funds, and, subject to certain limits, corporate debt and equity securities. From time-to-time the Company pledges eligible securities as collateral for certain deposit liabilities, FHLB advances, and other purposes permitted or required by law. Refer to “Notes to Consolidated Financial Statements—Note 2. Securities, Available-for-Sale.”
The Company’s investment policy allows participation in hedging strategies such as the use of financial futures, options, forward commitments, and interest rate swaps, but only with prior approval of the board of directors. Other than forward commitments related to its sale of residential loans in the secondary market, the Company did not have any investment hedging transactions in place at December 31, 2008. The Company’s investment policy prohibits the purchase of non-investment grade bonds. The Company’s investment policy also prohibits it from engaging in any practice that the Federal Financial Institutions Examination Council (“FFIEC”) considers to be an unsuitable investment practice. The Company does not invest in mortgage-related securities secured by subprime loans. The Company classifies securities as trading, held-to-maturity, or available-for-sale at the date of purchase. At

17

Table of Contents

December 31, 2008, all of the Company’s investment and mortgage-related securities were classified as available-for-sale. These securities are carried at fair value with the change in fair value recorded as a component of shareholders’ equity.
Investment Securities The Company’s investment securities consist principally of U.S. government and federal agency obligations and mutual funds. At December 31, 2008, the Company had not invested in any single mutual fund in excess of 10% of its capital. All of the Company’s mutual fund investments are permissible investments under its investment policy and applicable laws and regulations. The Company carries its mutual fund investments at market value. At December 31, 2008, its mutual fund investments were in funds which invested primarily in mortgage-related securities.
In 2008 the Company determined that its investment in the common stock of the Federal Home Loan Mortgage Corporation (“Freddie Mac”) was impaired due to Freddie Mac’s placement in conservatorship by the federal government. Accordingly, the Company recorded a $1.4 million impairment loss in the consolidated statement of income for the year ended December 31, 2008. Also in 2008, the Company determined that one of its mutual fund investments had impairments that were other-than-temporary. Accordingly, the Company recorded a $6.9 million impairment loss in the consolidated statement of income for the year ended December 31, 2008. This compares to a $955,000 impairment loss in the previous year related to the same mutual fund. In addition, in 2007 the Company recorded a $272,000 impairment loss on another mutual fund that did not experience further impairment in 2008. For additional discussion, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Mortgage-related Securities Mortgage-related securities consist principally of mortgage-backed securities (“MBSs”), real estate mortgage investment conduits (“REMICs”), and collateralized mortgage obligations (“CMOs”). Most of the Company’s mortgage-related securities are directly or indirectly insured or guaranteed by the Government National Mortgage Association (“Ginnie Mae”), Freddie Mac or Fannie Mae. The remaining securities are investment-grade, private label CMOs. Private label CMOs generally carry higher credit risks and higher yields than mortgage-related securities insured or guaranteed by agencies of the U.S. Government. For additional discussion related to the Company’s private label CMOs, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Mortgage-related securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees or credit enhancements that reduce credit risk. However, mortgage-related securities are more liquid than individual mortgage loans.
In general, mortgage-related securities issued or guaranteed by Ginnie Mae, Freddie Mac and Fannie Mae are weighted at no more than 20% for risk-based capital purposes, compared to the 50% risk weighting assigned to most non-securitized residential mortgage loans. While these securities carry a reduced credit risk as compared to private label CMOs, they remain subject to the risk of a fluctuating interest rate environment and instability in related markets. Along with other factors, such as the geographic distribution of the underlying mortgage loans, changes in interest rates may alter the prepayment rate of those mortgage loans and affect the value of mortgage-related securities.

18

Table of Contents

Securities Carrying Values, Yields, Maturities, and Activities The table below presents information regarding the carrying values, weighted average yields and contractual maturities of the Company’s investment securities and mortgage-related securities at December 31, 2008. Mortgage-related securities are presented by issuer and by coupon type.
                                                                                 
                    More than One Year   More than Five        
    One Year or Less   to Five Years   Years to Ten Years   More than Ten Years   Total
            Weighted           Weighted           Weighted           Weighted           Weighted
    Carrying   Average   Carrying   Average   Carrying   Average   Carrying   Average   Carrying   Average
    Value   Yield   Value   Yield   Value   Yield   Value   Yield   Value   Yield
    (Dollars in thousands)
Investment securities:
                                                                                
Mutual funds (1)
   $ 39,603       3.69 %   $ —       — %   $ —       — %   $ —       — %   $ 39,603       3.69 %
US government and agencies
     —       —       —       —       86,427       6.06       293,108       5.56       379,535       5.67  
     
Total investment securities
   $ 39,603       3.69     $ —       —     $ 86,427       6.06     $ 293,108       5.56     $ 419,138       5.49  
     
 
                                                                                
Mortgage-related securities by issuer:
                                                                                
Ginnie Mae pass-through certificates
   $ —       —     $ —             $ —       —     $ 297       5.42     $ 297       5.42  
Fannie Mae pass-through certificates
     1       6.00       9,263       4.94       12,261       5.74       207,894       5.49       229,419       5.49  
Freddie Mac pass-through certificates
     —       —       170       5.72       15       7.83       9,803       5.55       9,988       5.56  
Private label CMOs
     —       —       —       —       5,631       5.35       122,925       4.97       128,556       4.99  
Freddie Mac, Fannie Mae, and Ginnie Mae REMICs
     —       —       9,839       4.20       188,815       4.24       283,953       4.56       482,607       4.43  
     
Total mortgage-related securities
   $ 1       6.00     $ 19,272       4.57     $ 206,722       4.36     $ 624,872       4.99     $ 850,867       4.81  
     
By coupon type:
                                                                                
Adjustable rate
   $ —             $ —             $ 101       6.43     $ 69,562       4.48     $ 69,663       4.48  
Fixed rate
     1       6.00       19,272       4.57       206,621       4.36       555,310       5.05       781,204       4.86  
     
Total mortgage-related securities
   $ 1       6.00 %   $ 19,272       4.57 %   $ 206,722       4.36 %   $ 624,872       4.99 %   $ 850,867       4.81 %
     
Total investment and mortgage-related securities portfolio
   $ 39,604       3.69 %   $ 19,272       4.57 %   $ 293,149       4.86 %   $ 917,980       5.17 %   $ 1,270,005       5.04 %
     
 
(1)   The weighted average yield has not been adjusted for the impairments recorded in 2008 and 2007.
The following table presents the fair value of the Company’s investment securities and mortgage-related securities portfolios at the dates indicated. For all securities and for all periods presented, the carrying value is equal to fair value.
                         
    At December 31
    2008   2007   2006
    Carrying/   Carrying/   Carrying/
    Fair Value   Fair Value   Fair Value
    (Dollars in thousands)
Investment securities:
                        
Mutual funds
   $ 39,603     $ 46,550     $ 46,592  
United States government and federal agency obligations
     379,535       52,036       —  
Stock in federal agencies
     —       864       1,698  
     
Total investment securities available-for-sale
     419,138       99,450       48,290  
     
Mortgage-related securities:
                        
Freddie Mac
     282,237       524,898       441,404  
Fannie Mae
     413,364       363,337       373,394  
Private label CMO’s
     128,559       180,638       207,902  
Ginnie Mae
     26,707       31,049       42,151  
     
Total mortgage-related securities
     850,867       1,099,922       1,064,851  
     
Total securities available-for-sale
   $ 1,270,005     $ 1,199,372     $ 1,113,141  
     

19

Table of Contents

The following table presents the Company’s investment securities and mortgage-related securities activities for the periods indicated.
                         
    For the Year Ended December 31
    2008   2007   2006
    (Dollars in thousands)
Investment securities available-for-sale:
                        
Carrying value at beginning of period
   $ 99,450     $ 48,290     $ 63,361  
Purchases
     351,202       51,270       264  
Sales
     (8,358 )     (1,228 )     (9 )
Calls
     (29,992 )     —       —  
Maturities
     —       —       (14,720 )
Premium amortization and discount accretion, net
     (34 )     1       —  
Increase (decrease) in unrealized gains
     6,870       1,117       (606 )
     
Net increase (decrease) in investment securities
     319,688       51,160       (15,071 )
     
Carrying value at end of period
   $ 419,138     $ 99,450     $ 48,290  
     
Mortgage-related securities available-for-sale:
                        
Carrying value at beginning of period
   $ 1,099,922     $ 1,064,851     $ 1,087,816  
Purchases
     345,842       247,428       198,460  
Sales
     (385,167 )     —       —  
Principal payments
     (195,480 )     (227,041 )     (224,693 )
Premium amortization and discount accretion, net
     1,516       1,893       826  
Increase (decrease) in unrealized gains
     (15,767 )     12,791       2,442  
     
Net increase in mortgage-related securities
     (249,055 )     35,071       (22,965 )
     
Carrying value at end of period
   $ 850,867     $ 1,099,922     $ 1,064,851  
     
Deposit Liabilities
The Company offers a variety of deposit accounts having a range of interest rates and terms for both retail and business customers. The Company currently offers regular savings accounts (consisting of passbook and statement savings accounts), interest-bearing demand accounts, non-interest-bearing demand accounts, money market accounts, and certificates of deposit. The Company also offers IRA time deposit accounts and health savings accounts.
Deposit flows are significantly influenced by general and local economic conditions, changes in prevailing interest rates, pricing of deposits and competition. The Company’s deposits are primarily obtained from areas surrounding its bank offices. The Company relies primarily on competitive rates, quality service, and long-standing relationships with customers to attract and retain these deposits. From time to time the Company has used third-party brokers and a nationally-recognized reciprocal deposit gathering network to obtain wholesale deposits. As of December 31, 2008, the Company did not have any brokered deposits outstanding and had only $1.7 million in wholesale deposits outstanding. In February 2008, the Company launched a new high yield money market product available only online through www.bankmutualdirect.com. The new product attracted substantial deposits earlier in the year. However, due to the changes in the funding needs of the Company later in the year, management elected to let balances in these accounts decline to $11.9 million by the end of 2008.
When the Company determines its deposit rates, it considers rates offered by local competitors, rates on U.S. Treasury securities, rates on other sources of funds such as FHLB advances, and its deposit pricing model, which identifies the profitability of deposits at various price levels. Core deposits (defined as regular savings accounts, money market accounts, and demand accounts) represented 37.3% of total deposit liabilities on December 31, 2008.

20

Table of Contents

The following table presents the distribution of the Company’s deposit accounts at the dates indicated by dollar amount and percent of portfolio, and the weighted average rate.
                                                                         
    At December 31
    2008   2007   2006
            Percent   Weighted           Percent   Weighted           Percent   Weighted
            of Total   Average           of Total   Average           of Total   Average
            Deposit   Nominal           Deposit   Nominal           Deposit   Nominal
    Amount   Liabilities   Rate   Amount   Liabilities   Rate   Amount   Liabilities   Rate
    (Dollars in thousands)
Regular savings
   $ 185,003       8.68 %     0.19 %   $ 183,756       8.70 %     0.45 %   $ 200,016       9.27 %     0.45 %
Interest-bearing demand
     180,278       8.46       0.11       170,986       8.09       0.21       174,206       8.07       0.21  
Money market savings
     340,827       16.00       1.57       280,442       13.27       3.03       248,542       11.51       3.00  
Non-interest bearing demand
     89,106       4.18       0.00       97,506       4.61       0.00       104,821       4.86       0.00  
     
Total demand accounts
     795,214       37.32       0.74       732,690       34.67       1.32       727,585       33.71       1.20  
     
Certificates of deposit:
                                                                        
With original maturities of:
                                                                        
Three months or less
     19,819       0.93       1.78       45,835       2.17       3.97       64,486       2.99       4.76  
Over three to 12 months
     337,525       15.84       2.99       911,821       43.15       5.06       628,952       29.14       5.11  
Over 12 to 24 months
     732,908       34.40       4.04       238,986       11.31       4.61       323,869       15.00       4.14  
Over 24 to 36 months
     46,385       2.18       2.58       58,515       2.77       3.51       98,005       4.54       4.18  
Over 36 to 48 months
     6,592       0.31       4.30       4,963       0.23       3.68       7,155       0.33       3.38  
Over 48 to 60 months
     191,905       9.02       4.25       120,158       5.70       4.12       308,589       14.29       4.66  
Over 60 months
     —       0.00       0.00       —       0.00       0.00       —       0.00       0.00  
     
Total certificates of deposit
     1,335,134       62.68       3.72       1,380,278       65.33       4.79       1,431,056       66.29       4.71  
     
Total deposit liabilities
   $ 2,130,348       100.00 %     2.61 %   $ 2,112,968       100.00 %     3.59 %   $ 2,158,641       100.00 %     3.52  
     
At December 31, 2008, the Company had $293.6 million in certificates of deposit with balances of $100,000 and over maturing as follows:
         
    Amount  
    (In thousands)  
Maturing in:
        
Three months or less
   $ 64,211  
Over three months through six months
     61,103  
Over six months through 12 months
     88,387  
Over 12 months through 24 months
     52,642  
Over 24 months through 36 months
     5,282  
Over 36 months
     21,964  
 
      
Total certificates of deposits greater than $100,000
   $ 293,589  
 
      
The following table presents the Company’s activity in its deposit liabilities for the periods indicated:
                         
    For the Year Ended December 31
    2008   2007   2006
    (Dollars in thousands)
Total deposit liabilities at beginning of period
   $ 2,112,968     $ 2,158,641     $ 2,086,822  
Net deposits (withdrawals)
     (56,428 )     (110,709 )     9,292  
Interest credited, net of penalties
     73,808       65,036       62,527  
     
Total deposit liabilities at end of period
   $ 2,130,348     $ 2,112,968     $ 2,158,641  
     
Net increase (decrease)
   $ 17,380     $ (45,673 )   $ 71,819  
     
Percentage increase (decrease)
     0.82 %     (2.12 )%     3.44 %
     
Borrowings
The Company borrows funds to finance its lending, investing, operating, and stock repurchase activities. Substantially all of its borrowings take the form of advances from the FHLB of Chicago and are on terms and conditions generally available to member institutions. At December 31, 2008, the Company had $908.0 million in FHLB advances outstanding, none of which were due within one year, substantially all of which were subject to significant prepayment penalties if repaid prior to their stated maturity. As of that date, $856.0 million of the Company’s advances had redemption features that permit the FHLB of Chicago to redeem the advances at its option on a quarterly basis. While the Company expects that it would be able to refinance these borrowings with the FHLB of Chicago, it cannot provide any assurances that it could do so nor can it provide any assurance as to the terms at which any such refinancing could be made. The Company has pledged all of its one- to four-family mortgage loans and certain investment securities and multi-family mortgage loans as blanket collateral for these advances and future advances. The FHLB of Chicago offers a variety of borrowing options with fixed or variable rates, flexible

21

Table of Contents

repayment options, and fixed or callable terms. The Company chooses the rate, repayment option, and term to fit the purpose of the borrowing. For additional information, refer to “Notes to Consolidated Financial Statements—Note 7. Borrowings.”
The following table sets forth certain information regarding the Company’s borrowings at the end of and during the periods indicated:
                                         
    At or For the Year Ended December 31
    2008   2007   2006   2005   2004
            (Dollars in thousands)        
Balance outstanding at end of year:
                                        
FHLB term advances
   $ 907,971     $ 912,459     $ 705,025     $ 765,796     $ 623,925  
Overnight borrowings from FHLB
     —       —       —       —       137,600  
Weighted average interest rate at end of year:
                                        
FHLB term advances
     4.26 %     4.27 %     4.46 %     3.58 %     2.89 %
Overnight borrowings from FHLB
     —       —       —       —       2.47 %
Maximum amount outstanding during the year:
                                        
FHLB term advances
   $ 912,459     $ 921,781     $ 841,835     $ 909,920     $ 623,925  
Overnight borrowings from FHLB
     5,000       52,100       38,000       186,000       289,800  
Other borrowings
     1,103       —       —       500       —  
Average amount outstanding during the year:
                                        
FHLB term advances
   $ 910,517     $ 865,540     $ 782,619     $ 811,937     $ 325,861  
Overnight borrowings from FHLB
     22       3,570       3,242       50,712       75,106  
Other borrowings
     3       —       —       1       —  
Weighted average interest rate during the year:
                                        
FHLB term advances
     4.34 %     4.34 %     3.86 %     3.25 %     5.23 %
Overnight borrowings from FHLB
     3.75 %     5.56 %     5.40 %     2.95 %     2.03 %
Other borrowings
     1.92 %     —       —       3.04 %     —  
Borrowings decreased to $908.0 million at December 31, 2008, as compared to $912.5 million at December 31, 2007, primarily as a result of the repayment and/or periodic amortization of a small number of advances.
During the fourth quarter of 2008 the FDIC announced the creation of the Temporary Liquidity Guarantee Program (“TLGP”), one component of which was a temporary guarantee of senior unsecured debt of participating financial institutions that is issued before June 30, 2009. The Company has not used senior unsecured debt as a funding source in the past and does not anticipate a need for such funding prior to June 30, 2009. Accordingly, the Company elected to not participate in the in the debt guarantee component of the TLGP.
Shareholders’ Equity
The ratio of equity to total assets is a measure of a financial institution’s financial strength. As of December 31, 2008 and 2007, the Company’s equity to total assets ratio was 11.45% and 12.33%, respectively. Another measure of financial strength is the ratio of tangible equity to adjusted total assets, which excludes intangible assets from both the numerator and denominator of the formula. The Company’s tangible equity to adjusted total assets ratio was 9.97% and 10.83% as of December 31, 2008 and 2007, respectively.
The Company paid cash dividends of $0.36 per share in 2008, $0.33 per share in 2007, and $0.29 per share in 2006. These amounts equated to dividend payout ratios of 95.8%, 100.7%, and 77.5% of the net income in such periods, respectively. On February 2, 2009, the board of directors of the Company approved a regular quarterly dividend of $0.09 per share payable on March 2, 2009, to shareholders of record on February 12, 2009.
During 2008 the Company repurchased 2.2 million shares of its common stock under a stock repurchase plan adopted in 2007 (the “2007 Plan”). These shares were repurchased at a cost of approximately $24.1 million or $10.79 per share. As of December 31, 2008, no shares remained to be purchased under the 2007 Plan. On November 7, 2008, the board of directors of the Company approved a plan to repurchase up to one million shares or approximately 2.1% of the Company’s then outstanding common stock (the “2008 Plan”). From November 7, 2008, to December 31, 2008, the Company repurchased 573,600 shares under the 2008 Plan at a cost of $5.7 million or $9.89 per share. From January 1, 2009, to February 27, 2009, the Company repurchased 426,400 shares under the 2008 Plan at a cost of $4.0 million or $9.27 per share. No shares remain to be purchased under the 2008 Plan. On February 2, 2009, the board of directors of the Company approved a plan to repurchase up to one million shares or approximately 2.1% of the Company’s then outstanding common stock (the “2009 Plan”). From February 2, 2009, to February 27, 2009, the Company repurchased 133,400 shares under the 2009 Plan at a cost of $1.1 million

22

Table of Contents

or $8.44 per share. Since the Company’s conversion to a fully-shareholder owned company in October 2003, it has repurchased 34.8 million shares of its common stock at a total cost of $396.7 million or $11.41 per share.
The Bank is required to maintain specified amounts of capital pursuant to regulations promulgated by the OTS and the FDIC. The Bank’s objective is to maintain its regulatory capital in an amount sufficient to be classified in the highest regulatory category (i.e., as a “well capitalized” institution). At December 31, 2008, the Bank exceeded all regulatory minimum requirements, as well as the amount required to be classified as a “well capitalized” institution. For additional discussion refer to “Notes to Consolidated Financial Statements—Note 8. Shareholders’ Equity,” as well as “Regulation and Supervision,” below.
During the fourth quarter of 2008 the U.S. Department of the Treasury (“Treasury”) established the Troubled Assets Relief Program (“TARP”) in an effort to restore confidence in the nation’s financial markets. As part of TARP, the Treasury created a voluntary Capital Purchase Program (“CPP”), under which it may purchase senior preferred equity shares of certain qualified financial institutions. As a condition to participating in the CPP, institutions were required to accept certain limitations and restrictions related to executive compensation, dividend payments, and stock repurchase activities. Due to its level of capitalization and overall financial and operating strength at the time, the Company elected to not participate in the CPP.
Further, as described below in “Regulation and Supervision—General,” in February 2009, the federal government announced a financial stability plan, including a Capital Assistance Program (“CAP”) as an additional potential source of capital for financial holding companies and institutions such as the Company and the Bank. Management does not currently believe that the Company is in need of an additional capital buffer that would warrant participation in the CAP. However, management continues to evaluate the CAP and other new programs to determine if participation would provide a material benefit to the Company.
Subsidiaries
BancMutual Financial & Insurance Services, Inc. (“BMFIS”), a wholly-owned subsidiary of the Bank, provides investment, brokerage and insurance services to the Bank’s customers and the general public. Investment services include tax deferred and tax free investments, mutual funds, and government securities. Personal insurance, business insurance, life and disability insurance, and mortgage protection products are also offered by BMFIS. In March of 2007, BMFIS expanded its services to include investment advisory services to obtain additional service fees through expanded offerings to its customers.
Mutual Investment Corporation (“MIC”), a wholly-owned subsidiary of the Bank, owns and manages a portion of the Bank’s investment portfolio. First Northern Investment Inc. (“FNII”), a wholly-owned subsidiary of the Bank, also owns and manages a portion of the Bank’s investments, as well as certain indirect automobile, recreational vehicle, and boat loans from SFC, a 50% owned subsidiary of the Bank. FNII also owns a small number of one- to four-family mortgage loans.
Savings Financial Corporation (“SFC”) is 50% owned by the Bank and 50% owned by another financial institution. SFC was formed to originate, sell, and service indirect automobile, recreational vehicle, and boat loans. In May 2006, the Bank discontinued the purchase of loans from SFC as a result of reduced profitability of these loans. The Bank intends to maintain its ownership in SFC until all of the indirect loans are paid off.
MC Development LTD (“MC Development”), a wholly-owned subsidiary of the Bank, is involved in land development and sales. It owns five parcels of undeveloped land totaling 15 acres in Brown Deer, Wisconsin. In addition, in 2004, MC Development established Arrowood Development with an independent third party to develop 318 acres in Oconomowoc, Wisconsin. In the initial transaction, the third party purchased approximately one-half interest in that land, all of which previously had been owned by MC Development.
In addition, the Bank has four wholly-owned subsidiaries that are inactive but will continue to be wholly-owned subsidiaries for possible future use in a related or other area.
Employees
At December 31, 2008, the Company employed 677 full time and 92 part time associates. Management considers its relations with its associates to be good.

23

Table of Contents

Regulation and Supervision
General
The Company is a Wisconsin corporation registered with the Office of Thrift Supervision (“OTS”) as a unitary savings and loan holding company. The Bank is a federally-chartered savings bank. The Company files reports with the OTS and is subject to regulation and examination by the OTS; the Bank is also subject to these requirements as well as those of the FDIC. The Company also is required to file certain reports with, and otherwise comply with, the rules and regulations of the SEC under the federal securities laws. Any change in these laws and regulations, whether by the OTS, the FDIC, the SEC, or through legislation, could have a material adverse impact on the Company, the Bank, and the Company’s shareholders.
Certain of the laws and regulations applicable to the Company and the Bank are summarized below. These summaries do not purport to be complete and are qualified in their entirety by reference to such laws and regulations.
As a consequence of the instability of financial markets and financial institutions in the United States and globally and the deepening world-wide recession, Congress has recently passed legislation, and regulatory authorities have adopted regulations, which have a substantial effect upon financial holding companies and institutions including the Company and the Bank. The Company discusses certain significant new legislation and regulations which affect the Company or the Bank in the following paragraphs. However, even in the case of the legislation or regulations which have already been adopted, the consequences and effects, both short term and long term, on the Company and the Bank cannot yet be known, and further related regulations and interpretations may have additional effects.
In addition, in 2009, the federal government announced a financial stability plan which would further affect financial holding companies and institutions such as the Company and the Bank. Among other things, the financial stability plan establishes a Capital Assistance Program (“CAP”) under which financial institutions undergo comprehensive “stress tests” to evaluate their capital needs and determine if they can absorb losses and continue lending if economic conditions were to be more adverse than generally expected. Banks that have undergone the “stress test” will have access to Treasury funds to restore or maintain their capital bases. In exchange for the CAP funds, the Treasury will receive preferred securities convertible to common equity.
Eligibility requirements for participation in the CAP are generally the same as those for a qualified financial institution under the CPP. The stability plan also focuses on increased transparency and accountability of institutions receiving funds. Participating institutions will also be subject to greater SEC disclosure requirements and other restrictions, including restrictions related to dividends, stock repurchases, acquisitions and executive compensation. The deadline for applying to participate in the CAP is May 25, 2009. Management does not currently believe that the Company is in need of an additional capital buffer that would warrant participation in the CAP. However, management continues to evaluate the CAP and other new programs to determine if participation would provide a material benefit to the Company.
The financial stability plan is subject to further definition and changes prior to its adoption and/or implementation. In addition, it is widely expected that there will be additional potential legislation and regulation affecting the financial services industry. The effect of the financial stability plan and other potential legislation and regulation on the Company and the Bank cannot yet be determined.
Regulation and Supervision of the Bank
General As a federally-chartered, FDIC-insured savings bank, the Bank is subject to extensive regulation by the OTS and the FDIC. Lending activities and other investments must comply with federal statutory and regulatory requirements. This federal regulation and supervision establishes a comprehensive framework of activities in which a savings bank can engage and is intended primarily for the protection of the FDIC and depositors rather than the shareholders of the Company. This regulatory structure gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies regarding the classification of assets and the establishment of adequate loan loss reserves.
The OTS regularly examines the Bank and issues a report on its examination findings to the Bank’s board of directors. The Bank’s relationships with its depositors and borrowers are also regulated by federal law, especially in such matters as the ownership of savings accounts and the form and content of the Bank’s loan documents.

24

Table of Contents

The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, and must obtain regulatory approvals prior to entering into transactions such as mergers with or acquisitions of other financial institutions.
Regulatory Capital Requirements OTS capital regulations require savings associations such as the Bank to meet three capital standards. The minimum standards are tangible capital equal to at least 1.5% of adjusted total assets, core capital equal to at least 3% of adjusted total assets, and risk-based capital equal to at least 8% of total risk-weighted assets. These capital standards are in addition to the capital standards promulgated by the OTS under its prompt corrective action regulations.
Tangible capital is defined as core capital less all intangible assets, certain mortgage servicing rights, and certain non-includable subsidiaries. Core capital is defined as common shareholders’ equity, noncumulative perpetual preferred stock, related surplus and minority interests in the equity accounts of fully consolidated subsidiaries, non-withdrawable accounts and pledged deposits of mutual savings associations, and qualifying supervisory goodwill, less non-qualifying intangible assets, mortgage servicing rights, and investments in certain non-includable subsidiaries.
The risk-based capital standard for savings institutions requires the maintenance of total risk-based capital of at least 8% of risk-weighted assets. Risk-based capital is comprised of core and supplementary capital. The components of supplementary capital include, among other items, cumulative perpetual preferred stock, perpetual subordinated debt, mandatory convertible subordinated debt, intermediate-term preferred stock, up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair values, and the portion of the allowance for loan losses not designated for specific loan losses. The portion of the allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is limited to 100% of core capital. A savings association must calculate its risk-weighted assets by multiplying each asset and off-balance sheet item by various risk factors as determined by the OTS, which range from 0% for cash to 100% for delinquent loans, property acquired through foreclosure, commercial loans, and other assets.
OTS rules require a deduction from capital for institutions that have unacceptable levels of interest rate risk. The OTS calculates the sensitivity of an institution’s net portfolio value based on data submitted by the institution in a schedule to its quarterly Thrift Financial Report and using the interest rate risk measurement model adopted by the OTS. The amount of the interest rate risk component, if any, is deducted from an institution’s total capital in order to determine if it meets its risk-based capital requirement.
Prompt Corrective Action The FDIC has established a system of prompt corrective action to resolve the problems of undercapitalized insured institutions. The OTS, as well as the other federal banking regulators, adopted the FDIC’s regulations governing the supervisory actions that may be taken against undercapitalized institutions. These regulations establish and define five capital categories, in the absence of a specific capital directive, as follows:
                         
    Total Capital to Risk   Tier 1 Capital to Risk   Tier 1 Capital to
Category:   Weighted Assets   Weighted Assets   Total Assets
Well capitalized
     > 10 %     > 6 %     > 5 %
Adequately capitalized
     > 8 %     > 4 %     > 4 %(1)
Under capitalized
     < 8 %     < 4 %     < 4 %(2)
Significantly undercapitalized
     < 6 %     < 3 %     < 3 %
Critically undercapitalized (3)
                        
 
(1)   > 3% if the bank receives the highest rating under the uniform system.
 
(2)   < 3% if the bank receives the highest rating under the uniform system.
 
(3)   Tangible assets to capital of if equal to or less than 2%.
The severity of the action authorized or required to be taken under the prompt corrective action regulations increases as a bank’s capital decreases within the three undercapitalized categories. All savings associations are prohibited from paying dividends or other capital distributions or paying management fees to any controlling person if, following such distribution, the association would be undercapitalized. The FDIC or the OTS in the case of the Bank, is required to monitor closely the condition of an undercapitalized bank and to restrict the growth of its assets. An undercapitalized savings association is required to file a capital restoration plan within 45 days of the date the association receives notice that it is within any of the three undercapitalized categories, and the plan must be

25

Table of Contents

guaranteed by any parent holding company. The aggregate liability of a parent holding company is limited to the lesser of an amount equal to 5% of the bank’s total assets at the time it became “undercapitalized” or the amount that is necessary (or would have been necessary) to bring the bank into compliance with all capital standards applicable with respect to such bank as of the time it fails to comply with the plan.
If a savings association fails to submit an acceptable plan, it is treated as if it were “significantly undercapitalized.” Banks that are significantly or critically undercapitalized are subject to a wider range of regulatory requirements and restrictions.
The FDIC has a broad range of grounds under which it may appoint a receiver or conservator for an insured savings association. If one or more grounds exist for appointing a conservator or receiver for a savings association, the FDIC may require the association to issue additional debt or stock, sell assets, be acquired by a depository bank or savings association holding company or combine with another depository savings association. The FDIC is also required to appoint a receiver or a conservator for a critically undercapitalized savings association within 90 days after the association becomes critically undercapitalized or to take such other action that would better achieve the purposes of the prompt corrective action provisions. Such alternative action can be renewed for successive 90-day periods. However, if the savings association continues to be critically undercapitalized on average during the quarter that begins 270 days after it first became critically undercapitalized, a receiver must be appointed, unless the FDIC makes certain findings that the association is viable.
Dividend and Other Capital Distribution Limitations The OTS imposes various restrictions or requirements on the ability of savings associations to make capital distributions, including dividend payments.
OTS regulations require the Bank to give the OTS 30 days’ advance notice of any proposed declaration of dividends, and the OTS has the authority under its supervisory powers to prohibit the payment of dividends.
OTS regulations impose uniform limitations on the ability of all savings banks and associations to engage in various distributions of capital such as dividends to the Company, stock repurchases, and cash-out mergers. In addition, the regulation utilizes a three-tiered approach permitting various levels of distributions based primarily upon a savings bank’s capital level.
The Bank currently meets the criteria to be designated a Tier 1 association and, consequently, could at its option (after prior notice to, and no objection made by, the OTS) distribute to the Company up to 100% of its net income during the calendar year plus its retained net income for the preceding two years, less any distributions previously paid during the year. Additional dividends or distributions would require further OTS approval. The OTS has substantial discretion in deciding whether or not to approve such dividends, and may use its discretion, in view of the current state of the financial markets, to cut back on its approval of dividends. While the Bank has received prior approval for dividends up to 100% of net income, there can be no assurances that the OTS will continue to provide approval at that, or any other, level.
Qualified Thrift Lender Test Federal savings associations must meet a qualified thrift lender (“QTL”) test or they become subject to operating restrictions. The Bank met the QTL test as of December 31, 2008, and anticipates that it will maintain an appropriate level of investments consisting primarily of residential mortgages, mortgage-backed securities, and other mortgage-related investments, and will otherwise meet the QTL test requirements. The required percentage of these mortgage-related investments is 65% of portfolio assets. Portfolio assets are all assets minus goodwill and other intangible assets, property used by the institution in conducting its business, and liquid assets not exceeding 20% of total assets. Compliance with the qualified thrift lender test is determined on a monthly basis in nine out of every twelve months.
Liquidity Standard Each federal savings association is required to maintain sufficient liquidity to ensure its safe and sound operations. Management of the Bank believes it has established policies, procedures, and practices to maintain sufficient liquidity to meet the Bank’s obligations and otherwise ensure its safe and sound operation.
Federal Home Loan Bank System The Bank is a member of the FHLB of Chicago, which is one of twelve regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by member financial institutions and proceeds derived from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes loans to members pursuant to policies and procedures established by the board of directors of the FHLB of Chicago.

26

Table of Contents

As a member, the Bank must meet certain eligibility requirements and is required to purchase and maintain stock in the FHLB of Chicago in an amount equal to the greatest of $500, 1% of its related assets at the most recent calendar year end, or 5% of its outstanding advances from the FHLB of Chicago. At December 31, 2008, the Bank was in compliance with this requirement. The FHLB of Chicago also imposes various limitations on advances made to member banks, which limitations relate to the amount and type of collateral, the amounts of advances, and other items.
Under the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the “GLB Act”), the Bank is a voluntary member of the FHLB of Chicago; however, withdrawal of membership is subject to approval under a consent order entered into in October 2007 by the FHLB of Chicago with its primary regulator. The FHLB of Chicago contributes to affordable housing programs through direct loans, interest subsidies on advances, and grants targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of dividends paid by the FHLB of Chicago and could continue to do so in the future. The FHLB of Chicago’s cease and desist agreement with its primary regulator requires the FHLB of Chicago to, among other things, not pay dividends unless it meets certain capital requirements and gets prior permission from its regulator. The FHLB of Chicago has not paid dividends for the past six quarters. Management is unable to determine at this time when, or if, the FHLB of Chicago will resume payment of dividends on its common stock.
Federal Reserve System The Federal Reserve System requires all depository institutions to maintain reserves at specified levels against their checking accounts and non-personal certificates of deposit. Savings institutions have authority to borrow from the Federal Reserve System “discount window,” but Federal Reserve System policy generally requires savings institutions to exhaust all other sources before borrowing from the Federal Reserve System.
Deposit Insurance The deposit accounts held by customers of the Bank are insured by the FDIC’s Deposit Insurance Fund up to maximum limits, as provided by law. Insurance on deposits may be terminated by the FDIC if it finds that the Bank 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 or the OTS as the Bank’s primary regulator. The management of the Bank does not know of any practice, condition, or violation that might lead to termination of the Bank’s deposit insurance.
The FDIC sets deposit insurance premiums based upon the risks a particular bank or savings association posed to its deposit insurance funds. Under the risk-based deposit insurance assessment system, the FDIC assigns an institution to one of three capital categorizations based on the institution’s financial information, as of the reporting period ending six months before the assessment period. The three capital categorizations are (1) well capitalized, (2) adequately capitalized and (3) undercapitalized. The FDIC also assigns an institution to one of three supervisory sub categorizations within each capital group. With respect to the capital ratios, institutions are classified as well capitalized, adequately capitalized or undercapitalized using ratios that are substantially similar to the prompt corrective action capital ratios discussed above. The FDIC also assigns an institution to a supervisory subgroup based on a supervisory evaluation provided to the FDIC by the institution’s primary federal regulator and information that the FDIC determines to be relevant to the institution’s financial condition and the risk posed to the deposit insurance funds (which may include, if applicable, information provided by the institution’s state supervisor).
An institution’s assessment rate depends on the capital categorizations and supervisory categorizations to which it is assigned. Under the risk-based assessment system, there are then four assessment risk categories to which different assessment rates are applied. Assessment rates for deposit insurance currently range from five basis points to 43 basis points. The capital and supervisory subgroup to which an institution is assigned by the FDIC is confidential and may not be disclosed. Any increase in insurance assessments could have an adverse effect on the earnings of insured institutions, including the Bank.
Pursuant to the Federal Deposit Insurance Reform Act of 2005 (“FDIRA”), the FDIC was granted broader authority in adjusting insurance premium rates and more flexibility in establishing the designated reserve ratio. FDIRA provided assessment credits to insured depository institutions that could be used to offset certain insurance assessments. In 2007 and 2008 the Bank was able to offset a substantial portion of its assessment as a result of these credits. The Bank’s credits expire after the first quarter of 2009, which will result in higher costs related to deposit insurance assessments in 2009.

27

Table of Contents

During the fourth quarter of 2008 the FDIC announced a substantial increase in deposit insurance premiums for all financial institutions in 2009; the FDIC has established new assessment rates (which are higher than 2008 rates) that will be subject to further adjustment, effective April 1, 2009. In addition, in February 2009, the FDIC announced a special assessment of insured institutions to bolster the FDIC’s reserves. As a result of the increase and the special assessment, as well as certain premium credits that expire in 2009, management estimates that the Company’s deposit insurance premiums will increase to approximately $7.0 million in 2009 compared to $332,000 in 2008, although there can be no assurances. Furthermore, deposit insurance premiums in 2009 could be higher than the amount currently estimated by management depending on the outcome of another FDIC proposal to substantially alter the way in which it differentiates for risk in its current risk-based assessment system. The FDIC has also reserved the right to make additional special assessments, beyond the one already approved, if necessary or appropriate. Management is unable to estimate the probability or amount of any additional assessment at this time.
As previously noted, during the fourth quarter of 2008 the FDIC announced the creation of the TLGP. One component of this program was the Transaction Account Guarantee Program (“TAGP”), which provides for full deposit insurance coverage for non-interest-bearing transaction deposit accounts, regardless of dollar amount, until December 31, 2009. The Bank elected to participate in this program, which is not expected to have a material impact on the deposit premiums the Bank would otherwise expect to pay in 2009.
Transactions with Affiliates Sections 23A and 23B of the Federal Reserve Act govern transactions between an insured federal savings association, such as the Bank, and any of its affiliates, such as the Company. The Federal Reserve Board has adopted Regulation W, which comprehensively implements and interprets Sections 23A and 23B, in part by codifying prior Federal Reserve Board interpretations under Sections 23A and 23B.
An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. A subsidiary of a bank that is not also a depository institution or a “financial subsidiary” under the GLB Act is not treated as an affiliate of the bank for the purposes of Sections 23A and 23B; however, the OTS has the discretion to treat subsidiaries of a savings association as affiliates on a case-by-case basis. Sections 23A and 23B limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such bank’s capital stock and surplus, and limit all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus. The statutory sections also require that all such transactions be on terms that are consistent with safe and sound banking practices. The term “covered transaction” includes the making of loans, purchase of assets, issuance of guarantees and other similar types of transactions. Further, most loans by a bank to any of its affiliates must be secured by collateral in amounts ranging from 100% to 130% of the loan amounts. In addition, any covered transaction by an association with an affiliate and any purchase of assets or services by an association from an affiliate must be on terms that are substantially the same, or at least as favorable, to the bank as those that would be provided to a non-affiliate.
Acquisitions and Mergers Under the federal Bank Merger Act, any merger of the Bank with or into another institution would require the approval of the OTS, or the primary federal regulator of the resulting entity if it is not an OTS-regulated institution. Refer also to “Acquisition of Bank Mutual Corporation” below for a discussion of factors relating the acquisition of the Company.
Prohibitions Against Tying Arrangements Savings associations such as the Bank are subject to the prohibitions of 12 U.S.C. Section 1972 on certain tying arrangements. A savings association is prohibited, subject to certain exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or certain of its affiliates or not obtain services of a competitor of the institution.
Customer Privacy Savings associations such as the Bank are required to develop and maintain privacy policies relating to customer information and establish procedures to protect customer data and to respond to unauthorized disclosure of protected customer data. Applicable privacy regulations further restrict the sharing of non-public customer data with non-affiliated parties if the customer requests.
Uniform Real Estate Lending Standards The federal banking agencies adopted uniform regulations prescribing standards for extensions of credit that are secured by liens on interests in real estate or made for the purpose of financing the construction of a building or other improvements to real estate. Under the joint regulations adopted by the federal banking agencies, all insured depository institutions must adopt and maintain written policies that establish appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan

28

Table of Contents

portfolio diversification standards, prudent underwriting standards (including loan-to-value limits) that are clear and measurable, loan administration procedures, and documentation, approval and reporting requirements. The real estate lending policies must reflect consideration of the Interagency Guidelines for Real Estate Lending Policies that have been adopted by the federal bank regulators.
The Interagency Guidelines, among other things, require a depository institution to establish internal loan-to-value limits for real estate loans that are not in excess of the following supervisory limits:
  •   for loans secured by raw land, the supervisory loan-to-value limit is 65% of the value of the collateral;
 
  •   for land development loans (i.e., loans for the purpose of improving unimproved property prior to the erection of structures), that limit is 75%;
 
  •   for loans for the construction of commercial, multi-family or other non-residential property, that limit is 80%;
 
  •   for loans for the construction of one- to four-family properties, that limit is 85%; and
 
  •   for loans secured by other improved property (e.g., farmland, completed commercial property and other income-producing property, including non-owner occupied, one- to four-family property), that limit is 85%.
Although no supervisory loan-to-value limit has been established for owner-occupied, one- to four-family, and home equity loans, the Interagency Guidelines state that for any such loan with a loan-to-value ratio that equals or exceeds 90% at origination, an institution should require appropriate credit enhancement in the form of either mortgage insurance or readily marketable collateral.
Community Reinvestment Act Under the Community Reinvestment Act (“CRA”), any insured depository institution, including the Bank, has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires the OTS, in connection with its examination of a savings association, to assess the savings association’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such association, including applications for additional branches and acquisitions.
Among other things, the CRA regulations contain an evaluation system that would rate an institution based on its actual performance in meeting community needs. In particular, the evaluation system focuses on three tests:
  •   a lending test, to evaluate the institution’s record of making loans in its service areas;
 
  •   an investment test, to evaluate the institution’s record of making community development investments; and
 
  •   a service test, to evaluate the institution’s delivery of services through its branches, ATMs and other offices.
The CRA requires the OTS, in the case of the Bank, to provide a written evaluation of a savings association’s CRA performance utilizing a four-tiered descriptive rating system and requires public disclosure of an association’s CRA rating. The Bank received a “satisfactory” overall rating in its most recent CRA examination.
Safety and Soundness Standards Each federal banking agency, including the OTS, has adopted guidelines establishing general standards relating to internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal shareholder.

29

Table of Contents

Loans to Insiders A savings association’s loans to its executive officers, directors, any owner of more than 10% of its stock (each, “an insider”) and any of certain entities affiliated with any such person (an “insider’s related interest”) are subject to the conditions and limitations imposed by Section 22(h) of the Federal Reserve Act and the Federal Reserve Board’s Regulation O thereunder. Under these restrictions, the aggregate amount of the loans to any insider and the insider’s related interests may not exceed the loans-to-one-borrower limit applicable to national banks, which is comparable to the loans-to-one-borrower limit applicable to the Bank’s loans. All loans by a savings association to all insiders and insiders’ related interests in the aggregate may not exceed the association’s unimpaired capital and unimpaired surplus. With certain exceptions, loans to an executive officer, other than loans for the education of the officer’s children and certain loans secured by the officer’s residence, may not exceed the greater of $25,000 or 2.5% of the savings association’s unimpaired capital and unimpaired surplus, but in no event more than $100,000. Regulation O also requires that any proposed loan to an insider or a related interest of that insider be approved in advance by a majority of the board of directors of the savings association, with any interested director not participating in the voting, if such loan, when aggregated with any existing loans to that insider and the insider’s related interests, would exceed either $500,000 or the greater of $25,000 or 5% of the savings association’s unimpaired capital and surplus. Generally, such loans must be made on substantially the same terms as, and follow credit underwriting procedures that are no less stringent than, those that are prevailing at the time for comparable transactions with other persons and must not present more than a normal risk of collectibility.
An exception is made for extensions of credit made pursuant to a benefit or compensation plan of a bank that is widely available to employees of the savings association and that does not give any preference to insiders of the association over other employees of the association.
The Patriot Act In response to the terrorist attacks of September 11, 2001, Congress adopted the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”). The Patriot Act gives the federal government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By means of amendments to the Bank Secrecy Act, Title III of the Patriot Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks and savings associations.
Among other requirements, Title III of the Patriot Act imposes the following requirements with respect to financial institutions:
  •   All financial institutions must establish anti-money laundering programs that include, at minimum; (a) internal policies, procedures, and controls; (b) specific designation of an anti-money laundering compliance officer; (c) ongoing employee training programs, and (d) an independent audit function to test the anti-money laundering program.
 
  •   The Secretary of the Treasury, in conjunction with other bank regulators, may issue regulations that provide for minimum standards with respect to customer identification at the time new accounts are opened.
 
  •   Financial institutions that establish, maintain, or manage private banking accounts or correspondent accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) must establish appropriate, specific, and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering.
 
  •   Financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any country), and will be subject to certain recordkeeping obligations with respect to correspondent accounts of foreign banks.
 
  •   Bank regulators are directed to consider a holding company’s effectiveness in combating money laundering when ruling on Federal Reserve Act and bank merger applications.

30

Table of Contents

Regulation and Supervision of the Company
Holding Company Regulation The Company is registered with the OTS as a unitary savings and loan holding company and therefore, is subject to regulation and supervision by the OTS. The OTS has enforcement authority over the Company and its non-savings institution subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a risk to the Bank and to monitor and regulate the Company’s capital and other activities such as dividends and share repurchases that can affect capital.
The Company is limited to those activities permissible for financial holding companies because it is not a grandfathered unitary holding company. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance, incidental to financial activities or complementary to a financial activity.
Federal law prohibits a savings and loan holding company, directly or indirectly, from acquiring control of another savings institution or holding company thereof, without prior written approval of the OTS. It also prohibits the acquisition or retention of, with specified exceptions, more than 5% of the equity securities of a company engaged in activities that are not closely related to banking or financial in nature or acquiring or retaining control of an institution that is not federally-insured. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and managerial resources, future prospects of the savings institution involved, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community and competitive factors.
Federal Securities Laws The Company’s common stock is registered with the SEC under the Securities Exchange Act of 1934. The Company is therefore subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act.
Sarbanes-Oxley Act The Sarbanes-Oxley Act of 2002 was adopted in response to public concerns regarding corporate accountability in connection with the accounting and corporate governance scandals at several prominent companies. The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The Sarbanes-Oxley Act applies to all public companies, including the Company, that file periodic reports with the SEC.
The Sarbanes-Oxley Act includes additional disclosure requirements, corporate governance rules, requirements for the SEC and national securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules, and increases penalties for violation. The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law and corporate governance, such as the relationship between a board of directors and management, between a board of directors and its committees, and the corporation and its shareholders. Because some OTS accounting and governance regulations also refer to the SEC’s regulations, the Sarbanes-Oxley Act also affects the Bank.
Acquisition of Bank Mutual Corporation Under federal law, no person may acquire control of the Company or the Bank without first obtaining the approval of such acquisition of control by the OTS. Under the federal Change in Bank Control Act and the Savings and Loan Holding Company Act, any person, including a company, or group acting in concert, seeking to acquire 10% or more of the outstanding shares of the Company must file a notice with the OTS. In addition, any person or group acting in concert seeking to acquire more than 25% of the outstanding shares of the Company’s common stock will be required to obtain the prior approval of the OTS. Under regulations, the OTS generally has 60 days within which to act on such applications, taking into consideration certain factors, including the financial and managerial resources of the acquirer, the convenience and needs of the communities served by the Company and the Bank, and the antitrust effects of the acquisition.
Federal and State Taxation
Federal Taxation The Company and its subsidiaries file a calendar year consolidated federal income tax return, reporting income and expenses using the accrual method of accounting. The federal income tax returns for the Company’s subsidiaries have been examined and audited or closed without audit by the Internal Revenue Service for tax years through 2004, although the Company is currently undergoing an exam of its 2007 tax year.

31

Table of Contents

Depending on the composition of its items of income and expense, the Company may be subject to alternative minimum tax (“AMT”) to the extent AMT exceeds the regular tax liability. AMT is calculated at 20% of alternative minimum taxable income (“AMTI”). AMTI equals regular taxable income increased by certain tax preferences, including depreciation deductions in excess of allowable AMT amounts, certain tax-exempt interest income and 75% of the excess of adjusted current earnings (“ACE”) over AMTI. ACE equals AMTI adjusted for certain items, primarily accelerated depreciation and tax-exempt interest. The payment of AMT would create a tax credit, which can be carried forward indefinitely to reduce the regular tax liability in future years.
State Taxation Under law in effect through 2008, the state of Wisconsin imposes a corporate franchise tax of 7.9% on the separate taxable incomes of the members of the Company’s consolidated income tax group, excluding its Nevada subsidiaries. Under that law, the income of the Nevada subsidiaries was only subject to taxation in Nevada, which currently does not impose a corporate income or franchise tax. Effective January 1, 2009, Wisconsin law was amended to significantly restrict the tax benefits of out-of-state investment subsidiaries through the enactment of combined reporting legislation. Refer to Part I, Item 1A, “Risk Factors,” for additional discussion related to this development.

32

Table of Contents

Item 1A. Risk Factors
In addition to the discussion and analysis set forth in Part I, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the cautionary statements set forth in Part I, Item 1, “Business,” the following risk factors should be considered when evaluating the Company’s results of operations, financial condition, and outlook.
The Interest Rate Environment May Have an Adverse Impact on the Company’s Net Interest Income
From June 2004 through June 2006 the Federal Reserve Federal Open Market Committee (“FOMC”) increased the federal funds target rate 17 times from 1.00% to 5.25%. Beginning in September 2007, it decreased the federal funds target rate eleven times from 5.25% to a range of 0.00% to 0.25%.
A volatile interest rate environment makes it difficult for the Company to coordinate the timing and amount of changes in the rates of interest it pays on deposits and borrowings with the rates of interest it earns on loans and securities. In addition, volatile interest rate environments cause corresponding volatility in the demand by individuals and businesses for the loan and deposit products offered by the Company. This volatility has a direct impact on the Company’s net interest income, and consequently, its net income. Management expects future interest rates to continue to be volatile and is unable to predict the impact such volatility will have on the net interest income and profits of the Company.
Changes in Market Interest Rates or Other Conditions May Have an Adverse Impact on the Fair Value of the Company’s Available-for-Sale Securities, Shareholders’ Equity, and Profits
GAAP requires the Company to carry its securities at fair value on its balance sheet. Unrealized gains or losses on these securities, reflecting the difference between the fair market value and the amortized cost, net of its tax effect, are reported as a component of shareholders’ equity. When market rates of interest increase, the fair value of the Company’s securities available-for-sale generally decreases and equity correspondingly decreases. When rates decrease, fair value generally increases and shareholders’ equity correspondingly increases. However, due to significant disruptions in global financial markets during 2008, this usual relationship was disrupted. Despite a declining interest rate environment during 2008, certain of the Company’s available-for-sale securities declined in value, its private label CMOs in particular. In addition, recent and future legislation and/or instability in related markets could affect the value of the Company’s private label CMOs. In 2008 the Company’s unrealized losses on its portfolio of securities available-for-sale increased significantly. Management expects continued volatility in the fair value of its securities available for sale and is not able to predict when or if the fair value of such securities will improve.
In certain instances GAAP requires recognition through earnings of declines in the fair value of securities that are deemed to be other than temporarily impaired (“OTTI”). In 2007 the Company recognized $1.2 million in OTTI losses on two mutual funds. In 2008 the fair value of one of these funds declined by an additional $6.9 million and was deemed to be OTTI. Management believes it is possible there could be continued volatility in the fair value of this mutual fund, which could have an adverse impact on the Company’s future net income.
Changes in the Financial Condition or Future Prospects of the FHLB of Chicago May Have an Adverse Impact on the Company’s Investment in FHLB Common Stock
The Company is a voluntary member of the FHLB of Chicago, and holds shares in the FHLB of Chicago as a condition of borrowing money from it. In 2007, the FHLB of Chicago was required to suspend payment of dividends on its stock. If there are any further developments that impair the value of the common stock of the FHLB of Chicago, the Company would be required to write down the value of the shares which it holds, which in turn could affect the Company’s net income and shareholder’s equity.
If the Company’s Allowance for Loan Losses Is Not Sufficient to Cover Actual Loan Losses, the Company’s Earnings Could Decrease
The Company’s loan customers may not repay their loans according to the terms of the loans and the collateral securing the payment of these loans may be insufficient to pay any remaining loan balance. A continued slowdown in the economy may affect borrowers’ ability to repay their loan obligations which could lead to increased loan

33

Table of Contents

losses or provisions. As a result, the Company may experience significant loan losses, which could have a material adverse effect on its operating results.
Softness in the Real Estate Market May Adversely Affect Collateral Values and the Company’s Profits
The Company’s market areas have generally experienced a decline in real estate values and an increase in non-residential tenant vacancies. These developments could affect the value of the collateral securing the Company’s mortgage loans. That decrease in value could in turn lead to increased losses on loans in the event of foreclosures. Increased losses would affect the Company’s loan loss allowance and may cause it to increase its provision for loan losses resulting in a charge to earnings.
Some of the Company’s Lending Activities Are in Credits that are Riskier than One- to Four-Family Real Estate Loans
The Company has identified commercial real estate, commercial business, construction and development, and consumer loans as areas for lending emphasis. While lending diversification is being pursued for the purpose of increasing net interest income, non-residential and construction and development loans historically have carried greater risk of payment default than residential real estate loans. As the volume of these loans increases, credit risk increases. In the event of substantial borrower defaults, the Company’s provision for loan losses would increase and loans may be written off, and therefore, earnings would be reduced.
Wisconsin Tax Developments Could Reduce the Company’s Net Income
Like many Wisconsin financial institutions, the Company has non-Wisconsin subsidiaries which hold and manage investment assets and loans, the income on which has not been subject to Wisconsin tax. The Wisconsin Department of Revenue (the “Department”) has instituted an audit program specifically aimed at out-of-state subsidiaries of Wisconsin banks. The Department has asserted the position that some or all of the income of the out-of-state subsidiaries is taxable in Wisconsin. The Department is conducting audits of many Wisconsin banks; its audit of the Bank has not yet been concluded, is not being actively pursued, and the Department has not asserted a claim against the Bank or its subsidiaries.
The Department sent letters in 2004 to Wisconsin financial institutions (whether or not they were undergoing an audit) reporting on settlements the Department had reached with certain other financial institutions and their out-of-state investment subsidiaries. The letter provided a summary of available settlement parameters. For prior periods they included: restrictions on the types of subsidiary income excluded from Wisconsin taxation; assessment of certain back taxes relating to a limited time period; limitations on net operating loss carry forwards; and interest on past-due taxes (but no penalties). For 2004 and going forward, the letter states similar provisions, including limits on subsidiaries’ assets, which could be considered in determining income not subject to Wisconsin taxation. As outlined, the settlement would result in the rescission of prior Department letter rulings and purport to be binding going forward except for future legislation or change by mutual agreement. However, the letter appears to implicitly accept the general proposition that some out-of-state investment subsidiary income is not subject to Wisconsin taxes. The Department’s positions may be challenged by one or more financial institutions in the state.
The Company has previously engaged in discussions with the Department and has asked the Department to consider some specific factors which the Company believes may distinguish it from many other institutions. However, the change in Wisconsin tax law described below causes the settlement agreements between the Department and other banks to be inapplicable on a going-forward basis. It is not yet known whether the Department will continue to challenge the Bank’s treatment of its out-of-state investment subsidiaries for prior years, and, if so, whether the Department will continue to offer the same, if any, settlement terms.
Depending upon the terms and circumstances, an adverse resolution of these matters could result in additional Wisconsin tax obligations for prior periods, which could have a substantial negative impact on the earnings of the Company. The Company currently has Wisconsin tax years open since 1997 under extensions with the Department in connection with the audit. The Company believes it has reported income and paid Wisconsin taxes in accordance with applicable legal requirements, and the Department’s long standing interpretations thereof, and that the Company would likely prevail against the Department should it attempt to tax the income of the Company’s out-of-state subsidiaries in Wisconsin. However, management can provide no assurances of this result. The Company also may incur further costs in the future to address these issues.

34

Table of Contents

As previously mentioned, Wisconsin law was recently amended, effective January 1, 2009, to significantly restrict the future tax benefits of out-of-state investment subsidiaries through enactment of combined reporting legislation. Going forward, this change in tax law is expected to have a substantial negative impact on the earnings of the Company. If the Company had been required to file a combined Wisconsin income tax return in 2008, management estimates the Company’s income tax expense would have been approximately $1.3 million higher than reported in that year, excluding the impact of state net operating loss carryforwards, if any, that may be available to the Company.
The Global Credit Market Crisis and Deteriorating Economic Conditions May Significantly Affect the Company’s Liquidity, Financial Condition, and Earnings
Global financial markets recently have been, and continue to be, extremely unstable and unpredictable, and economic conditions have been weak and appear to be deteriorating. Continued, and potentially increased, volatility, instability and weakness could affect the Company’s ability to sell investment securities and other financial assets, which in turn could adversely affect the Company’s liquidity and financial position. This instability also could affect the prices at which the Company could make any such sales, which could adversely affect its earnings and financial condition. Conditions could also negatively affect the Company’s ability to secure funds or raise capital for acquisitions and other projects, which in turn, could cause the Company to use deposits or other funding sources for such projects.
In addition, the instability of the markets and weakness of the economy could affect the strength of the Company’s customers or counterparties, their willingness to do business, and/or their ability to fulfill their obligations, which could further affect the Company’s earnings. Current conditions, including increasing unemployment, deteriorating corporate performance, the continued softening of real estate markets and the decline of home sales and property values, could negatively affect the volume of loan originations and prepayments, the value of the real estate securing the Company’s mortgage loans, and borrowers’ ability to repay loan obligations, all of which could adversely impact the Company’s earnings and financial condition.
Recent and Future Legislation and Rulemaking in Response to Market and Economic Conditions May Significantly Affect the Company’s Results of Operations and Financial Condition
The instability and volatility in the credit markets led to the adoption of significant legislation and regulatory actions in the past few months which will significantly affect financial institutions and holding companies, including the Company. This legislation includes the recently adopted federal stimulus legislation, and the federal government’s proposed financial stability plan, which could substantially affect the Company and the Bank in far reaching ways which cannot yet be determined. During the 2008, the federal government enacted the Emergency Economic Stabilization Act of 2008, the U.S. Department of the Treasury has, among other things, established the Troubled Assets Relief Program (“TARP”), including a voluntary Capital Purchase Program. In addition, during the fourth quarter of 2008 the FDIC announced the creation of the Temporary Liquidity Guarantee Program (“TLGP”) in which it temporarily guarantees newly issued senior unsecured debt of participating organizations and providing full coverage for non-interest-bearing transaction deposit accounts.
In 2008 and 2009, the FDIC has also adopted, and proposed substantial further, increases to its insurance premiums payable by financial institutions, including a 2009 special assessment to bolster the FDIC’s reserves. Further, the federal government announced a financial stability plan, which among other things, establishes a Capital Assistance Program (“CAP”) under which financial institutions undergo comprehensive “stress tests” to evaluate their capital needs and determine if they can absorb losses and continue lending if economic conditions were to be more adverse than generally expected; subject to the results of these tests, institutions may have access to Treasury funds to augment their capital. The financial stability plan is subject to further definition and changes prior to its adoption and/or implementation.
Although the Company elected to not participate in the TARP Capital Purchase Program and elected to not participate in the debt guarantee component of the TLGP, and does not currently expect to participate in CAP (although it continues to evaluate the possibility of doing so), management believes these new laws, regulations, and changes may significantly affect the business environment, the markets for and value of the Company’s securities, and its ongoing operations, costs and profitability. In addition, it is widely expected that there will be additional potential legislation and regulations affecting the financial services industry. At this time, management cannot fully determine the extent of these effects, as well as any future laws and regulations that may be enacted as a result of the current economic crisis.

35

Table of Contents

The current economic turmoil has also increased the potential for federal or state governments to legislate foreclosure forbearance, forced loan modifications, or “cram downs” of losses to lenders in bankruptcy proceedings. Such efforts could lead to increased loan charge-offs or loan loss provisions and/or reduced income. These efforts could also have an adverse impact on the value of certain mortgage-related securities not guaranteed by Freddie Mac, Fannie Mae, and Ginnie Mae, such as private-label CMOs.
Strong Competition Within the Company’s Market Area May Affect Net Income
The Company encounters strong competition both in attracting deposits and originating real estate and other loans. The Company competes with commercial banks, savings institutions, mortgage banking firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms. The Company’s market area includes branches of several commercial banks that are substantially larger than the Company in terms of deposits and loans. For example, approximately half of the deposits in the Milwaukee market area are held by two large commercial banks. In addition, tax-exempt credit unions operate in most of the Company’s market area and aggressively price their products and services to a large part of the population. If competitors succeed in attracting business from the Company’s customers, its deposits and loans could be reduced, which would likely affect earnings.
The Company’s Ability to Grow May Be Limited if It Cannot Make Acquisitions
The Company will continue to seek to expand its banking franchise by opening new offices, growing internally, and acquiring other financial institutions or branches and other financial services providers. The Company’s ability to grow through selective acquisitions of other financial institutions or branches will depend on successfully identifying, acquiring, and integrating those institution or branches. The Company has not made any acquisitions in recent years, as management has not identified acquisitions for which it was able to reach an agreement on terms management believed were appropriate and/or which met its acquisition criteria. The Company cannot provide any assurance that it will be able to generate internal growth, identify attractive acquisition candidates, make acquisitions on favorable terms, or successfully integrate any acquired institutions or branches.
The Company Has Significant Intangible Assets Which It May Need to Write Off (Expense) in the Future
The Company has $52.6 million in goodwill, $1.8 million in other intangible assets, and $3.7 million of mortgage servicing rights as of December 31, 2008. The Company continues to amortize other intangible assets over seven to fifteen years and evaluate mortgage servicing rights for impairment on a monthly basis. The Company periodically evaluates goodwill and the other intangible assets for impairment. At some point in the future, the Company’s intangible assets could become impaired and it would need to write them off as a reduction to earnings in the period in which they became impaired.
The Company is Subject to Security and Operational Risks Relating to the Use of Technology that Could Damage Its Reputation and Business
Security breaches in the Company’s internet, telephonic, or other electronic banking activities could expose it to possible liability and damage its reputation. Any compromise of the Company’s security also could deter customers from using its internet banking services that involve the transmission of confidential information. The Company relies on standard internet and other security systems to provide the security and authentication necessary to effect secure transmission of data. These precautions may not protect the Company’s systems from compromises or breaches of its security measures, which could result in damage to the Company’s reputation and business.
Additionally, the Company outsources a large portion of its data processing to third parties. If these third party providers encounter technological or other difficulties or if they have difficulty in communicating with the Company, it will significantly affect the Company’s ability to adequately process and account for customer transactions, which would significantly affect business operations.

36

Table of Contents

Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company and its subsidiaries conduct their business through an executive office, an operations center, and 79 banking offices, which had an aggregate net book value of $48.6 million as of December 31, 2008. As of December 31, 2008, the Company owned the building and land for 68 of its property locations and leased the space for 13.
The Company also owns 15 acres of undeveloped land in a suburb of Milwaukee, Wisconsin, through its MC Development subsidiary, as well as 318 acres of undeveloped land in another community located near Milwaukee through MC Development’s 50% ownership in Arrowood Development. The net book value of these parcels of land was $7.1 million at December 31, 2008.
Item 3. Legal Proceedings
The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Management believes that these routine legal proceedings, in the aggregate, are immaterial to the Company’s financial condition, results of operations, and cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.

37

Table of Contents

Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters’ and Issuer Purchase of Equity Securities
The common stock of the Company is traded on The NASDAQ Global Select Market under the symbol BKMU.
As of February 27, 2009, there were 47,188,528 shares of common stock outstanding and approximately 5,320 shareholders of record.
The Company paid a total cash dividend of $0.36 per share in 2008. A cash dividend of $0.09 per share was paid on March 2, 2009, to shareholders of record on February 12, 2009. The Company anticipates that it will continue to pay quarterly cash dividends on its common stock, although there can be no assurance that payment of such dividends will continue or that they will not be reduced. The payment of dividends in the future is discretionary with the Company’s board of directors and will depend on the Company’s operating results and financial condition, regulatory limitations, tax considerations, and other factors. Interest on deposits will be paid prior to payment of dividends on the Company’s common stock. Refer also to Part I, Item 1, “Business—Regulation and Supervision” regarding regulatory limitations on the payment of dividends by the Bank to the Company, which in turn could affect the payment of dividends by the Company to its shareholders.
The high and low trading prices of the Company’s common stock from January 1, 2007 through December 31, 2008, by quarter, and the dividends paid in each quarter, were as follows:
                                                 
    2008 Stock Prices     2007 Stock Prices     Cash Dividends Paid  
    High     Low     High     Low     2008     2007  
1st Quarter
   $ 12.32     $ 10.05     $ 12.37     $ 10.94     $ 0.090     $ 0.080  
2nd Quarter
   $ 11.51     $ 10.04     $ 12.04     $ 10.93     $ 0.090     $ 0.080  
3rd Quarter
   $ 14.25     $ 9.60     $ 12.24     $ 10.25     $ 0.090     $ 0.085  
4th Quarter
   $ 12.00     $ 8.62     $ 12.25     $ 9.68     $ 0.090     $ 0.085  
 
                                            
 
                                   $ 0.360     $ 0.330  
 
                                            
During the first two months of 2009, the trading price of the Company’s common stock ranged between $11.76 to $8.01 per share, and closed on February 27, 2009, at $8.45 per share
During 2008, the Company repurchased 2.8 million shares of its common stock at an average price of $10.60 per share. The following table provides the specified information about the repurchases of shares by the Company during the fourth quarter of 2008.
                                 
                    Total Number   Maximum Number of
    Total Number   Average   of Shares Purchased   Shares That May Yet
    of Shares   Price Paid   as Part of Publicly   be Purchased Under
Period   Purchased   per Share   Announced Plans   the Plan
October 1 to 31, 2008
     97,865     $ 10.53       88,500       56,300  
November 1 to 30, 2008
     317,900       10.21       317,900       738,400 (1)
December 1 to 31, 2008
     314,199       9.75       312,000       426,400 (2)
             
Total purchased
     729,964     $ 10.05       718,400          
             
 
(1)   Reflects the impact of 1.0 million shares approved for repurchase by the Company’s board of directors on November 7, 2008 (the “2008 Plan”).
 
(2)   Subsequent to December 31, 2008, the Company completed its repurchases under the 2008 Plan and announced the establishment in the 2009 Stock Repurchase Plan for an additional 1.0 million shares (the “2009 Plan”). As of February 27, 2009, the Company had the remaining authority to repurchase 866,600 shares pursuant to the 2009 Plan.
The shares not purchased as part of the publicly announced program were existing owned shares used by option holders in payment of the purchase price and/or tax withholding obligations in connection with the exercise of stock options under the Company’s 2001 Stock Incentive Plan. The “price” used for these purposes is the fair market

38

Table of Contents

value of those shares on the date of purchase. For additional discussion relating to the Company’s repurchase of its common stock during 2008 and thus far in 2009, refer to Item I, “Business—Shareholders’ Equity.
Set forth below is a line graph comparing the cumulative total shareholder return on Company common stock, based on the market price of the common stock and assuming reinvestment of cash dividends, with the cumulative total return of companies on the NASDAQ Stock Market U.S. Index (“NASDAQ Composite Index”), NASDAQ Stock Market Bank Index, and the SNL Midwest Thrift Index. The graph assumes that $100 was invested on December 31, 2003, in Company common stock and each of those indices.
Total Return Performance
(PERFORMANCE GRAPH)
                                                                 
 
        Period Ending  
  Index     12/31/03     12/31/04     12/31/05     12/31/06     12/31/07     12/31/08  
 
Bank Mutual Corporation
       100.00         108.58         96.73         113.26         101.77         114.70    
 
NASDAQ Composite Index
       100.00         108.59         110.08         120.56         132.39         78.72    
 
NASDAQ Bank Index
       100.00         114.44         111.80         125.47         99.45         72.51    
 
SNL Midwest Thrift
       100.00         110.43         107.91         122.48         103.45         91.93    
 
Historically, the Company has used the SNL Midwest Thrift Index as a comparable peer group index for the performance graph. Going forward, the Company intends to use the NASDAQ Bank Index as its comparable peer group index. Management believes it is more appropriate to compare the Company’s total return performance to a broader bank index such as the NASDAQ Bank Index.

39

Table of Contents

Item 6. Selected Financial Data
The following table provides selected financial data for the Company for its past five fiscal years. The data is derived from the Company’s audited financial statements, although the table itself is not audited. The following data should be read together with the Company’s consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.
                                         
    At December 31
    2008   2007   2006   2005   2004
    (Dollars in thousands, except number of shares and per share amounts)
Selected Financial Condition Data:
                                        
Total assets
   $ 3,489,689     $ 3,488,046     $ 3,451,385     $ 3,431,377     $ 3,445,299  
Loans receivable, net
     1,829,053       1,994,556       2,024,325       1,990,492       1,875,885  
Loans held-for-sale
     19,030       7,952       3,787       2,312       4,987  
Securities available-for-sale:
                                        
Investment securities
     419,138       99,450       48,290       63,361       68,753  
Mortgage-related securities
     850,867       1,099,922       1,064,851       1,087,816       1,266,224  
Foreclosed and repossessed assets
     4,768       3,687       1,231       708       1,621  
Goodwill
     52,570       52,570       52,570       52,570       52,570  
Other intangible assets
     1,809       2,428       3,089       3,750       4,412  
Mortgage servicing rights
     3,703       4,708       4,653       4,771       4,542  
Deposit liabilities
     2,130,348       2,112,968       2,158,641       2,086,822       1,982,881  
Borrowings
     907,971       912,459       705,025       765,796       761,525  
Shareholders’ equity
     399,611       430,035       533,779       544,374       670,454  
Tangible shareholders’ equity
     342,256       371,303       474,706       484,786       610,698  
Number of shares outstanding — net of treasury stock
     47,626,759       49,834,756       60,277,087       62,325,268       73,485,113  
Book value per share
     8.38       8.63       8.86       8.73       9.12  
Tangible book value per share
     7.18       7.45       7.88       7.78       8.31  
                                         
    For the Year Ended December 31
    2008   2007   2006   2005   2004
    (Dollars in thousands, except per share amounts)
Selected Operating Data:
                                        
Total interest income
   $ 177,556     $ 183,001     $ 174,404     $ 164,871     $ 149,771  
Total interest expense
     104,191       113,771       99,091       77,231       58,498  
     
Net interest income
     73,365       69,230       75,313       87,640       91,273  
Provision for (recovery of) loan losses
     1,447       (272 )     632       541       1,330  
     
Net interest income after provision for loan losses
    71,918       69,502       74,681       87,099       89,943  
Total non-interest income
     17,708       20,428       17,035       16,780       15,325  
Total non-interest expense
     63,377       63,543       61,311       60,837       60,082  
Minority interest in income (loss) of real estate operations
     (1 )     392       —       —       —  
     
Income before income taxes
     26,250       25,995       30,405       43,042       45,186  
Income tax expense
     9,094       8,892       9,808       15,016       15,632  
     
Net income
   $ 17,156     $ 17,103     $ 20,597     $ 28,026     $ 29,554  
     
Earnings per share-basic
   $ 0.36     $ 0.32     $ 0.35     $ 0.44     $ 0.39  
Earnings per share-diluted
   $ 0.35     $ 0.31     $ 0.34     $ 0.43     $ 0.38  
Cash dividends paid per share
   $ 0.36     $ 0.33     $ 0.29     $ 0.25     $ 0.18  

40

Table of Contents

                                         
    At or For the Year Ended December 31
    2008   2007   2006   2005   2004
     
Selected Financial Ratios:
                                        
Net interest margin (1)
     2.21 %     2.09 %     2.27 %     2.64 %     3.03 %
Net interest rate spread
     1.85       1.59       1.73       2.17       2.47  
Return on average assets
     0.49       0.49       0.59       0.80       0.93  
Return on average shareholders’ equity
     4.15       3.57       3.89       4.84       4.10  
Return on average tangible shareholders’ equity (2)
     4.83       4.07       4.38       5.39       4.47  
Efficiency ratio, excluding amortization of goodwill (3)
     68.71       69.92       66.89       59.28       56.65  
Non-interest expense (excluding amortization of goodwill) as a percent of adjusted average assets
     1.79       1.81       1.77       1.74       1.88  
Shareholders’ equity to total assets
     11.45       12.33       15.47       15.86       19.46  
Tangible shareholders’ equity to adjusted total assets (4)
     9.97       10.83       13.99       14.38       18.04  
 
Selected Asset Quality Ratios:
                                        
Non-performing loans to loans receivable, net
     1.81 %     0.65 %     0.72 %     0.29 %     0.33 %
Non-performing assets to total assets
     1.08       0.48       0.46       0.19       0.23  
Allowance for loan losses to non-performing loans
     36.89       90.98       86.74       207.23       222.09  
Allowance for loan losses to total loans receivable, net
     0.67       0.59       0.62       0.61       0.74  
Charge-offs to average loans
     0.05       0.03       0.01       0.12       0.07  
 
(1)   Net interest margin is calculated by dividing net interest income by average earnings assets.
 
(2)   This ratio is calculated by dividing net income by total shareholders’ equity minus goodwill, other intangible assets net of deferred taxes and mortgage servicing rights.
 
(3)   Efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income and non-interest income.
 
(4)   The ratio is calculated by dividing total shareholders’ equity minus goodwill, other intangible assets net of deferred taxes and mortgage servicing rights by the sum of total assets minus goodwill, other intangible assets net of deferred taxes and mortgage servicing rights.

41

Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The discussion and analysis in this section should be read in conjunction with Item 8, “Financial Statements and Supplementary Data,” and Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” as well as Part I, Item 1, “Business,” and Item 1A, “Risk Factors.”
Financial Condition
Overview The Company’s total assets increased slightly from $3.488 billion at December 31, 2007, to $3.490 billion at December 31, 2008. During 2008 proceeds from a $165.5 million or 8.3% decrease in loans receivable and a $17.4 million or 0.8% increase in deposit liabilities were primarily reinvested in securities available-for-sale and overnight investments or were used to repurchase treasury shares. Securities available-for-sale increased by $70.6 million or 5.9% during the year and overnight investments increased from $2.7 million to $71.9 million during the year. The Company repurchased 2.8 million shares of its common stock for $29.8 million during the year.
Cash and cash equivalents Cash and cash equivalents increased from $38.9 million at December 31, 2007, to $112.9 million at December 31, 2008. Most of this increase occurred in the Company’s interest-earning deposits, which consist of overnight investments. This increase was purposeful and reflected management’s belief that it was prudent to increase the Company’s liquidity and future flexibility in light of adverse developments in the financial markets.
Securities Available-for-Sale Total securities available-for-sale increased $70.6 million or 5.9% during 2008. During the year the Company purchased $351.2 million in investment securities, consisting principally of U.S. government and federal agency obligations. The Company also purchased $345.8 million in mortgage-related securities, consisting principally of Freddie Mac and Fannie Mae MBSs. These purchases were funded in part by the sale of $392.5 million in Freddie Mac and Fannie Mae MBSs, which resulted in $7.2 million in realized gains during the year. During 2008, the Company was able to take advantage of opportunities in the securities market, particularly in the fourth quarter, which enabled it to sell these securities at substantial gains and reinvest the proceeds in securities with comparable or better yields and similar risk profiles.
Changes in the fair value of securities available-for-sale are recorded through accumulated other comprehensive loss (net of deferred income taxes), which is a component of shareholder’s equity. During 2008 the fair value adjustment on the Company’s securities available-for-sale increased from a net unrealized loss of $10.8 million to a net unrealized loss of $19.7 million. This increase was due to a decline in the fair value of Company’s portfolio of private label CMOs. At December 31, 2008, the Company’s portfolio of private label CMOs had a carrying value of $128.6 million, net of unrealized losses of $29.1 million. The Company’s whole-loan CMOs were originally purchased in late 2004, 2005, and early 2006 and are secured by prime residential mortgage loans. The securities were all rated triple-A by various credit rating agencies at the time of their original purchase. However, in 2008, certain securities in the portfolio with a carrying value $12.5 million at the end of the year were downgraded to double-A by one of the credit rating agencies. The unrealized losses related to these securities were $5.9 million as of the end of the year. In addition, the market for private label CMOs in general deteriorated substantially during the last few months of 2008 in response to increased stress and illiquidity in the financial markets and a general deterioration in economic conditions. Although mindful of these developments, management has determined that it is unlikely the Company will not collect all amounts due according to the contractual terms of these securities, although there can be no assurances. As such, management has determined that none of the Company’s private label CMOs are other-than-temporarily impaired as of December 31, 2008. However, collection is subject to numerous factors outside of the Company’s control and a future determination of other-than-temporary impairment could result in significant losses being recorded through earnings in future periods. For additional discussion refer to Part I, Item 1, “Business—Investment Activities,” as well as Item 1A, “Risk Factors.”
Investment securities at December 31, 2008, included three mutual fund investments with an aggregate carrying value of $39.6 million. Refer to “Results of Operations—Non-Interest Income,” below, for additional discussion relating to certain of these mutual fund investments.
Loans Held-for-Sale Loans held-for-sale increased from $8.0 million at December 31, 2007, to $19.0 million at December 31, 2008. This increase was caused by a historically low interest rate environment in late 2008 that resulted in a substantial increase in originations of fixed rate one- to four-family loans, which the Company typically sells in the secondary market. Management expects originations and sales of one- to four-family loans to be substantially higher in the near term assuming interest rates remain at current levels or decline further.

42

Table of Contents

Loans Receivable Loans receivable decreased $165.5 million or 8.3% from December 31, 2007, to December 31, 2008. This decrease was due to declines in the Company’s one- to four-family mortgage loans, multi-family mortgage loans, construction and development loans, consumer loans, and commercial business loans during the year. These loan categories declined by $251.0 million or 13.4% in the aggregate. In general, deterioration in economic conditions in 2008, as well as a general decline in real estate values, resulted in lower demand by individuals and business for these types of loans. In addition, the Company reduced its purchases of residential loans from third-party originators during the year and declined to match competitors’ rates and terms on certain large loans that refinanced away from the Company during the year. Finally, a favorable interest rate environment during much of 2008 resulted in increased refinancings of the Company’s adjustable rate residential loans, which it generally retains in portfolio, into fixed rate loans, which it generally sells in the secondary market.
The declines in the loan categories described in the previous paragraph were offset by a $73.3 million or 36.2% increase in commercial real estate loans. The Company has emphasized originations of these types of loans in recent years, as well as multi-family mortgage, consumer loans, and commercial business loans, in an effort to diversify its loan portfolio, improve profitability, and manage interest rate risk. Management expects to continue this emphasis, but believes growth in these loan categories may slow or even decline in the near term due to the factors cited in the previous paragraph, as well as the Company’s strict underwriting standards.
Goodwill The Company recorded goodwill as a result of its acquisitions of two other financial institutions in 1997 and 2000. Under SFAS 142, “Goodwill and Other Intangible Assets,” goodwill is tested at least annually for impairment. If goodwill is determined to be impaired, it will be expensed in the period in which it becomes impaired. The Company performed an annual impairment analysis during 2008 and determined that its goodwill was not impaired.
Other Intangible Assets Other intangible assets are composed of core deposit base intangibles recorded as a result of the acquisitions mentioned in the previous paragraph. Core deposit base intangibles are amortized over their expected life and tested for impairment on an annual basis.
Mortgage Servicing Rights The Company records MSRs on one- to four-family mortgage loans that it originates and sells in the secondary market. MSRs declined in 2008 due in part to an $822,000 valuation allowance related to the impairment of its MSRs during the fourth quarter of the year due to a historically low interest rate environment. For additional information, refer to “Results of Operations—Non-Interest Income,” below, as well as Part I, Item 1, “Business—Lending Activities” and Notes 1 and 4 of the Company’s Consolidated Financial Statements.
Other Assets Other assets consist of the following items on the dates indicated:
                 
    At December 31
    2008   2007
    (Dollars in thousands)
Accrued interest receivable:
                
Mortgage-related securities
   $ 6,669     $ 4,463  
Investment securities
     1,734       687  
Loans receivable
     8,130       9,475  
     
Total accrued interest receivable
     16,533       14,625  
Foreclosed properties and repossessed assets
     4,768       3,687  
Premises and equipment
     52,209       51,628  
Federal Home Loan Bank stock, at cost
     46,092       46,092  
Bank owned life insurance
     51,261       48,871  
Prepaid and other assets
     29,763       22,608  
     
Total other assets
   $ 200,626     $ 187,511  
     
The Company’s foreclosed properties and repossessed assets increased to $4.8 million at December 31, 2008, compared to $3.7 million at December 31, 2007. This increase was caused by deterioration in economic conditions in 2008, as well as a general decline in real estate values, which has resulted in increased foreclosure actions. Management expects this trend to continue in the near term.

43

Table of Contents

Premises and equipment increased modestly in 2008 primarily as a result of adding one new office location and building and relocating another office in 2008. The Company does not have current plans to establish any new office locations in 2009, although there can be no assurances.
The Company’s investment in the common stock of the FHLB of Chicago did not change in 2008. The FHLB of Chicago requires that its members own its common stock as a condition for borrowing; the stock is redeemable at par. In 2007 the FHLB of Chicago suspended the payment of dividends on its common stock. This suspension was due to the FHLB of Chicago entering into a memorandum of understanding with its primary regulator the Federal Housing Finance Board (“FHFB”) which among other things restricted the dividends that the FHLB of Chicago can pay without prior approval of the FHFB. Management is unable to determine at this time when, or if, the FHLB of Chicago will resume payment of dividends on its common stock.
Bank owned life insurance (“BOLI”) is an asset that the Company uses to partially offset the future cost of employee benefits. BOLI is long-term life insurance on the lives of certain current and past employees where the insurance policy benefits and ownership are retained by the employer. The Company values BOLI at the amount which it could obtain if it were to cash in the policies as of the reporting date. The cash value accumulation on BOLI is permanently tax deferred if the policy is held to the insured person’s death and certain other conditions are met. The increase in BOLI in 2008 was a result of the increase in the accumulated cash value of the insurance policies during the period.
Prepaid and other assets increased in 2008 primarily as a result of an increase in deferred income taxes caused by unrealized losses on available-for-sale securities, as described above.
Deposit Liabilities Deposit liabilities increased $17.4 million or 0.8% during the twelve months ended December 31, 2008, to $2.13 billion compared to $2.11 billion at December 31, 2007. Within the deposit portfolio, core deposits (checking, savings. and money market accounts) increased $62.5 million and certificates of deposit declined $45.1 million. The increase in core deposits resulted from the opening of new offices and efforts to market deposit plans at rates and terms designed to attract more of such deposits. The decrease in certificates of deposit was due to a management decision to reduce wholesale certificates of deposit during the year, which declined by $55.2 million as a result of that decision. The weighted average cost of deposit liabilities declined by 100 basis points at December 31, 2008, compared to December 31, 2007.
Borrowings The Company’s borrowings consist of advances from the FHLB. FHLB advances decreased slightly during the year as a result of the repayment and/or periodic amortization of a small number of advances. For additional information refer to Part 1, Item 1, “Business—Borrowings.”
Other Liabilities Other liabilities increased $19.0 million or 68.4% from December 31, 2007, to December 31, 2008. This increase was primarily caused by an increase in drafts payable, which was brought about by a change during the year in the manner in which the Company processes payments to third parties. Also contributing to the increase in other liabilities was an increase in the Company’s qualified pension liability, due principally to the performance of the assets that fund the plan. Refer to Note 10 in the Company’s Consolidated Financial Statements.
Shareholders’ Equity In 2008 shareholders’ equity decreased $30.4 million or 7.1% due primarily to the Company’s stock repurchase program, which resulted in a $21.6 million increase in treasury stock. Also contributing to the decrease was the Company’s payment of regular quarterly dividends and a $10.3 million increase in accumulated other comprehensive loss for reasons described under “Securities Available-for-Sale,” above. These developments were partially offset by earnings during the year. For additional information relating to the Company’s shareholders’ equity, refer to Part I, Item 1, “Business—Shareholders’ Equity,” above.
The payment of dividends by the Company is subject to any requirements imposed by law or regulations and to the interpretations thereof by the OTS. For further information about factors which could affect the Company’s payment of dividends, refer to Part I, Item 1, “Business—Regulation and Supervision,” as well as Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchase of Equity Securities,” above.

44

Table of Contents

Results of Operations
Overview The Company’s earnings for the years ended December 31, 2008, 2007, and 2006, were $17.2 million, $17.1 million, and $20.6 million, respectively. These amounts represented returns on average assets of 0.49%, 0.49%, and 0.59%, respectively, and returns on average equity of 4.15%, 3.57%, and 3.89%, respectively. Diluted earnings per share during these periods were $0.35, $0.31, and $0.34, respectively.
The Company’s earnings performance in 2008 included:
  •   a $6.9 million impairment loss on a mutual fund that invests in mortgage-related securities;
 
  •   a $1.4 million impairment loss related to Freddie Mac common stock;
 
  •   a $1.3 million loss provision on a loan secured by a completed condominium development project; and,
 
  •   an $822,000 valuation allowance for impairment of mortgage servicing rights.
These developments were substantially offset by $7.2 million in gains on the sale of certain mortgage-related securities during the year. Management estimates that the net after-tax impact of these items lowered the Company’s earnings in 2008 by approximately $2.1 million or $0.04 per diluted share.
In contrast, the Company’s earnings performance in 2007 was favorably impacted by:
  •   a $1.3 million recovery of a loss provision on a commercial business loan;
 
  •   a $685,000 one-time adjustment to the amortization of certain deferred costs; and,
 
  •   a net gain of $585,000 on the sale of undeveloped land.
These developments were offset in part by a $955,000 impairment loss related to the above mutual fund, as well as a $272,000 impairment on a second mutual fund. Management estimates that the net after-tax impact of these items increased the Company’s earnings in 2007 by approximately $872,000 or $0.02 per diluted share.
In addition to the developments described in the preceding paragraphs, the Company’s earnings performance in 2008 was impacted by a $4.1 million or 6.0% increase in net interest income compared to 2007. In contrast, earnings performance in 2007 was impacted by a $6.1 million or 8.1% decrease in net interest income compared to 2006. The following paragraphs discuss these changes in greater detail, along with other changes in the components of net income during the years ended December 31, 2008, 2007, and 2006.
Net Interest Income Net interest income increased by $4.1 million or 6.0% during the twelve months ended December 31, 2008, compared to the same period in 2007. In contrast, net interest income declined by $6.1 million or 8.1% in 2007 compared to 2006. Net interest income in 2008 was favorably impacted by a 12 basis point improvement in net interest margin, which increased from 2.09% in 2007 to 2.21% in 2008. This improvement was primarily attributable to a declining interest rate environment during most of 2008 that resulted in a larger decline in the cost of the Company’s liabilities than it did in the yield on its interest-earning assets. Also contributing to the increase in net interest income in 2008 was a modest increase in average interest-earning assets relative to 2007. The favorable impact of these developments was partially offset by a change in the Company’s mix of interest-earning assets to lower yielding securities available-for-sale and overnight investments, as discussed in “Financial Condition,” above. Also impacting net interest income in 2008 was a decrease in the ratio of average interest-earning assets to average interest-bearing liabilities relative to 2007, which was primarily caused by the Company’s stock repurchases during the year. Stock repurchases reduce shareholders’ equity (which is non-interest bearing) by means of either an increase in interest-bearing liabilities or a reduction in interest-earning assets, thereby reducing the net interest margin. Also affecting the comparison of net interest income between 2008 and 2007 is the inclusion in 2007 of $1.0 million in dividend income from Company’s investment in the common stock of the FHLB of Chicago. The FHLB of Chicago suspended dividends on its common stock in 2007.
Net interest income in 2007 was adversely impacted by a higher interest rate environment, as well as an inverted yield curve, which together caused the Company’s net interest margin to decline by 18 basis points, from 2.27% in 2006 to 2.09% in 2007. Also contributing was a modest decline in average interest-earning assets, as well as a

45

Table of Contents

decrease in the ratio of average interest-earning assets to average interest-bearing liabilities relative to 2006, which was primarily caused by the Company’s stock repurchases in 2007.
The following table presents certain details regarding the Company’s average balance sheet and net interest income for the periods indicated. The tables present the average yield on interest-earning assets and the average cost of interest-bearing liabilities. The yields and costs are derived by dividing income or expense by the average balance of interest-earnings assets or interest-bearing liabilities, respectively, for the periods shown. The average balances are derived from daily balances over the periods indicated. Interest income includes fees, which are considered adjustments to yields. Net interest spread is the difference between the yield on interest-earning assets and the rate paid on interest-bearing liabilities. Net interest margin is derived by dividing net interest income by average interest-earning assets. No tax equivalent adjustments were made since the Company does not have any tax exempt investments.
                                                                         
    Years ended December 31  
    2008     2007     2006  
            Interest     Avg.             Interest     Avg.             Interest     Avg.  
    Average     Earned/     Yield/     Average     Earned/     Yield/     Average     Earned/     Yield/  
    Balance     Paid     Cost     Balance     Paid     Cost     Balance     Paid     Cost  
    (Dollars in thousands)  
Assets:
                                                                        
Interest-earning assets:
                                                                        
Loans receivable, net (1)
   $ 1,892,397     $ 113,635       6.00 %   $ 2,016,225     $ 123,141       6.11 %   $ 2,042,534     $ 118,708       5.81 %
Mortgage-related securities
     959,574       45,535       4.75       1,130,780       52,518       4.64       1,134,822       50,017       4.41  
Investment securities (2)
     344,533       16,041       4.66       118,625       4,871       4.11       101,987       3,762       3.69  
Interest-earning deposits
     54,666       764       1.40       9,186       430       4.68       10,882       483       4.44  
Federal funds sold
     71,934       1,581       2.20       39,596       2,041       5.15       28,581       1,434       5.02  
             
Total interest-earning assets
     3,323,104       177,556       5.34       3,314,412       183,001       5.52       3,318,806       174,404       5.25  
Non-interest-earning assets
     214,682                       197,212                       146,649                  
 
                                                                  
Total average assets
     3,537,786                       3,511,624                     $ 3,465,455                  
 
                                                                  
 
                                                                        
Liabilities and equity:
                                                                        
Interest-bearing liabilities:
                                                                        
Savings deposits
     190,271       609       0.32     $ 194,887       924       0.47     $ 215,525       923       0.43  
Money market accounts
     336,208       8,245       2.45       267,338       8,500       3.18       258,307       7,620       2.95  
Interest-bearing demand accounts
     170,700       376       0.22       161,652       351       0.22       163,446       351       0.21  
Certificates of deposit
     1,358,021       55,459       4.08       1,381,480       66,236       4.79       1,368,166       59,818       4.37  
             
Total deposit liabilities
     2,055,200       64,689       3.15       2,005,357       76,011       3.79       2,005,444       68,712       3.43  
Advance payment by borrowers for taxes and insurance
     18,549       18       0.10       19,493       22       0.11       19,588       24       0.12  
Borrowings
     910,542       39,484       4.34       869,110       37,738       4.34       785,861       30,355       3.86  
             
Total interest-bearing liabilities
     2,984,291       104,191       3.49       2,893,960       113,771       3.93       2,810,893       99,091       3.52  
             
 
Non-interest-Bearing Liabilities
                                                                       
Non-interest-bearing deposits
     89,590                       92,810                       96,308                  
Other non-interest-bearing liabilities
     50,268                       45,853                       29,364                  
 
                                                                  
Total non-interest-bearing liabilities
     139,858                       138,663                       125,672                  
 
                                                                  
Total liabilities
     3,124,149                       3,032,623                       2,936,565                  
Shareholders’ equity
     413,637                       479,000                       528,890                  
 
                                                                  
Total average liabilities and equity
   $ 3,537,786                     $ 3,511,624                     $ 3,465,455                  
 
                                                                  
Net interest income and net interest rate spread
           $ 73,365       1.85             $ 69,230       1.59             $ 75,313       1.73  
 
                                                                  
Net interest-earning assets and net interest margin
   $ 338,813               2.21 %   $ 420,452               2.09 %   $ 507,913               2.27 %
 
                                                            
Average interest-earnings assets to average interest- bearing liabilities
     1.11 x                     1.15 x                     1.18 x                
 
(1)   For the purposes of these computations, non-accruing loans and loans held-for-sale are included in the average loans outstanding.
 
(2)   FHLB of Chicago stock is included in investment securities dollars outstanding and yields.

46

Table of Contents

The following tables present the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to the change attributable to change in volume (change in volume multiplied by prior rate), the change attributable to change in rate (change in rate multiplied by prior volume), and the net change. The change attributable to the combined impact of volume and rate has been allocated proportionately to the change due to volume and the change due to rate.
                         
    Year Ended December 31, 2008, Compared to 2007
    Increase (Decrease)
    Volume   Rate   Net
    (Dollars in thousands)
Interest-earning assets:
                        
Loans receivable
   $ (7,368 )   $ (2,138 )   $ (9,506 )
Mortgage-related securities
     (8,153 )     1,170       (6,983 )
Investment securities
     10,444       726       11,170  
Interest-earning deposits
     822       (488 )     334  
Federal funds sold
     1,106       (1,566 )     (460 )
     
Total interest-earning assets
     (3,149 )     (2,296 )     (5,445 )
     
Interest-bearing liabilities:
                        
Savings deposits
     (22 )     (293 )     (315 )
Money market deposits
     1,924       (2,179 )     (255 )
Interest-bearing demand deposits
     20       5       25  
Certificates of deposit
     (1,108 )     (9,669 )     (10,777 )
Advance payment by borrowers for taxes and insurance
     (1 )     (3 )     (4 )
Borrowings
     1,798       (52 )     1,746  
     
Total interest-bearing liabilities
     2,611       (12,191 )     (9,580 )
     
Net change in net interest income
   $ (5,760 )   $ 9,895     $ 4,135  
     
                         
    Year Ended December 31, 2007, Compared to 2006
    Increase (Decrease)
    Volume   Rate   Net
        (Dollars in thousands)  
Interest-earning assets:
                        
Loans receivable
   $ (1,632 )   $ 6,065     $ 4,433  
Mortgage-related securities
     (101 )     2,602       2,501  
Investment securities
     655       454       1,109  
Interest-earning deposits
     (78 )     25       (53 )
Federal funds sold
     567       40       607  
     
Total interest-earning assets
     (589 )     9,186       8,597  
     
Interest-bearing liabilities:
                        
Savings deposits
     (81 )     82       1  
Money market deposits
     272       608       880  
Interest-bearing demand deposits
     (4 )     4       —  
Certificates of deposit
     587       5,831       6,418  
Advance payment by borrowers for taxes and insurance
     —       (2 )     (2 )
Borrowings
     3,397       3,986       7,383  
     
Total interest-bearing liabilities
     4,171       10,509       14,680  
     
Net change in net interest income
   $ (4,760 )   $ (1,323 )   $ (6,083 )
     

47

Table of Contents

Provision for (Recovery of) Loan Losses The Company’s provision for (recovery of) loan losses was $1.4 million, $(272,000), and $632,000 during the years ended December 31, 2008, 2007, and 2006, respectively. During 2008 the Company recorded a $1.3 million loss related to a $9.1 million loan secured by a completed condominium development project that defaulted during the year. The Company continues to work with the developer to dispose of the condominium units, but it is uncertain at this time whether the Company will ultimately foreclose on the project. The Company is also uncertain whether additional losses will be recorded on this loan relationship in the future as a result of continued deterioration in the value of the condominium units due to market conditions and/or lack of sales. Excluding this development, the Company’s provision for loan losses was relatively modest in 2008. Net loan charge-offs increased slightly in 2008 relative to 2007, but were tempered in their impact on the Company’s provision for loan losses by an overall decrease in loans receivable and the resulting impact such had on the allowance for loan losses.
The $272,000 net recovery in 2007 was due to a $1.3 million recovery of a loss on a commercial business loan that had been recognized in a previous period. Excluding that development, the Company’s provision for loan losses in 2007 was $1.0 million compared to $632,000 in 2006. This increase was principally due to an increase in net loan charge-offs in 2007 relative to 2006. Also contributing was an increasing mix of commercial real estate loans, commercial business loans, and multi-family loans in 2007, which typically result in higher provisions for loan losses due the impact such loans have on the Company’s allowance for loan losses.
As of December 31, 2008, 2007, and 2006, the Company’s allowance for losses was $12.2 million, $11.8 million, and $12.6 million, respectively, or 0.67%, 0.59%, and 0.62% of loans receivable, respectively. As of the same dates, the allowance for loan losses was 36.9%, 91.0% and 86.7% of total non-performing loans, respectively. The dollar increase in the allowance at the end of 2008 compared to 2007 was caused in part by the loss provision on the condominium development project mentioned above. The impact of this increase was partially offset by a decline in the allowance caused by an overall decline in the size of Company’s loan portfolio. The reduction in the allowance for loan losses as a percent of non-performing loans at the end of 2008 compared to 2007 was principally the result of an increase in non-performing loans, as described in the next paragraph.
As of December 31, 2008, 2007, and 2006, the Company’s non-performing loans were $33.1 million, $12.9 million and $14.5 million, respectively, or 1.81%, 0.65%, and 0.72% of total loans receivable, respectively. The increase in 2008 was due in part to the condominium development project mentioned above. Also contributing to the increase in non-performing loans since December 31, 2007, was a $5.5 million or 222% increase in non-performing one- to four-family residential loans due to a general decline in economic conditions. During 2008 the Company avoided a larger increase in non-performing loans by providing $8.5 million in financing for the sale of a large apartment project by the original borrower to another, unrelated borrower. The loan was extended at market rates and terms and the new borrower was able to provide additional collateral in lieu of a down payment to secure the new loan.
Management is responsible for the timely and periodic determination of the amount of the allowance required. Future provisions for loan losses will continue to be based upon management’s assessment of the overall loan portfolio and the underlying collateral, trends in non-performing loans, current economic conditions, unemployment levels, and other relevant factors. As a result of applying the methodologies described elsewhere in this report, it is possible that there may be periods when the amount of the allowance and/or its percentage to total loans may decrease even though non-performing loans may increase, as is the case in the current period. To the best of management’s knowledge, all known and inherent losses have been provided for in the allowance for loan losses.
The establishment of the amount of the loan loss allowance inherently involves judgments by management as to the adequacy of the allowance, which ultimately may or may not be correct. Higher rates of loan defaults than anticipated would likely result in a need to increase provisions in future years. Also, as multi-family, commercial real estate, construction and development, and commercial business loan portfolios increase, additional provisions would likely be added to the loan loss allowances as they carry a higher risk of loss. The dollar amount of these types of loans tends to be larger than the Company’s average one- to four-family loan and, therefore, any loss that the Company experiences on these loans could be larger than what it has historically experienced on one- to four-family loans.
Refer to Part I, Item 1, “Business—Asset Quality,” for additional discussion related to the Company’s asset quality and allowance for loan losses. Refer also to “Critical Accounting Policies,” below.
Non-Interest Income Total non-interest income for the years ended December 31, 2008, 2007, and 2006, was $17.7 million, $20.4 million, and $17.1 million, respectively. Results for 2008 included $1.2 million in net losses on investments, which is the net effect of a $6.9 million impairment loss on a mutual fund, a $1.4 million impairment

48

Table of Contents

loss related to Freddie Mac common stock, and $7.2 million in gains on the sale of certain mortgage-related securities. The mutual fund in question invests primarily in mortgage-related securities, none of which are believed by management to be secured by sub-prime mortgages, but a portion of which are secured by interest-only mortgages, option-payment mortgages, and other “Alt-A” mortgages. Given the significant uncertainty and illiquidity that exists in the markets for securities secured by these types of loans, the Company cannot be certain that future impairment charges will not be required against this investment, which had a remaining book value of $21.7 million at December 31, 2008 (net of impairment charges). As of February 27, 2009, the fair value of this mutual fund was $21.2 million.
In September 2008 the federal government placed Freddie Mac in conservatorship. This action resulted in a $1.4 million loss to the Company, which was the Company’s entire recorded investment in Freddie Mac common stock. This stock was originally held by another financial institution that the Company acquired in 2000.
During 2008 the Company was able to take advantage of certain opportunities in the securities markets, particularly in the last quarter, which enabled it to realize $7.2 million in gains on sales and reinvest the proceeds in securities with comparable or better yields and similar risk profiles.
Non-interest income in 2007 included $1.2 million net loss on investments. This loss consisted of a $955,000 impairment loss on the mutual fund described above, as well as a $272,000 impairment loss on another mutual fund that did not experience further impairment in 2008. Non-interest income in 2007 also included $1.4 million in income from a real estate investment partnership. This amount represented the net sales price of approximately 30 acres of land sold by Arrowood Development, a 50% owned partnership of a subsidiary of the Bank. The cost of sales is included in non-interest expense and the minority interest in income of real estate operations is on a separate line in the Company’s Consolidated Statements of Income.
Non-interest income in 2006 included $694,000 in net gains on investments as a result of the sale of the Company’s remaining interest in certain equity securities.
Service charges on deposits for the years ended December 31, 2008, 2007, and 2006, were $6.7 million, $6.6 million, and $6.1 million, respectively. In recent years increased pricing of deposit service charges has been partially offset by a decrease in the number of checking accounts and/or increased customer utilization of on-line banking and check card services. On-line banking and real time check card purchase authorizations have allowed customers to better manage their accounts and reduce their service charge fees.
Brokerage and insurance commissions were $2.6 million, $2.6 million, and $2.4 million for the years ended December 31, 2008, 2007, and 2006, respectively. Increased commissions from sales of fixed annuities in recent years have been offset by reduced commissions from sales of insurance and securities. Sales of fixed annuities increased in 2008 due to a favorable interest rate environment for such investments. Sales of securities declined in the same period due to an overall decline in the stock market.
Gains on the sales of loans were $1.7 million, $1.5 million, and $1.1 million for the years ended December 31, 2008, 2007, and 2006, respectively. The Company’s policy is to sell substantially all of its fixed-rate, one- to four-family mortgage loan originations in the secondary market. In 2008, 2007, and 2006, the Company sold mortgage loans with a principal balance of $128.8 million, $102.9 million and $89.5 million, respectively. Loan sales increased in 2008 as a result of a declining interest rate environment which resulted in increased mortgage refinance activity at certain times during the year. Near the end of 2008 mortgage rates declined to historically low levels and remained there early in 2009. As a result, management expects originations and sales of one- to four-family loans to be substantially higher in the near term assuming interest rates remain at their current levels or decline further.
Other non-interest income was $7.3 million, $9.0 million, and $6.2 million for the years ended December 31, 2008, 2007, and 2006, respectively. Other non-interest income in 2008 was negatively impacted by an $822,000 valuation allowance for the impairment of MSRs. In addition, the periodic amortization of MSRs, which is an offset to mortgage servicing fee revenue included in other non-interest income, increased by $396,000 in 2008. This increase was caused by a declining interest rate environment in 2008 which resulted in a higher level of loan prepayment activity and faster amortization of the related MSRs. Other non-interest income in 2007 was favorably impacted by a $685,000 one-time adjustment to the amortization of certain deferred costs. Also, other non-interest income in years after 2006 was favorably impacted by the purchase of $25.0 million in BOLI in late 2006. The Company reports increases in the cash surrender value of BOLI as a component of other non-interest income.

49

Table of Contents

As mentioned in the preceding paragraph, the Company recorded an $822,000 valuation allowance related to the impairment of its MSRs in 2008. This impairment was a direct result of historically low interest rates for one- to four-family loans near the end of the year. If interest rates for one- to four-family loans continue to decline, the Company could incur additional impairments of its MSRs in future periods. Alternatively, if interest rates increase and/or prepayment expectations decrease, the Company could potentially recapture through earnings all or a portion of the previously established valuation allowance for impairments. The carrying value of the Company’s MSRs was $3.7 million at December 31, 2008, net of the valuation allowance.
Non-Interest Expense Total non-interest expense for the years ended December 31, 2008, 2007, and 2006 was $63.4 million, $63.5 million and $61.3 million, respectively. Since 2004, the Company’s non-interest expense has increased at a compounded annualized growth rate of 1.3%. The following paragraphs discuss the principal components of non-interest expense and the primary reasons for their changes from 2007 to 2008, as well as 2006 to 2007.
Compensation and related expenses were $38.5 million, $38.2 million, and $37.5 million during the years ended December 31, 2008, 2007, and 2006, respectively. Increases in compensation expense in 2008 and 2007 were due to normal annual merit increases and, to a lesser extent, increases in the number of employees; the latter due principally to new branch openings in recent years. In 2008, these developments were partially offset by declines in certain employee benefit costs. As of December 31, 2008, the Company had 677 full-time associates and 92 part-time associates. This compared to 657 full-time and 89 part-time employees at December 31, 2007.
Occupancy and equipment expense during the years ended December 31, 2008, 2007, and 2006 was $11.6 million, $11.3 million, and $10.5 million, respectively. Occupancy and equipment expense has increased in recent years as a result of the opening of one new office in 2008, the construction and relocation of a second office in 2008, and the opening of two new offices in each of 2007 and 2006. The Company does not currently have plans to establish any new offices in 2009, although there can be no assurances.
Non-interest expense in 2007 included $645,000 in cost of sales attributable to the sale of land by Arrowood Development, a 50% owned partnership of a subsidiary of the Bank. The revenue from these sales was included in non-interest income, as previously described. There were no sales of land in 2008 or 2006.
Other non-interest expense was $12.6 million, $12.7 million, and $12.6 million during the years ended December 31, 2008, 2006, and 2007, respectively. Included in the 2008 amount was $332,000 in FDIC deposit insurance premiums, which compared to $258,000 in 2007 and $273,000 in 2006. During the fourth quarter of 2008 the FDIC announced a substantial increase in deposit insurance premiums for all financial institutions in 2009. In addition, the FDIC has recently announced a special assessment of insured institutions to bolster the FDIC’s reserves. As a result of this increase and the 20 basis point special assessment, as well as certain premium credits that expire in 2009, management estimates that the Company’s deposit insurance premiums will increase to approximately $7.0 million in 2009, although there can be no assurances as to that amount. Furthermore, deposit insurance premiums in 2009 could be higher than the amount currently estimated by management depending on the outcome of another FDIC proposal to substantially alter the way in which it differentiates for risk in its current risk-based assessment system and/or potential further special assessments. Management is unable to estimate the probability or amount of any additional assessment at this time.
Income Tax Expense Income tax expense for the years ended December 31, 2008, 2007, and 2006, was $9.1 million, $8.9 million, and $9.8 million, respectively. The effective tax rate for these periods was 34.6%, 34.2%, and 32.3%, respectively. The effective tax rate in 2006 was reduced by the impact of an $812,000 refund of federal income taxes paid in prior years.
Effective January 1, 2009, Wisconsin law was amended to significantly restrict the tax benefits of out-of-state investment subsidiaries through enactment of combined reporting legislation. Going forward, this change is expected to have a substantial negative impact on the earnings of the Company. If the Company had been required to file a combined Wisconsin income tax return in 2008, management estimates the Company’s income tax expense would have been approximately $1.3 million higher than reported in that year, excluding the impact of state net operating loss carryforwards, if any, that may be available to the Company. For additional discussion, refer to Part I, Item 1A, “Risk Factors.”

50

Table of Contents

Critical Accounting Policies
There are a number of accounting policies that the Company has established which require a significant amount of management judgment. A number of the more significant policies are discussed in the following paragraphs.
Allowance for Loan Losses Establishing the amount of the allowance for loan losses requires the use of management judgment. The allowance for loan losses is maintained at a level believed adequate by management to absorb losses inherent in the loan portfolio and is based on the size and current risk characteristics of the loan portfolio, an assessment of individual problem loans and pools of homogenous loans, actual loss experience, current economic events in specific industries and geographical areas, including unemployment levels, and other pertinent factors, including regulatory guidance and general economic conditions. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends, all of which may be susceptible to significant change. Loan losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for loan losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors. Evaluations are conducted at least quarterly and more often if deemed necessary. If management misjudges a major component of the allowance and the Company experiences an unanticipated loss, it will likely affect earnings. Developments affecting loans can also cause the allowance to vary significantly between quarters. Management consistently challenges itself in the review of the risk components to identify any changes in trends and their causes.
Mortgage Servicing Rights Mortgage servicing rights (“MSRs”) are recorded as an asset when loans are sold with servicing rights retained. The total cost of loans sold is allocated between the loan balance and the servicing asset based on their relative fair values. The capitalized value of MSRs is amortized in proportion to, and over the period of, estimated net future servicing revenue. MSRs are carried at the lower of the initial carrying value, adjusted for amortization, or estimated fair value. The carrying values are periodically evaluated by management for impairment. For purposes of measuring impairment, MSRs are stratified into pools based on term and interest rate. Impairment represents the excess of the remaining capitalized cost of a stratified pool over its fair value, and is recorded through a valuation allowance. The fair value of each MSR pool is calculated based on the present value of estimated future cash flows using a discount rate, given current market conditions. Estimates of fair value also include assumptions about prepayment speeds, interest rates, and other factors which are subject to change over time. Changes in these underlying assumptions could cause the fair value of MSRs, and the related valuation allowance, if any, to change significantly in the future.
Other-Than-Temporary Impairment Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”), requires enterprises to determine whether a decline in the fair value of an individual debt security below its amortized cost is other than temporary. If the decline is deemed to be other than temporary, the cost basis of the security must be written down through a charge to earnings. Determination of an other-than-temporary impairment requires significant management judgment relating to the probability of future cash flows, the financial condition and near-term prospects of the issuer of the security, and/or the collateral for the security, the duration and extent of the decline in fair value, and the ability and intent of the Company to retain the security, among other things. Future changes in management’s assessment of other-than-temporary impairment on its securities could result in significant charges to earnings in future periods.
Goodwill Management reviews goodwill at least annually for impairment, which requires the use of significant judgment. Goodwill has been recorded as a result of two acquisitions in which the purchase price exceeded the fair value of tangible net assets acquired. If goodwill is determined to be impaired, it would be expensed in the period in which it becomes impaired.
Income Taxes The assessment of the Company’s tax assets and liabilities involves the use of estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions, regulatory actions or interpretations, or changes in positions of federal and state taxing authorities will not differ from management’s current assessments. The impact of these matters could be significant to the consolidated results of operations and reported earnings.

51

Table of Contents

The Company describes all of its significant accounting policies in Note 1 of the Company’s Consolidated Financial Statements included in this report.
Contractual Obligations, Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements
The Company has various financial obligations, including contractual obligations and commitments, that may require future cash payments.
The following table presents, as of December 31, 2008, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the Company’s Consolidated Financial Statements.
                                         
    Payments Due In
            One to   Three to   Over    
    One Year   Three   Five   Five    
    Or Less   Years   Years   Years   Total
    (Dollars in thousands)
Deposit liabilities without a stated maturity (1)
   $ 795,214     $ —     $ —     $ —     $ 795,214  
Certificates of deposit (1)
     960,205       269,226       105,703       —       1,335,134  
Borrowed funds (2)
     —       —       100,278       807,693       907,971  
Operating leases
     1,196       1,740       1,300       3,540       7,776  
Purchase obligations
     2,160       720       —       —       2,880  
Deferred retirement plans and deferred compensation plans
     644       2,028       1,947       9,235       13,854  
 
(1)   Excludes interest to be paid in the periods indicated.
 
(2)   Includes $866.0 million of borrowings that contain quarterly call features after an initial locked interest rate period of 6 months to 2 years.
The Company’s operating lease obligations represent short and long-term lease and rental payments for facilities, certain software and data processing and other equipment. Purchase obligations represent obligations under agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The purchase obligation amounts presented above primarily relate to certain contractual payments for services provided for information technology.
The Company also has obligations under its deferred retirement plan for directors as described in Note 10 to the Company’s Consolidated Financial Statements.

52

Table of Contents

The following table details the amounts and expected maturities of significant off balance sheet commitments as of December 31, 2008. Further discussion of these commitments is included in the “Notes to the Consolidated Financial Statements – Note 13. Financial Instruments with Off-Balance Sheet Risk.”
                                         
    Payments Due In
            One to   Three to   Over    
    One Year   Three   Five   Five    
    Or Less   Years   Years   Years   Total
    (Dollars in thousands)
Commitments to extend credit:
                                        
Commercial real estate
   $ 8,823     $ —     $ —     $ —     $ 8,823  
Residential real estate
     34,453       —       —       —       34,453  
Revolving home equity and credit card lines
     153,568       —       —       —       153,568  
Standby letters of credit
     50       —       —       10       60  
Commercial letters of credit
     21,760       —       —       —       21,760  
Unused commercial lines of credit
     994       —       —       —       994  
Net commitments to sell mortgage loans
     72,653       —       —       —       72,653  
Commitments to extend credit, including loan commitments, standby letters of credit, unused lines of credit and commercial letters of credit do not necessarily represent future cash requirements, since these commitments often expire without being drawn upon.

53

Table of Contents

Quarterly Financial Information
The following table sets forth certain unaudited quarterly data for the periods indicated:
                                 
    Quarter Ended
    March 31   June 30   September 30   December 31
    (Dollars in thousands, except per share amounts)
2008
                                
 
                                
Interest income
   $ 45,268     $ 44,075     $ 44,225     $ 43,988  
Interest expense
     28,239       25,980       25,643       24,329  
     
Net interest income
     17,029       18,095       18,582       19,659  
Provision for loan losses
     156       67       1,135       89  
     
Net income after provision for loan losses
     16,873       18,028       17,447       19,570  
Total non-interest income
     6,290       4,059       843       6,516  
Total non-interest expense
     15,600       15,727       16,022       16,028  
Minority interest in income (loss) of real estate operations
     —       —       —       (1 )
     
Income before income taxes
     7,563       6,360       2,268       10,059  
Income taxes
     2,501       2,081       645       3,867  
     
Net income
   $ 5,062     $ 4,279     $ 1,623     $ 6,192  
     
Earnings per share — Basic
   $ 0.11     $ 0.09     $ 0.03     $ 0.13  
     
Earnings per share — Diluted
   $ 0.10     $ 0.09     $ 0.03     $ 0.13  
     
Cash dividend paid per share
   $ 0.09     $ 0.09     $ 0.09     $ 0.09  
     
 
                                
2007
                                
 
                                
Interest income
   $ 44,508     $ 45,846     $ 46,107     $ 46,540  
Interest expense
     27,336       28,476       28,920       29,039  
     
Net interest income
     17,172       17,370       17,187       17,501  
Provision for loan losses
     (929 )     51       388       218  
     
Net income after provision for loan losses
     18,101       17,319       16,799       17,283  
Total non-interest income
     4,852       6,499       4,854       4,223  
Total non-interest expense
     15,876       16,385       16,007       15,275  
Minority interest in income of real estate operations
     —       391       —       1  
     
Income before income taxes
     7,077       7,042       5,646       6,230  
Income taxes
     2,370       2,439       1,923       2,160  
     
Net income
   $ 4,707     $ 4,603     $ 3,723     $ 4,070  
     
Earnings per share — Basic
   $ 0.08     $ 0.08     $ 0.07     $ 0.08  
     
Earnings per share — Diluted
   $ 0.08     $ 0.08     $ 0.07     $ 0.08  
     
Cash dividend paid per share
   $ 0.08     $ 0.08     $ 0.085     $ 0.085  
     

54

Table of Contents

Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company’s ability to maintain net interest income depends upon earning a higher yield on assets than the rates it pays on deposits and borrowings. Fluctuations in market interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Company’s assets and liabilities. Fluctuations in interest rates will also affect the market value of all interest-earning assets and interest-bearing liabilities, other than those with a very short term to maturity.
Interest rate sensitivity is a measure of the difference between amounts of interest-earning assets and interest-bearing liabilities which either reprice or mature during a given period of time. The difference, or the interest rate sensitivity “gap,” provides an indication of the extent to which the Company’s interest rate spread will be affected by changes in interest rates. Refer to “Gap Analysis” below.
Due to the nature of the Company’s operations, it is not directly subject to foreign currency exchange or commodity price risk. Instead, the Company’s real estate loan portfolio, which is concentrated in Wisconsin, is subject to risks associated with the state and local economies.
Management seeks to coordinate asset and liability decisions so that, under changing interest rate scenarios, the Company’s earnings will remain within an acceptable range.
The primary objectives of the Company’s interest rate management strategy are to:
  •   maintain earnings and capital within self-imposed parameters over a range of possible interest rate environments;
 
  •   coordinate interest rate risk policies and procedures with other elements of the Company’s business plan, all within the context of the current business environment and regulatory capital and liquidity requirements; and
 
  •   manage interest rate risk in a manner consistent with the approved guidelines and policies set by the Company’s board of directors.
To achieve the objectives of managing interest rate risk, the Company’s Asset/Liability Committee meets periodically to discuss and monitor the market interest rate environment and provides reports to the board of directors. This committee is comprised of senior management.
Historically, the Company’s lending activities have been concentrated in one- to four-family first and second mortgage loans. The Company’s primary source of funds has been deposits and borrowings, consisting primarily of certificates of deposit and borrowings which have substantially shorter terms to maturity than the loan portfolio. The Company has employed certain strategies to manage the interest rate risk inherent in the asset/liability mix, including:
  •   emphasizing the origination of adjustable rate and certain 15-year fixed rate mortgage loans for portfolio, and selling certain 15, 20, and 30 year fixed rate mortgage loans in the secondary market;
 
  •   maintaining a significant level of investment securities and mortgage-related securities with a weighted average life of less than eight years or with interest rates that reprice in less than five years; and
 
  •   managing deposits and borrowings to provide stable funding.
Management believes that the frequent repricing of adjustable-rate mortgage loans, the cash flows from 15-year fixed rate real estate loans, the shorter duration of consumer loans, and adjustable rate features and shorter durations of investment securities, reduce the Company’s interest rate risk exposure to acceptable levels.
Gap Analysis Repricing characteristics of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring a financial institution’s interest rate sensitivity “gap.” An asset or liability is said to be “interest rate sensitive” within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period.

55

Table of Contents

A gap is considered positive when the amount of interest-earning assets maturing or repricing within a specific time period exceeds the amount of interest-bearing liabilities maturing or repricing within that specific time period. A gap is considered negative when the amount of interest-bearing liabilities maturing or repricing within a specific time period exceeds the amount of interest-earning assets maturing or repricing within the same period. During a period of rising interest rates, a financial institution with a negative gap position would be expected, absent the effects of other factors, to experience a greater increase in the costs of its liabilities relative to the yields of its assets and thus a decrease in the institution’s net interest income. An institution with a positive gap position would be expected, absent the effect of other factors, to experience the opposite result. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to reduce net interest income.
At December 31, 2008, based on the assumptions below, the Company’s interest-earning assets maturing or repricing within one year exceeded its interest-bearing liabilities maturing or repricing within the same period by $196.5 million. This represented a positive cumulative one-year interest rate sensitivity gap of 5.63%, and a ratio of interest-earning assets maturing or repricing within one year to interest-bearing liabilities maturing or repricing within one year of 114.6%.
The table on the next page presents the amounts of the Company’s interest-earning assets and interest-bearing liabilities outstanding at December 31, 2008, which management anticipates to reprice or mature in each of the future time periods shown. The information presented in the following table is based on the following assumptions:
  •   Investment securities — based upon contractual maturities and if applicable, call dates.
 
  •   Mortgage-related securities — based upon an independent outside source for determining cashflows (prepayment speeds).
 
  •   Loans — based upon contractual maturities, repricing date, if applicable, scheduled repayments of principal, and projected prepayments of principal based upon the Company’s historical experience or anticipated prepayments.
 
  •   Deposit liabilities — based upon contractual maturities and the Company’s historical decay rates.
 
  •   Borrowings — based upon the earlier of call date or final maturity.

56

Table of Contents

                                                 
    At December 31, 2008
    Within   Three to   More Than   More Than   Over    
    Three   Twelve   One Year -   Three Years -   Five    
    Months   Months   Three Years   Five Years   Years   Total
    (Dollars in thousands)
Interest-earning assets:
                                                
Loans receivable:
                                                
Mortgage loans:
                                                
Permanent:
                                                
Fixed
   $ 69,728     $ 115,236     $ 194,945     $ 93,278     $ 104,749     $ 577,936  
Adjustable
     90,641       296,280       280,307       94,700       229       762,157  
Construction:
                                                
Fixed
     2,463       1,370       29,359       —       25,188       58,380  
Adjustable
     —       7,916       17,760       17,735       —       43,411  
Consumer loans
     91,838       90,663       101,952       33,348       19,440       337,241  
Commercial business loans
     15,670       19,360       12,178       896       25       48,129  
Interest-earning deposits
     71,876       —       —       —       —       71,876  
Investment securities
     219,559       100,880       91,639       —       —       412,078  
Mortgage-related securities:
                                                
Fixed
     81,872       126,973       104,769       374,803       97,624       786,041  
Adjustable
     91,584       —       —       —       —       91,584  
Other interest-earning assets
     46,092       —       —       —       —       46,092  
     
Total interest-earning assets
     781,323       758,678       832,909       614,760       247,255       3,234,925  
     
 
                                                
Non-interest-bearing and interest- bearing liabilities:
                                                
Non-interest-bearing demand accounts
     1,012       2,967       7,432       6,783       70,912       89,106  
Interest-bearing liabilities:
                                                
Deposit liabilities:
                                                
Interest-bearing demand accounts
     2,047       6,004       15,040       13,726       143,452       180,269  
Regular savings accounts
     2,845       8,217       19,793       17,113       137,035       185,003  
Money market accounts
     340,631       —       —       —       —       340,631  
Certificates of deposit
     300,005       676,844       250,865       105,555       —       1,333,269  
Advance payments by borrowers for taxes and insurance
     —       1,929       —       —       —       1,929  
Borrowings
     246       747       2,144       102,571       802,263       907,971  
     
Total interest-bearing liabilities
     646,786       696,708       295,274       245,748       1,153,662       3,038,178  
     
Interest rate sensitivity gap
   $ 134,537     $ 61,970     $ 537,635     $ 369,012     $ (906,407 )   $ 196,747  
     
 
                                                
Cumulative interest rate sensitivity gap
   $ 134,537     $ 196,507     $ 734,142     $ 1,103,154     $ 196,747          
             
Cumulative interest rate sensitivity gap as a % total assets
     3.86 %     5.63 %     21.04 %     31.61 %     5.64 %        
Cumulative interest-earning assets as a percentage of interest bearing liabilities
     120.80 %     114.63 %     144.80 %     158.54 %     106.48 %        
The methods used in the previous table have some inherent shortcomings. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Certain assets, such as adjustable rate loans, have features which limit changes in interest rates on a short-term basis and over the life of the loan. If interest rates change, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of borrowers to make payments on their adjustable rate loans may decrease if interest rates increase.
Present Value of Equity In addition to the gap analysis table, the Company also uses a simulation model to monitor interest rate risk. The model reports the present value of equity in different interest rate environments, assuming an instantaneous and permanent interest rate shock to all interest rate-sensitive assets and liabilities. The present value of equity is the difference between the present value of expected cash flows of interest rate-sensitive assets and liabilities. The changes in market value of assets and liabilities due to changes in interest rates reflect the interest rate sensitivity of those assets and liabilities as their values are derived from the characteristics of the asset or liability (i.e., fixed rate,

57

Table of Contents

adjustable-rate, caps, floors) relative to the current interest rate environment. For example, in a rising interest rate environment the fair market value of a fixed rate asset will decline, whereas the fair market value of an adjustable-rate asset, depending on its repricing characteristics, may not decline. Increases in the market value of assets will increase the present value of equity whereas decreases in market value of assets will decrease the present value of equity. Conversely, increases in the market value of liabilities will decrease the present value of equity whereas decreases in the market value of liabilities will increase the present value of equity.
The following table presents the estimated present value of equity over a range of interest rate change scenarios at December 31, 2008. The present value ratio shown in the table is the present value of equity as a percent of the present value of total assets in each of the different rate environments. For purposes of this table, management has made assumptions such as prepayment rates and decay rates similar to those used for the gap analysis table.
                                         
                            Present Value of Equity
                            as Percent of
Change in   Present Value of Equity   Present Value of Assets
Interest Rates   Dollar   Dollar   Percent   Present Value   Percent
(Basis Points)   Amount   Change   Change   Ratio   Change
    (Dollars in thousands)                
+300
  $ 422,921     $ (13,154 )     (3.0 )%     12.26 %     2.7 %
+200
    471,435       35,360       8.1       13.37       11.9  
+100
    458,868       22,793       5.2       12.78       7.0  
0
    436,075       —       —       11.94       —  
-100
    335,794       (100,281 )     (23.0 )     9.18       (23.1 )
As in the case of the gap analysis table, the methods management used in the table above have some inherent shortcomings. This type of modeling requires management to make assumptions which may not reflect the manner in which actual yields and costs respond to changes in market interest rates. For example, management makes assumptions regarding the acceleration rate of the prepayment speeds of higher yielding mortgage loans. Prepayments will accelerate in a falling rate environment and the reverse will occur in a rising rate environment. Management also assumes that decay rates on core deposits will accelerate in a rising rate environment and the reverse in a falling rate environment. The table assumes that management will take no action in response to the changes in interest rates, when in practice rate changes on certain products, such as savings deposits, may lag market changes. In addition, prepayment estimates and other assumptions within the model are subjective in nature, involve uncertainties, and therefore cannot be determined with precision. Accordingly, although the present value of the equity model may provide an estimate of the Company’s interest rate risk at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in interest rates on the Company’s present value of equity.

58

Table of Contents

Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Bank Mutual Corporation
Milwaukee, Wisconsin
We have audited the accompanying consolidated statement of financial condition of Bank Mutual Corporation and Subsidiaries (the “Company”) as of December 31, 2008, and the related consolidated statement of income, changes in shareholders’ equity, and cash flows for the year then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit. 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 2008 consolidated financial statements present fairly, in all material respects, the financial position of Bank Mutual Corporation and subsidiaries as of December 31, 2008, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 4, 2009, expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
March 4, 2009

59

Table of Contents

Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Bank Mutual Corporation
Milwaukee, Wisconsin
We have audited the accompanying consolidated balance sheet of Bank Mutual Corporation and subsidiaries as of December 31, 2007, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bank Mutual Corporation and subsidiaries at December 31, 2007, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 2006 the Company changed its method of accounting for stock-based compensation to adopt Statement of Financial Accounting Standards No. 123 (Revised), Share Based Payments, changed its method of accounting for pension plans to adopt Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, and adopted the provisions of Securities and Exchange Commission Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
March 5, 2008

60

Table of Contents

Bank Mutual Corporation and Subsidiaries
Consolidated Statements of Financial Condition
                 
    December 31
    2008   2007
    (Dollars in Thousands)
Assets
                
 
Cash and due from banks
   $ 41,017     $ 36,235  
Interest-earning deposits
     71,876       2,714  
     
Cash and cash equivalents
     112,893       38,949  
Securities available-for-sale, at fair value:
                
Investment securities
     419,138       99,450  
Mortgage-related securities
     850,867       1,099,922  
Loans held-for-sale
     19,030       7,952  
Loans receivable, net
     1,829,053       1,994,556  
Goodwill
     52,570       52,570  
Other intangible assets
     1,809       2,428  
Mortgage servicing rights
     3,703       4,708  
Other assets
     200,626       187,511  
     
 
                
Total assets
   $ 3,489,689     $ 3,488,046  
     
 
                
Liabilities and shareholders’ equity
                
 
                
Liabilities:
                
Deposit liabilities
   $ 2,130,348     $ 2,112,968  
Borrowings
     907,971       912,459  
Advance payments by borrowers for taxes and insurance
     1,929       1,815  
Other liabilities
     46,906       27,859  
     
Total liabilities
     3,087,154       3,055,101  
Minority interest in real estate development partnership
     2,924       2,910  
     
Shareholders’ equity:
                
Preferred stock – $.01 par value:
                
Authorized – 20,000,000 shares in 2008 and 2007
Issued and outstanding – none in 2008 and 2007
     —       —  
Common stock – $.01 par value:
                
Authorized – 200,000,000 shares in 2008 and 2007
Issued – 78,783,849 shares in 2008 and 2007
Outstanding – 47,686,759 shares in 2008 and 49,834,756 in 2007
     788       788  
Additional paid-in capital
     498,501       498,408  
Retained earnings
     273,826       273,330  
Unearned ESOP shares
     (1,247 )     (2,166 )
Accumulated other comprehensive loss
     (16,404 )     (6,069 )
Treasury stock – 31,097,090 shares in 2008 and 28,949,093 in 2007
     (355,853 )     (334,256 )
     
Total shareholders’ equity
     399,611       430,035  
     
 
                
Total liabilities and shareholders’ equity
   $ 3,489,689     $ 3,488,046  
     
Refer to Notes to Consolidated Financial Statements

61

Table of Contents

Bank Mutual Corporation and Subsidiaries
Consolidated Statements of Income
                         
    Year ended December 31
    2008   2007   2006
    (Dollars in Thousands, Except Per Share Data)
Interest income:
                        
Loans
   $ 113,635     $ 123,141     $ 118,708  
Investment securities
     16,041       4,871       3,762  
Mortgage-related securities
     45,535       52,518       50,017  
Interest-earning deposits
     2,345       2,471       1,917  
     
Total interest income
     177,556       183,001       174,404  
     
Interest expense:
                        
Deposit liabilities
     64,689       76,011       68,712  
Borrowings
     39,484       37,738       30,355  
Advance payments by borrowers for taxes and insurance
     18       22       24  
     
Total interest expense
     104,191       113,771       99,091  
     
Net interest income
     73,365       69,230       75,313  
Provision for (recovery of) loan losses
     1,447       (272 )     632  
     
Net interest income after provision for loan losses
     71,918       69,502       74,681  
     
Non-interest income:
                        
Service charges on deposits
     6,688       6,612       6,085  
Brokerage and insurance commissions
     2,626       2,617       2,400  
Loan related fees and servicing revenue
     560       478       511  
Gain on sales of loans
     1,693       1,478       1,132  
Gains (losses) on investments
     (1,166 )     (1,228 )     694  
Real estate investment partnership income
     —       1,422       —  
Other
     7,307       9,049       6,213  
     
Total non-interest income
     17,708       20,428       17,035  
     
Non-interest expense:
                        
Compensation, payroll taxes and other employee benefits
     38,538       38,234       37,468  
Occupancy and equipment
     11,614       11,277       10,539  
Amortization of other intangible assets
     618       661       661  
Real estate investment partnership cost of sales
     —       645       —  
Other
     12,607       12,726       12,643  
     
Total non-interest expense
     63,377       63,543       61,311  
Minority interest in income (loss) of real estate operations
     (1 )     392       —  
     
Income before income taxes
     26,250       25,995       30,405  
Income taxes
     9,094       8,892       9,808  
     
 
                        
Net income
   $ 17,156     $ 17,103     $ 20,597  
     
 
                        
Per share data:
                        
Earnings per share — basic
   $ 0.36     $ 0.32     $ 0.35  
Earnings per share — diluted
   $ 0.35     $ 0.31     $ 0.34  
Cash dividends per share paid
   $ 0.36     $ 0.33     $ 0.29  
Refer to Notes to Consolidated Financial Statements

62

Table of Contents

Bank Mutual Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
                                 
            Additional           Unearned
    Common   Paid-In   Retained   ESOP
    Stock   Capital   Earnings   Shares
    (Dollars in Thousands, Except Per Share Data)
Balances at January 1, 2006
   $ 788     $ 497,589     $ 269,913     $ (3,966 )
Impact of adoption of SAB 108
     —       —       (1,101 )     —  
Comprehensive income:
                                
Net income
     —       —       20,597       —  
Other comprehensive income:
                                
Net unrealized gain on securities available-for-sale, net of deferred income tax expense of $622
     —       —       —       —  
Pension asset, net of deferred income tax expense of $457
     —       —       —       —  
Total comprehensive income
     —       —       —       —  
Purchase of treasury stock
     —       —       —       —  
Committed ESOP shares
     —       2,977       —       900  
Exercise of stock options
     —       (2,557 )     —       —  
Share based payments
     —       5,248       —       —  
Impact of adoption of SFAS 123(R)
     —       (6,955 )     —       —  
Cash dividends ($0.29 per share)
     —       —       (15,955 )     —  
     
Balance at December 31, 2006
   $ 788     $ 496,302     $ 273,454     $ (3,066 )
Comprehensive income:
                                
Net income
     —       —       17,103       —  
Other comprehensive income:
                                
Net unrealized gain on securities available-for-sale, net of deferred income tax expense of $5,199
     —       —       —       —  
Pension asset, net of deferred income tax expense of $349
     —       —       —       —  
Total comprehensive income
     —       —       —       —  
Purchase of treasury stock
     —       —       —       —  
Committed ESOP shares
     —       2,843       —       900  
Exercise of stock options
     —       (3,001 )     —       —  
Share based payments
     —       2,264       —       —  
Cash dividends ($0.33 per share)
     —       —       (17,227 )     —  
     
Balance at December 31, 2007
   $ 788     $ 498,408     $ 273,330     $ (2,166 )
Comprehensive income:
                                
Net income
     —       —       17,156       —  
Other comprehensive income:
                                
Net unrealized loss on securities available-for-sale, net of deferred income tax benefit of $2,962
     —       —       —       —  
Pension liability, net of deferred income tax benefit of $2,365
     —       —       —       —  
Total comprehensive income
     —       —       —       —  
Impact of change in measurement date in accordance with SFAS 158
     —       —       (218 )     —  
Purchase of treasury stock
     —       —       —       —  
Issuance of management recognition plan shares
     —       (403 )     —       —  
Committed ESOP shares
     —       2,696       —       919  
Exercise of stock options
     —       (4,489 )     —       —  
Share based payments
     —       2,289       —       —  
Cash dividends ($0.36 per share)
     —       —       (16,442 )     —  
     
Balance at December 31, 2008
   $ 788     $ 498,501     $ 273,826     $ (1,247 )
     
Refer to Notes to Consolidated Financial Statements

63

Table of Contents

Bank Mutual Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
                                 
    Accumulated Other   Unearned        
    Comprehensive   Deferred   Treasury    
    Income (Loss)   Compensation   Stock   Total
    (Dollars in Thousands, Except Per Share Data)
Balances at January 1, 2006
   $ (17,346 )   $ (6,955 )   $ (195,649 )   $ 544,374  
Impact of adoption of SAB 108
     —       —       —       (1,101 )
 
                                
Comprehensive income:
                                
Net income
     —       —       —       20,597  
Other comprehensive income:
                                
Net unrealized gain on securities available-for-sale, net of deferred income tax expense of $622
     1,214       —       —       1,214  
Pension asset, net of deferred income tax expense of $457
     706       —       —       706  
 
                                
Total comprehensive income
     —       —       —       22,517  
Purchase of treasury stock
     —       —       (27,828 )     (27,828 )
Committed ESOP shares
     —       —       —       3,877  
Exercise of stock options
     —       —       5,249       2,692  
Share based payments
     —       —       (45 )     5,203  
Impact of adoption of SFAS 123(R)
     —       6.955       —       —  
Cash dividends ($0.29 per share)
     —       —       —       (15,955 )
     
Balance at December 31, 2006
   $ (15,426 )     —     $ (218,273 )   $ 533,779  
 
                                
Comprehensive income:
                                
Net income
     —       —       —       17,103  
Other comprehensive income:
                                
Net unrealized gain on securities available-for-sale, net of deferred income tax expense of $5,199
     8,709       —       —       8,709  
Pension asset, net of deferred income tax expense of $349
     648       —       —       648  
 
                                
Total comprehensive income
     —       —       —       26,460  
Purchase of treasury stock
     —       —       (120,687 )     (120,687 )
Committed ESOP shares
     —       —       —       3,743  
Exercise of stock options
     —       —       4,830       1,829  
Share based payments
     —       —       (126 )     2,138  
Cash dividends ($0.33 per share)
     —       —       —       (17,227 )
     
Balance at December 31, 2007
   $ (6,069 )     —     $ (334,256 )   $ 430,035  
 
                                
Comprehensive income:
                                
Net income
     —       —       —       17,156  
Other comprehensive income:
                                
Net unrealized loss on securities available-for-sale, net of deferred income tax benefit of $2,962
     (5,935 )     —       —       (5,935 )
Pension liability, net of deferred income tax benefit of $2,365
     (4,392 )     —       —       (4,392 )
 
                                
Total comprehensive income
     —       —       —       6,829  
Impact of change in measurement date in accordance with SFAS 158
     (8 )     —       —       (226 )
Purchase of treasury stock
     —       —       (29,927 )     (29,927 )
Issuance of management recognition plan shares
     —       —       403       —  
Committed ESOP shares
     —       —       —       3,615  
Exercise of stock options
     —       —       8,181       3,692  
Share based payments
     —       —       (254 )     2,035  
Cash dividends ($0.36 per share)
     —       —       —       (16,442 )
     
Balance at December 31, 2008
   $ (16,404 )     —     $ (355,853 )   $ 399,611  
     
Refer to Notes to Consolidated Financial Statements

64

Table of Contents

Bank Mutual Corporation and Subsidiaries
Consolidated Statements of Cash Flows
                         
    Year ended December 31
    2008   2007   2006
    (Dollars in Thousands)
Operating activities:
                        
Net income
   $ 17,156     $ 17,103     $ 20,597  
Adjustments to reconcile net income to net cash provided by operating activities:
                        
Net provision for (recovery of) loan losses
     1,447       (272 )     632  
Provision for depreciation
     2,469       2,620       2,644  
Amortization of other intangible assets
     618       661       661  
Amortization of mortgage servicing rights
     2,409       1,191       1,158  
Minority interest in real estate investment partnership
     1       391       —  
Stock-based compensation expense
     5,650       5,881       9,080  
Net amortization on securities
     (1,482 )     (1,894 )     (826 )
Loans originated for sale
     (139,906 )     (107,018 )     (90,988 )
Proceeds from loan sales
     129,117       103,085       89,605  
Net gain on sale of available-for-sale securities
     (7,192 )     —       (694 )
Other than temporary impairment of available-for-sale securities
     8,358       1,228       —  
Net gain from real estate investment partnership
     —       (777 )     —  
Gain on sales of loans originated for sale
     (1,693 )     (1,478 )     (1,132 )
Gain on sale of real estate owned
     —       —       (33 )
Adoption of SAB 108
     —       —       (1,101 )
Increase (decrease) in other liabilities
     (40 )     (15,517 )     26,616  
Decrease (increase) in other assets
     (9,452 )     21,415       (44,682 )
Increase in accrued interest receivable
     (1,908 )     (1,118 )     (1,787 )
     
Net cash provided by operating activities
     5,552       25,501       9,750  
     
Investing activities:
                        
Net purchases of investments in mutual funds
     —       —       (264 )
Proceeds from maturities of investment securities
     29,992       —       14,721  
Purchases of investment securities
     (351,202 )     (51,270 )     —  
Purchases of mortgage-related securities
     (345,842 )     (247,428 )     (198,460 )
Principal repayments on mortgage-related securities
     195,480       227,041       224,693  
Proceeds from sale of investment securities
     392,358       —       702  
Net decrease (increase) in loans receivable
     160,877       26,317       (35,894 )
Proceeds from real estate investment partnership
     —       1,422       —  
Purchase of Federal Home Loan Bank stock
     —       (216 )     —  
Redemption of FHLB stock
     —       —       2,661  
Proceeds from sale of foreclosed properties
     2,100       949       737  
Net purchases of premises and equipment
     (3,145 )     (3,722 )     (5,581 )
     
Net cash provided by (used in) investing activities
     80,618       (46,907 )     3,315  
     
Refer to Notes to Consolidated Financial Statements

65

Table of Contents

Bank Mutual Corporation and Subsidiaries
Consolidated Statements of Cash Flows
                         
    Year ended December 31
    2008   2007   2006
    (Dollars in Thousands)
Financing activities:
                        
Net cash inflows (outflows) from deposit liabilities
   $ 34,825     $ (56,070 )   $ 65,172  
Net decrease in short-term borrowings
     —       (175,000 )     (25,000 )
Proceeds from long-term borrowings
     —       657,950       398,075  
Repayments on long-term borrowings
     (4,488 )     (275,516 )     (433,846 )
Net increase (decrease) in advance payments by borrowers for taxes and insurance
    114       (384 )     (330 )
Proceeds from exercise of stock options
     3,313       1,396       1,940  
Excess tax benefit from exercise of stock options
     379       433       752  
Cash dividends
     (16,442 )     (17,227 )     (15,955 )
Purchase of treasury stock
     (29,927 )     (120,687 )     (27,828 )
     
Net cash provided by (used in) financing activities
     (12,226 )     14,895       (37,020 )
     
Increase (decrease) in cash and cash equivalents
     73,944       (6,511 )     (23,955 )
Cash and cash equivalents at beginning of year
     38,949       45,460       69,415  
     
Cash and cash equivalents at end of year
   $ 112,893     $ 38,949     $ 45,460  
     
 
                        
Supplemental information:
                        
Interest paid on deposits and borrowings
   $ 121,660     $ 102,744     $ 92,022  
Income taxes paid
     10,704       8,187       10,786  
Loans transferred to foreclosed properties and repossessed assets
     3,179       3,724       1,429  
Refer to Notes to Consolidated Financial Statements

66

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
1. Summary of Significant Accounting Policies
Business
Bank Mutual Corporation (the “Company”), a Wisconsin corporation, is a federally-registered unitary savings and loan bank holding company which holds all of the outstanding shares of Bank Mutual, a federal savings bank (the “Bank”).
The Bank is a federal savings bank offering a full range of financial services to customers who are primarily located in the state of Wisconsin. The Bank is principally engaged in the business of attracting deposits from the general public and using such deposits to originate residential and commercial real estate loans, consumer loans, and commercial and industrial loans.
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The consolidated financial statements include the accounts and transactions of the Company and its wholly-owned subsidiaries. The Bank has the following wholly-owned subsidiaries: BancMutual Financial & Investment Services, Inc., Mutual Investment Corporation, MC Development Ltd., and First Northern Investments, Inc. All intercompany accounts and transactions have been eliminated in consolidation. The Bank or its subsidiaries also own 50% interests in two entities, Savings Financial Corporation, which is accounted for using the equity method, and Arrowood Development, LLC, which is a variable interest entity and is consolidated into the financial statements as required by Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (Revised), “Consolidation of Variable Interest Entities” (“FIN 46”).
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of financial condition and revenues and expenses for the period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers federal funds sold and interest-bearing deposits that have original maturities of three months or less to be cash equivalents. Under Regulation D, the Bank is required to maintain cash and reserve balances with the Federal Reserve Bank. The average amount of reserve balances for the years ended December 31, 2008 and 2007 was approximately $610 and $598, respectively.
Federal Home Loan Bank Stock
Stock of the Federal Home Loan Bank of Chicago (“FHLB of Chicago”) is owned due to regulatory requirements and carried at cost, which is its redeemable value, and is included in other assets.
Securities Available-for-Sale
Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of accumulated other comprehensive income in shareholders’ equity.
The amortized cost of securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-related securities, over the estimated life of the security. Such accretion or amortization is included in interest income from investments. Interest and dividends are

67

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
1. Summary of Significant Accounting Policies (continued)
included in interest income from investments. Realized gains and losses and declines in value judged to be other-than-temporary are included in net gain or loss on sales of securities and are based on the specific identification method.
Impairment of available-for-sale securities is evaluated considering numerous factors, and their relative significance varies case-by-case. Factors considered include the length of time and extent to which the market value has been less than cost; the financial condition and near-term prospects of the issuer of a security; and the Bank’s intent and ability to retain the security in order to allow for an anticipated recovery in fair value. If, based upon an analysis of each of the above factors, it is determined that the impairment is other-than-temporary, the carrying value of the security is written down to fair value, and a loss is recognized through earnings.
Loans Held-for-Sale
Loans held-for-sale, which generally consist of current production of certain fixed-rate mortgage loans, are recorded at the lower of cost or market value, determined on an individual loan basis. Fees received from the borrower are deferred and recorded as an adjustment of the carrying value.
Loans Receivable and Related Interest Income
Interest on loans is accrued and credited to income as earned. Accrual of interest is generally discontinued either when reasonable doubt exists as to the full, timely collection of interest or principal or when a loan becomes contractually past due by more than 90 days with respect to interest or principal. At that time, any accrued but uncollected interest is reversed and additional income is recorded only to the extent that payments are received and the collection of principal is reasonably assured. Loans are generally restored to accrual status when the obligation is brought to a current status by the borrower. Loans are shown net of the allowance for loan losses.
Loan Fees and Related Costs
Loan origination and commitment fees and certain direct loan origination costs are deferred and amortized as an adjustment of the related loans’ yield. The Company amortizes these amounts in accordance with Statement of Financial Accounting Standards No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases” (“SFAS 91”).
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses inherent in the loan portfolio and is based on the size and current risk characteristics of the loan portfolio, an assessment of individual problem loans and pools of homogenous loans, actual loss experience, current economic events in specific industries and geographical areas, including unemployment levels, peer comparisons, and other pertinent factors, including regulatory guidance and general economic conditions. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends, all of which may be susceptible to significant change. Loan losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for loan losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors. Evaluations are conducted at least quarterly and more often if deemed necessary.

68

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
1. Summary of Significant Accounting Policies (continued)
Mortgage Servicing Rights
Mortgage servicing rights are recorded as an asset when loans are sold with servicing rights retained. The total cost of loans sold is allocated between the loan balance and their servicing asset based on their relative fair values. The capitalized value of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net future servicing revenue. Mortgage servicing rights are carried at the lower of the initial carrying value, adjusted for amortization, or estimated fair value. The carrying values are periodically evaluated for impairment. For purposes of measuring impairment, the servicing rights are stratified into pools based on term and interest rate. Impairment represents the excess of the remaining capitalized cost of a stratified pool over its fair value, and is recorded through a valuation allowance. The fair value of each servicing rights pool is calculated based on the present value of estimated future cash flows using a discount rate, given current market conditions. Estimates of fair value include assumptions about prepayment speeds, interest rates and other factors which are subject to change over time. Changes in these underlying assumptions could cause the fair value of mortgage servicing rights, and the related valuation allowance, if any, to change significantly in the future.
Mortgage Banking Loan Commitments
In connection with its mortgage banking activities, the Company enters into loan commitments to fund residential mortgage loans at specified interest rates and within specified periods of time, generally up to 60 days from the time of rate lock. A loan commitment whose loan arising from exercise of the loan commitment will be held for sale upon funding is a derivative instrument under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” (as amended), which must be recognized at fair value on the consolidated balance sheet in other assets and other liabilities with changes in its value recorded in income from mortgage banking operations.
In determining the fair value of its derivative loan commitments for economic purposes, the Company considers the value that would be generated when the loan arising from exercise of the loan commitment is sold in the secondary mortgage market. That value includes the price that the loan is expected to be sold for in the secondary mortgage market.
Foreclosed Properties and Repossessed Assets
Foreclosed properties acquired through, or in lieu of, loan foreclosure are recorded at the lower of cost or fair value less estimated costs to sell. Costs related to the development and improvement of property are capitalized, whereas costs related to holding the property are expensed. Gains and losses on sales are recognized based on the carrying value upon closing of the sale.
Premises and Equipment
Land, buildings, leasehold improvements and equipment are carried at amortized cost. Buildings and equipment are depreciated over their estimated useful lives (office buildings 40 to 44 years and furniture and equipment 3 to 10 years) using the straight-line method. Leasehold improvements are amortized over the shorter of their useful lives or expected lease terms. The Company reviews buildings, leasehold improvements and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment exists when the estimated undiscounted cash flows for the property are less than its carrying value. If identified, an impairment loss is recognized through a charge to earnings based on the fair value of the property.

69

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
1. Summary of Significant Accounting Policies (continued)
Goodwill and Other Intangible Assets
Goodwill, representing the excess of purchase price over the fair value of net assets acquired, results from acquisitions made by the Company. Goodwill is reviewed at least annually for impairment based upon guidelines specified by SFAS 142, “Goodwill and Other Intangible Assets.” SFAS 142 requires that goodwill be assessed at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment. The Company determined that the consolidated entity has one operating segment and is the level for which goodwill is assessed. Other intangible assets, primarily attributed to the customer relationships acquired, are amortized over their estimated useful lives, generally seven to fifteen years. Other intangible assets are reviewed if facts and circumstances indicate that they may be impaired.
Life Insurance Policies
Investments in life insurance policies owned by the Company are carried at the amount that could be realized under the insurance contract if the Company cashed them in on the respective dates.
Income Taxes
The Company files a consolidated federal income tax return and separate, or combined, state income tax returns, depending on the state. A deferred tax asset or liability is determined based on the enacted tax rates that will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company’s income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date of the change. A valuation allowance is provided for any deferred tax asset for which it is more likely than not that the asset will not be realized. Changes in valuation allowances are recorded as a component of income taxes.
Earnings Per Share
Basic and diluted earnings per share (“EPS”) are computed by dividing net income by the weighted-average number of common shares outstanding for the period. ESOP shares committed to be released are considered outstanding for basic EPS calculations. Vested shares of restricted stock which have been awarded under the management recognition plan (“MRP”) provisions of the Company’s 2004 and 2001 Stock Incentive Plans are also considered outstanding for basic EPS. Non-vested MRP and stock option shares are considered dilutive potential common shares and are included in the weighted-average number of shares outstanding for diluted EPS.
Pension Costs
The Company has both defined benefit and defined contribution plans. The Company’s net periodic pension cost of the defined benefit plan consists of the expected cost of benefits earned by employees during the current period and an interest cost on the projected benefit obligation, reduced by the expected earnings on assets held by the retirement plan, amortization of prior service cost, and amortization of recognized actuarial gains and losses over the estimated future service period of existing plan participants.
The costs associated with the defined contribution plan consist of a predetermined percentage of compensation, which is determined by the Company’s board of directors.

70

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
1. Summary of Significant Accounting Policies (continued)
Segment Information
The Company has determined that it has one reportable segment – community banking. The Company offers a range of financial products and services to external customers, including: accepting deposits from the general public; originating residential, consumer and commercial loans; and marketing annuities and other insurance products.
Stock Compensation
In May 2001, the Company shareholders approved the 2001 Stock Incentive Plan (the “2001 Plan”), providing for restricted stock (“MRP”) awards of up to 1,226,977 shares. All outstanding MRPs under the 2001 Plan were fully vested by 2006 and therefore no MRPs under that plan were outstanding at December 31, 2008 and 2007. No further MRPs may be granted under the 2001 Plan.
In May 2004, the Company shareholders approved the 2004 Stock Incentive Plan (the “2004 Plan”), providing for MRP awards up to 1,642,521 shares. As of December 31, 2008, 654,721 shares remain eligible for award under the 2004 Plan. The MRP grants under the 2004 Plan are being amortized to compensation expense as the Company’s employees and directors become vested in the granted shares. The amount amortized to expense was $1,735, $1,873, and $2,334 for the years ended December 31, 2008, 2007, and 2006, respectively. The outstanding non-vested MRP grants under the 2004 Plan had a fair value of $2,250 and an unamortized cost of $972 at December 31, 2008. The cost of these shares are expected to be recognized over a weighted-average period of 0.9 years.
The 2001 Plan also provided for the award of stock options for 4,150,122 shares. All outstanding options under the 2001 Plan are fully vested; no further options may be granted under the 2001 Plan. The 2004 Plan also provides for the award of stock options for up to 4,106,362 shares. As of December 31, 2008, options for 1,592,362 shares remain eligible for award under the 2004 Plan. Options granted under the 2004 Plan generally vest over five years from the date of grant.
The following schedule reflects activity in the Company’s vested and non-vested stock options for the years ended December 31, 2008, 2007, and 2006.
                                                 
    For the Year Ended December 31
    2008     2007     2006  
    Stock     Weighted     Stock     Weighted     Stock     Weighted  
    Options     Avg. Cost     Options     Avg. Cost     Options     Avg. Cost  
Outstanding at beginning of year
     4,090,628     $ 7.3650       4,525,238     $ 7.0730       4,919,051     $ 6.8170  
Granted
     82,000     $ 11.6874       —       —       50,000     $ 12.2340  
Exercised
     (667,461 )   $ 4.9956       (402,610 )   $ 3.7620       (436,813 )   $ 4.7236  
Forfeited
     (59,200 )   $ 10.6730       (32,000 )   $ 10.6730       (7,000 )   $ 10.6730  
 
                                          
Outstanding at end of year
     3,445,967     $ 7.8763       4,090,628     $ 7.3650       4,525,238     $ 7.0730  
 
                                          
The total intrinsic value of options outstanding as of December 31, 2008, was $12,683. The total intrinsic value of vested options as of the same date was $12,320.

71

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
1. Summary of Significant Accounting Policies (continued)
The following table summarizes activity in non-vested options during 2008.
                 
            Weighted
            Avg. Grant
    Stock   Date Fair
    Options   Value
Non-vested options at beginning of year
     906,000     $ 3.28  
Granted
     82,000     $ 1.85  
Vested
     (411,600 )   $ 3.30  
Forfeited
     (59,200 )   $ 3.30  
 
                
Non-vested options at end of year
     517,200     $ 3.03  
 
                
The following table provides additional information regarding the Company’s outstanding options as of December 31, 2008.
                         
    Non-Vested     Vested     Remaining  
Exercise Price   Options     Options     Contractual Life  
$  3.2056
     —       1,312,167     2.3 years
$10.6730
     405,200       1,596,600     5.3 years
$12.2340
     30,000       20,000     7.5 years
$11.1600
     32,000       —     9.3 years
$12.0250
     50,000       —     9.6 years
             
Total
     517,200       2,928,667     4.2 years
             
Weighted average exercise price
   $ 10.9244     $ 7.3381          
             
During the years ended December 31, 2008, 2007, and 2006, the Company recorded stock option compensation expense of $300, $278, and $463, respectively, which approximates the total fair value of the options that vested during these periods. As of December 31, 2008, there was $281 in total unrecognized stock option compensation expense related to non-vested options. This cost is expected to be recognized over a weighted-average period of 1.3 years.
The estimated fair value of each option granted is calculated using the Black-Scholes option-pricing model. The weighted average estimated fair values of the options granted in 2008 and 2006 were $1.85 and $2.56 per share, respectively. The following summarizes the weighted average assumptions used in the model during each year options were granted.
                         
    2008   2007   2006
     
Risk-free interest rate
     3.15 %   NA     5.04 %
Dividend yield
     3.00 %   NA     2.00 %
Expected stock volatility
     18.20 %   NA     12.40 %
Expected years until exercise
     7.50     NA     7.50  
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The Company’s stock options have characteristics significantly different from traded options and, therefore, changes in the subjective input assumptions can materially affect the fair value estimate. Option valuation models such as the Black-Scholes require the input of highly subjective assumptions including the expected stock price volatility, which is computed using five-years of actual price activity in the Company’s stock. The Company uses historical data of employee behavior as a basis to estimate the expected life of the options, as well as forfeitures due to employee terminations. The Company also

72

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
1. Summary of Significant Accounting Policies (continued)
uses its actual dividend yield at the time of the grant, as well as actual U.S Treasury yields in effect at the time of the grant to estimate the risk-free rate.
The Company has no stock compensation plans that have not been approved by shareholders.
Recent Accounting Changes
In February 2007, FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which permits eligible assets and liabilities to be measured at fair value without having to apply complex hedge accounting provisions. The Company did not apply the fair value option to any existing financial assets or liabilities as of January 1, 2008, which was the Company’s adoption date. Consequently, the Company’s adoption of SFAS 159 had no impact on the Company’s financial statements.
On September 15, 2006, FASB issued SFAS 157 “Fair Value Measurements” which gives guidance for using fair value to measure assets and liabilities and expands disclosures about the use of fair value. The Company adopted SFAS 157 on January 1, 2008. Adoption of SFAS 157 had no material effect on the financial statements. The disclosures required by SFAS 157 are included in Note 14, below.
In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which provides guidance regarding the process of quantifying financial misstatements and addresses the diversity in practice in quantifying financial statement misstatements and the potential under current practices for the build up of improper amounts on the balance sheet.
The techniques most commonly used in practice to accumulate and quantify misstatements are generally referred to as “rollover” and “iron curtain” approaches. The rollover approach quantifies a misstatement based on the amount of the error originating in the current year income statements. This approach ignores the effect of correcting the portion of the current year balance sheet misstatement that originated in prior years. The iron curtain approach quantifies a misstatement based on the effects of correcting the misstatement existing on the balance sheet at the end of the current year, irrespective of the misstatement’s year(s) of origination. This approach ignores the effect on the current period income statements.
The SEC staff has indicated in SAB 108 that it does not believe that the exclusive reliance on either the rollover or iron curtain approach appropriately quantifies all misstatements that could be material to users of financial statements. The staff believes registrants must quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements on the current year financial statements. The staff believes that this can be accomplished by quantifying an error under both the rollover and iron curtain approaches as described above and by evaluating the error measured under each approach. Application of the guidance is required beginning with the first fiscal year ending after November 15, 2006. The Company adopted SAB 108 on December 31, 2006. Refer to Note 16 for the impact of SAB 108 on the Company’s consolidated financial statements.
On September 29, 2006, FASB issued SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” which requires a company to: (a) recognize in its statement of financial condition an asset for a defined benefit postretirement plan’s over funded status or a liability for a plan’s underfunded status; (b) measure a defined benefit postretirement plan’s assets and obligations that determine its funded status as of the end of the employers’ fiscal year; and (c) recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. The requirement to recognize the funded status of a defined postretirement plan and the disclosure requirements are effective for fiscal years ending after December 15, 2006, and the requirement to measure plan assets and benefit obligations as of the date of the fiscal year-end

73

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
1. Summary of Significant Accounting Policies (continued)
statement of financial condition is effective for fiscal years ending after December 15, 2008. The Company adopted the recognition portions of SFAS 158 as of December 2006 and it did not have a material impact on the Company’s financial position, results of operations, or liquidity. The Company adopted the measurement portions of SFAS 158 as of December 2008. Refer to “Note 10. Employee Benefit Plans,” below.
In December 2007, FASB issued SFAS 160 “Non-Controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.” SFAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years beginning after December 15, 2008. SFAS No. 160 will be applied prospectively to all non-controlling interests, including any that arose before the effective date. The Company is in the process of determining the impact SFAS 160 will have on the financial statements.
In December 2007, the FASB issued SFAS 141(R), “Business Combinations.” SFAS 141(R) replaces SFAS 141 and provides greater consistency in the accounting and financial reporting of business combinations. SFAS 141(R) requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction and any non-controlling interest in the acquiree at the acquisition date and be measured at the fair value as of that date. This includes the measurement of the acquirer’s shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance and deferred taxes. SFAS 141(R) is effective for the Company on January 1, 2009 and is to be applied prospectively. However, under the transition provisions of SFAS 141(R), the new requirements related to income tax accounting in business combinations apply to all business combinations, regardless of the consummation date. SFAS 141(R) may have a significant impact to the Company depending on the nature and type of future business combinations.
In December 2008, the FASB issued FASB Staff Position (“FSP”) FAS 132(R)-1 (“FSP 132(R)-1”), “Employers’ Disclosures about Postretirement Benefit Plan Assets.” FSP 132(R)-1 requires additional disclosure regarding plan assets held in an employer’s defined benefit pension or other postretirement plan to provide disclosures regarding investment allocations, major categories of plan assets, valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable (Level 3) inputs on changes in plan assets for the period and significant concentrations of risk within plan assets. FSP 132(R)-1 is effective for fiscal years ending after December 15, 2009. Earlier application of the provisions of this FSP is permitted. The Company plans on adopting FSP 132(R)-1 for the year ended December 31, 2009.
Reclassifications
In 2008, the Company changed its presentation of certain items in the consolidated statements of income and cash flows. Conforming changes were also reflected via a change in presentation of 2007 and 2006 amounts. In the consolidated statements of income, the Company changed its presentation of loan fee income. This resulted in a reclassification of $533 from loan related fees and servicing revenue to loan interest income for each of the years ended December 31, 2007 and 2006, and a reclassification of $549 and $506 from loan related fees and servicing revenue to other non-interest income for the years ended December 31, 2007 and 2006, respectively. In addition, the Company changed its presentation related to the addition and amortization of mortgage servicing rights on the consolidated statements of cash flows. Previously, the Company presented $(55) and $118 as net decrease (increase) in mortgage servicing rights for the years ended December 31, 2007 and 2006. Those items are now included in the line items amortization of mortgage servicing rights and proceeds from loan sales for the years ended December 31, 2007 and 2006. This had no impact on net cash provided by operating activities.

74

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
2. Securities Available-for-Sale
The amortized cost and fair value of investment securities available-for-sale are as follows:
                                 
    December 31, 2008
            Gross   Gross   Estimated
    Amortized   Unrealized   Unrealized   Fair
    Cost   Gains   Losses   Value
     
Investment securities:
                                
U.S. government and federal obligations
   $ 372,446     $ 7,089     $ —     $ 379,535  
Mutual funds
     39,632       36       (65 )     39,603  
Total investment securities
     412,078       7,125       (65 )     419,138  
     
Mortgage-related securities:
                                
Federal Home Loan Mortgage Corporation
     281,652       1,367       (782 )     282,237  
Federal National Mortgage Association
     411,528       2,534       (698 )     413,364  
Private label CMOs
     157,706       —       (29,147 )     128,559  
Government National Mortgage Association
     26,739       208       (240 )     26,707  
     
Total mortgage-related securities
     877,625       4,109       (30,867 )     850,867  
     
Total securities available-for-sale
   $ 1,289,703     $ 11,234     $ (30,932 )   $ 1,270,005  
     
                                 
    December 31, 2007
            Gross   Gross   Estimated
    Amortized   Unrealized   Unrealized   Fair
    Cost   Gains   Losses   Value
     
Investment securities:
                                
Mutual funds
   $ 46,548     $ 2     $ —     $ 46,550  
U.S. government and federal obligations
     51,270       766       —       52,036  
Stock in federal agencies
     1,442       44       (622 )     864  
     
Total investment securities
     99,260       812       (622 )     99,450  
     
Mortgage-related securities:
                                
Federal Home Loan Mortgage Corporation
     529,622       2,660       (7,384 )     524,898  
Federal National Mortgage Association
     368,104       1,240       (6,007 )     363,337  
Private label CMOs
     181,401       309       (1,072 )     180,638  
Government National Mortgage Association
     31,786       8       (745 )     31,049  
     
Total mortgage-related securities
     1,110,913       4,217       (15,208 )     1,099,922  
     
Total securities available-for-sale
   $ 1,210,173     $ 5,029     $ (15,830 )   $ 1,199,372  
     

75

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
2. Securities, Available-for-Sale (continued)
As of December 31, 2008, the following schedule identifies securities by time in which the securities had a gross unrealized loss.
                                                                 
    Less Than 12 Months   Greater Than 12 Months        
    in an Unrealized Loss Position   in an Unrealized Loss Position   Gross   Total
    Unrealized   Number   Estimated   Unrealized   Number   Estimated   Unrealized   Estimated
    Loss   of   Fair   Loss   of   Fair   Loss   Fair
    Amount   Securities   Value   Amount   Securities   Value   Amount   Value
     
Investment securities:
                                                                
Mutual funds
   $ (65 )     1     $ 643     $ —       —     $ —     $ (65 )   $ 643  
     
Mortgage-related securities:
                                                                
Federal Home Loan Mortgage Corporation
     —       —       —       (782 )     38       94,959       (782 )     94,959  
Federal National Mortgage Association
     (192 )     8       12,537       (506 )     40       96,429       (698 )     108,966  
Government National Mortgage Association
     (4 )     1       218       (236 )     6       14,825       (240 )     15,043  
Private label CMOs
     (6,078 )     11       56,594       (23,069 )     18       71,963       (29,147 )     128,557  
     
Total mortgage-related securities
     (6,274 )     20       69,349       (24,593 )     102       278,176       (30,867 )     347,525  
     
Total
   $ (6,339 )     21     $ 69,992     $ (24,593 )     102     $ 278,176     $ (30,932 )   $ 348,168  
     
During 2008, the Company recorded an impairment of $6,916 on one of its mutual fund investments. This impairment was recorded in the consolidated statement of income for the year ended December 31, 2008. The Company believes its gross unrealized losses as of December 31, 2008, were temporary in nature.
The Company has determined that the unrealized loss reported for mortgage-backed securities is temporary. The Company believes it is probable that it will receive all future contractual cash flows related to these securities. The Company has the positive intent and ability to hold these securities for the time necessary to recover the amortized cost.
As of December 31, 2007, the following schedule identifies securities by time in which the securities had a gross unrealized loss.
                                                                 
    Less Than 12 Months   Greater Than 12 Months        
    in an Unrealized Loss Position   in an Unrealized Loss Position   Gross   Total
    Unrealized   Number   Estimated   Unrealized   Number   Estimated   Unrealized   Estimated
    Loss   of   Fair   Loss   of   Fair   Loss   Fair
    Amount   Securities   Value   Amount   Securities   Value   Amount   Value
     
Investment securities:
                                                                
Stock in federal agencies
   $ (622 )     1     $ 818     $ —       —     $ —     $ (622 )   $ 818  
     
Mortgage-related securities:
                                                                
Federal Home Loan Mortgage Corporation
     —       —       —       (7,384 )     106       323,393       (7,384 )     323,393  
Federal National Mortgage Association
     (142 )     2       24,575       (5,865 )     80       227,448       (6,007 )     252,023  
Government National Mortgage Association
     —       —       —       (745 )     10       30,656       (745 )     30,656  
Private label CMOs
     (253 )     2       15,892       (819 )     16       92,050       (1,072 )     107,942  
     
Total mortgage-related securities
     (395 )     4       40,467       (14,813 )     212       673,547       (15,208 )     714,014  
     
Total
   $ (1,017 )     5     $ 41,285     $ (14,813 )     212     $ 673,547     $ (15,830 )   $ 714,832  
     
As of December 31, 2007, the Company determined that two investments in mutual funds that invested in mortgage-related securities had impairments equal to $1.2 million that were other-than-temporary. These impairments were

76

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
2. Securities, Available-for-Sale (continued)
recorded in the consolidated statement of income for the year ended December 31, 2007. The Company believes its gross unrealized losses as of December 31, 2007, were temporary in nature.
The amortized cost and fair values of securities by contractual maturity at December 31, 2008, are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay obligations with or without call or prepayment penalties.
                 
    Amortized   Fair
    Cost   Value
     
Due in one year or less
   $ —     $ —  
Due after one year through five years
     —       —  
Due after five years through ten years
     85,673       86,427  
Due after ten years
     286,773       293,108  
Mutual funds
     39,632       39,603  
Mortgage-related securities
     877,625       850,867  
     
Total securities available for sale
   $ 1,289,703     $ 1,270,005  
     
The following table summarizes the adjustment to other comprehensive income and the related tax effect for securities available-for-sale for each of the three years ended December 31:
                         
    2008   2007   2006
     
Change in unrealized holding gain (loss):
                        
Unrealized net gains (losses)
   $ (8,897 )   $ 13,908     $ 1,836  
Related tax expense (benefit)
     (2,962 )     5,199       622  
     
Change in other comprehensive income
   $ (5,935 )   $ 8,709     $ 1,214  
     
Investment securities with a fair value of approximately $206,642 and $55,542 at December 31, 2008 and 2007, were pledged to secure deposits, borrowings, and for other purposes as permitted or required by law.

77

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
3. Loans Receivable
                 
    December 31
    2008   2007
     
Loans receivable consist of the following:
                
Permanent mortgage loans:
                
One- to four-family
   $ 881,288     $ 1,059,307  
Multi-family
     190,497       206,640  
Commercial real estate
     275,802       202,528  
     
Total permanent mortgages
     1,347,587       1,468,475  
     
Construction and development loans:
                
One- to four-family
     17,349       35,040  
Multi-family
     71,208       58,712  
Commercial real estate
     70,612       76,649  
     
Total construction and development
     159,169       170,401  
     
Total mortgage loans
     1,506,756       1,638,876  
     
Consumer loans:
                
Fixed equity
     173,104       199,161  
Home equity lines of credit
     86,962       90,631  
Student
     21,469       21,845  
Home improvement
     36,023       33,604  
Automobile
     11,775       24,878  
Other
     8,740       9,439  
     
Total consumer loans
     338,073       379,558  
Commercial business loans
     49,623       53,784  
     
Gross loans receivable
     1,894,452       2,072,218  
Undisbursed loan proceeds
     (54,187 )     (68,457 )
Allowance for loan losses
     (12,208 )     (11,774 )
Unearned costs and discounts, net
     996       2,569  
     
Total loans receivable, net
   $ 1,829,053     $ 1,994,556  
     
The Company’s first mortgage loans and home equity lines of credit are primarily secured by properties housing one- to four-families which are generally located in the Company’s local lending areas in Wisconsin, Michigan, and Minnesota. Non-accrual loans at December 31, 2008, were $32,513 and at December 31, 2007, were $12,340.
A summary of the activity in the allowance for loan losses follows:
                         
    Year Ended December 31
    2008   2007   2006
     
Balance at beginning of year
   $ 11,774     $ 12,574     $ 12,090  
Provision for (recovery of) loan losses
     1,447       (272 )     632  
Charge-offs
     (1,058 )     (623 )     (367 )
Recoveries
     45       95       219  
     
Balance at end of year
   $ 12,208     $ 11,774     $ 12,574  
     
The unpaid principal balance of loans serviced for others was $728,407 and $707,519 at December 31, 2008 and 2007, respectively. These loans are not reflected in the consolidated financial statements.

78

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
3. Loans Receivable (continued)
A loan is considered impaired when, in management’s judgment, it becomes probable that all contractual principal and interest will not be collected. The following tables present data on impaired loans:
                 
    December 31
    2008   2007
     
Impaired loans for which an allowance has been provided
   $ 16,535     $ 15,957  
Impaired loans for which no allowance has been provided
     16,554       4,286  
     
Total loans determined to be impaired
   $ 33,089     $ 20,243  
     
Allowance for loan losses related to impaired loans
   $ 3,351     $ 1,715  
     
                         
    Year Ended December 31
    2008   2007   2006
     
Average recorded investment in impaired loans
   $ 21,396     $ 19,746     $ 6,507  
Cash basis interest income recognized from impaired loans
   $ 117     $ 853     $ 179  
4. Goodwill, Other Intangible Assets, and Mortgage Servicing Rights
Goodwill is not amortized but is subject to impairment tests on at least an annual basis. Management determined that there were no goodwill impairments in 2008, 2007, or 2006. The carrying value of goodwill at the end of each of these periods was $52,570.
Other intangible assets consist of deposit base intangibles. As of December 31, 2008 and 2007, deposit base intangibles were net of accumulated amortization of $12,691 and $12,072, respectively.
The carrying amount of mortgage servicing rights net of accumulated amortization and the associated valuation allowance at December 31 is presented in the following table.
                         
    2008   2007   2006
     
Mortgage servicing rights at beginning of year
   $ 4,708     $ 4,653     $ 4,771  
Additions
     1,404       1,246       1,040  
Amortization
     (1,587 )     (1,191 )     (1,158 )
     
Mortgage servicing rights at end of year
     4,525       4,708       4,653  
Valuation allowance
     (822 )     —       —  
     
Mortgage servicing rights at end of year
   $ 3,703     $ 4,708     $ 4,653  
     
The projections of amortization expense shown below for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of December 31, 2008. Future amortization expense may be significantly different depending upon changes in the mortgage servicing portfolio, mortgage interest rates and market conditions.

79

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
4. Goodwill, Other Intangible Assets, and Mortgage Servicing Rights (continued)
The following table shows the current period and estimated future amortization expense for amortizable intangible assets:
                         
    Mortgage        
    Servicing   Deposit Base    
    Rights   Intangibles   Total
     
Twelve months ended December 31, 2008
   $ 1,587     $ 618     $ 2,205  
     
Estimate for year ending December 31:
                        
2009
   $ 819     $ 405     $ 1,224  
2010
     813       405       1,218  
2011
     679       405       1,084  
2012
     507       199       706  
2013
     386       140       526  
Thereafter
     499       255       754  
     
Total
   $ 3,703     $ 1,809     $ 5,512  
     
5. Other Assets
Other assets are summarized as follows:
                 
    December 31
    2008   2007
     
Accrued interest:
                
Mortgage-related securities
   $ 6,669     $ 4,463  
Investment securities
     1,734       687  
Loans receivable
     8,130       9,475  
     
Total accrued interest
     16,533       14,625  
Foreclosed properties and repossessed assets
     4,768       3,687  
Premises and equipment
     52,209       51,628  
Federal Home Loan Bank stock, at cost
     46,092       46,092  
Bank owned life insurance
     51,261       48,871  
Prepaid and other assets
     29,763       22,608  
     
Total other assets
   $ 200,626     $ 187,511  
     
Premises and equipment are summarized as follows:
                 
    December 31
    2008   2007
     
Land and land improvements
   $ 17,300     $ 16,374  
Office buildings
     50,177       48,933  
Furniture and equipment
     18,701       18,190  
Leasehold improvements
     1,298       1,294  
     
Total cost
     87,476       84,791  
Less accumulated depreciation and amortization
     35,267       33,163  
     
Total premises and equipment
   $ 52,209     $ 51,628  
     
Depreciation expense for 2008, 2007, and 2006 was $2,469, $2,620, and $2,644, respectively.

80

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
5. Other Assets (continued)
The Company leases various branch offices, office facilities and equipment under non-cancelable operating leases which expire on various dates through 2017. Future minimum payments under non-cancelable operating leases with initial or remaining terms of one year or more for the years indicated are as follows at December 31, 2008:
         
2009
   $ 1,196  
2010
     969  
2011
     771  
2012
     676  
2013
     624  
Thereafter
     3,540  
 
      
Total
   $ 7,776  
 
      
Rental expense totaled $1,238, $1,132, and $886, for 2008, 2007, and 2006, respectively.
6. Deposits Liabilities
Deposit liabilities are summarized as follows:
                 
    December 31
    2008   2007
     
Checking accounts:
                
Non-interest-bearing
   $ 89,106     $ 97,506  
Interest-bearing
     180,278       170,986  
     
Total checking accounts
     269,384       268,492  
     
Money market accounts
     340,827       280,442  
Regular savings accounts
     185,003       183,756  
     
Certificate of deposits:
                
Due within one year
     960,205       1,076,140  
After one but within two years
     243,444       261,556  
After two but within three years
     25,782       26,980  
After three but within four years
     13,742       8,971  
After four but within five years
     91,961       6,631  
After five years
     —       —  
     
Total certificates of deposit
     1,335,134       1,380,278  
     
Total deposit liabilities
   $ 2,130,348     $ 2,112,968  
     
The aggregate amount of certificate accounts with balances of one hundred thousand dollars or more was $293,589 and $274,419 at December 31, 2008 and 2007, respectively.
Interest expense on deposits was as follows:
                         
    Year Ended December 31
    2008   2007   2006
     
Interest-bearing checking accounts
   $ 376     $ 351     $ 351  
Money market accounts
     8,245       8,500       7,620  
Regular savings accounts
     609       924       923  
Certificate of deposits
     55,459       66,236       59,818  
     
Total interest expense on deposit liabilities
   $ 64,689     $ 76,011     $ 68,712  
     

81

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
7. Borrowings
Borrowings consist of the following:
                                 
    December 31, 2008     December 31, 2007  
            Weighted-             Weighted-  
            Average             Average  
    Balance     Rate     Balance     Rate  
     
Federal Home Loan Bank advances maturing in:
                                
2008
   $ —       —     $ 1,025       5.90 %
2012
     100,000       4.52 %     100,000       4.52  
2013
     278       4.17       —       —  
Thereafter
     807,693       4.23       811,434       4.24  
 
                            
Total borrowings
   $ 907,971             $ 912,459          
 
                          
Substantially all of the Company’s FHLB advances are subject to prepayment penalties if voluntarily repaid prior to their stated maturity. At December 31, 2008, $856,000 of the Company’s FHLB advances were redeemable on a quarterly basis at the option of the FHLB of Chicago.
The Bank is required to maintain unencumbered mortgage loans in its portfolios aggregating at least 133% of the amount of outstanding advances from the FHLB of Chicago as collateral. The Bank’s borrowings at the FHLB of Chicago are limited to the lesser of: (1) 35% of total assets; (2) twenty (20) times the FHLB of Chicago capital stock owned by the Bank; or (3) the total of 60% of the book value of certain multi-family mortgage loans, 75% of the book value of one- to four-family mortgage loans, and 95% of certain mortgage-related securities. Advances are also collateralized by any capital stock of the FHLB of Chicago that is owned by the Bank, which amounted to $46,092 at December 31, 2008.
The Company has a $5,000 and a $10,000 line of credit with two financial institutions. At December 31, 2008 and 2007, no amounts were outstanding on these lines of credit.
8. Shareholders’ Equity
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional discretionary, actions by regulators, that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by federal regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as these terms are defined in regulations) to risk-weighted assets (as these terms are defined in regulations), and of Tier I capital (as these terms are defined in regulations) to average assets (as these terms are defined in regulations). Management believes, as of December 31, 2008, that the Bank met all capital adequacy requirements. Management is not aware of any conditions or events, which would change the Bank’s status as well capitalized.

82

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
8. Shareholders’ Equity (continued)
The actual and required capital amounts and ratios as of December 31, 2008 and 2007, are presented in the following table (all dollar amounts and ratios are unaudited):
                                                 
                                    To Be Well Capitalized
                                    Under Prompt
                    For Capital   Corrective Action
    Actual   Adequacy Purposes   Provisions
    Amount   Ratio   Amount   Ratio   Amount   Ratio
As of December 31, 2008:
                                                
Total capital
   $ 349,928       20.61 %   $ 135,856       8.00 %   $ 169,820       10.00 %
(to risk-weighted assets)
                                                
Tier 1 capital
     337,720       19.89       67,928       4.00       101,892       6.00  
(to risk-weighted assets)
                                                
Tier 1 capital
     337,720       9.79       138,028       4.00       172,536       5.00  
(to adjusted total assets)
                                                
 
                                                
As of December 31, 2007:
                                                
Total capital
   $ 337,154       19.93 %   $ 135,334       8.00 %   $ 169,167       10.00 %
(to risk-weighted assets)
                                                
Tier 1 capital
     325,380       19.23       67,667       4.00       101,500       6.00  
(to risk-weighted assets)
                                                
Tier 1 capital
     325,380       9.47       137,378       4.00       171,723       5.00  
(to adjusted total assets)
                                                
Following are reconciliations of the Bank’s equity under generally accepted accounting principles to capital as determined by regulators (amounts are unaudited):
                 
    December 31, 2008
    Risk-   Tier I
    Based   (Core)
    Capital   Capital
     
Stockholder’s equity according to the Bank’s records
   $ 378,963     $ 378,963  
Unrealized gains on investments
     12,779       12,779  
SFAS 158 adjustment
     3,625       3,625  
Goodwill and intangibles
     (53,652 )     (53,652 )
Investment in “non-includable” subsidiaries
     (3,773 )     (3,773 )
Disallowed servicing assets
     (222 )     (222 )
Allowance for loan losses
     12,208       —  
     
Regulatory capital
   $ 349,928     $ 337,720  
     
Accumulated other comprehensive income is as follows:
                 
    At December 31
    2008   2007
     
Net unrealized loss on securities available-for-sale
   $ (12,779 )   $ (6,844 )
Additional minimum pension asset
     (3,625 )     775  
     
Accumulated other comprehensive income (loss)
     (16,404 )   $ (6,069 )
     

83

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
9. Earnings Per Share
The computation of the Company’s basic and diluted earnings per share is presented in the following table.
                         
    Year Ended December 31  
    2008     2007     2006  
     
Basic earnings per share:
                        
Net income
   $ 17,156     $ 17,103     $ 20,597  
     
Weighted average shares outstanding
     47,212,574       53,593,140       58,710,159  
Allocated ESOP shares during the period
     327,250       327,251       327,493  
Vested MRP shares during the period
     186,636       189,252       277,996  
     
Basic shares outstanding
     47,726,460       54,109,643       59,315,648  
     
Basic earnings per share
   $ 0.36     $ 0.32     $ 0.35  
     
 
                        
Diluted earnings per share:
                        
Net income
   $ 17,156     $ 17,103     $ 20,597  
     
Weighted average shares outstanding used in basic earnings per share
     47,726,460       54,109,643       59,315,648  
Net dilutive effect of:
                        
Stock option shares
     898,416       1,267,200       1,625,082  
Non-vested MRP shares
     4,363       20,947       58,881  
     
Diluted shares outstanding
     48,629,239       55,397,790       60,999,611  
     
Diluted earnings per share
   $ 0.35     $ 0.31     $ 0.34  
     
The Company had stock options for 2,133,800, 2,271,000, and 50,000 shares outstanding at December 31, 2008, 2007, and 2006, respectively, which were not included in the computation of diluted earnings per share because they were anti-dilutive. These shares had weighted average exercise prices of $10.75, $10.71, and $12.23, as of those same dates, respectively.
10. Employee Benefit Plans
The Company has a discretionary, defined contribution savings plan (the “Savings Plan”). The Savings Plan is qualified under Sections 401 and 401(k) of the Internal Revenue Code and provides employees meeting certain minimum age and service requirements the ability to make contributions to the Savings Plan on a pretax basis. The Company then matches a percentage of the employee’s contributions. Matching contributions made by the Company were $155 in 2008, $146 in 2007, and $144 in 2006.
The Company also has a defined benefit pension plan covering employees meeting certain minimum age and service requirements and a supplemental pension plan for certain qualifying employees. The supplemental pension plan is funded through a “rabbi trust” arrangement. The benefits are generally based on years of service and the employee’s average annual compensation for five consecutive calendar years in the last ten calendar years which produces the highest average. The Company’s funding policy is to contribute annually the amount necessary to satisfy the requirements of the Employee Retirement Income Security Act of 1974.
On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS 158. SFAS 158 required the Company to recognize the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of its pension plan in the December 31, 2006, statement of financial position, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The adjustment to accumulated other comprehensive income at adoption represents the net unrecognized actuarial losses, unrecognized prior service

84

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
10. Employee Benefit Plans (continued)
costs, and unrecognized transition obligation remaining from the initial adoption of SFAS 87, all of which were previously netted against the plan’s funded status in the Company’s statement of financial position pursuant to the provisions of SFAS 87. These amounts will be subsequently recognized as net periodic pension cost pursuant to the Company’s historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic pension cost in the same periods will be recognized as a component of other comprehensive income. Those amounts will be subsequently recognized as a component of net periodic pension cost on the same basis as the amounts recognized in accumulated other comprehensive income at adoption of SFAS 158.
In December 2008 the Company adopted the measurement portions of SFAS 158 effective as of January 1, 2008. This resulted in an increase in the Company’s liabilities for its qualified pension plan and its supplemental pension plan of $347, an increase in deferred tax assets of $122, an after-tax increase to accumulated other comprehensive loss of $8, and an after tax charge to retained earnings of $218.
The changes in benefit obligations and plan assets at December 31, 2008, and, 2007, are presented in the following table. Due to the adoption of the measurement date provisions of SFAS 158, the changes in benefit obligations and plan assets for the year ended December 31, 2008, include fourteen months of activity. In 2007, the Company used October 31 as its measurement date.
                                 
    Qualified   Supplemental
    Pension Plan   Pension Plan
    2008   2007   2008   2007
         
Change in Benefit Obligation:
                                
Benefit obligation at beginning of year
   $ 26,863     $ 24,831     $ 6,880     $ 6,696  
Service cost
     2,033       1,789       215       173  
Interest cost
     1,934       1,471       491       393  
Actuarial loss (gain)
     329       (586 )     (6 )     (85 )
Benefits paid
     (770 )     (642 )     (347 )     (297 )
         
Benefit obligation at end of year
   $ 30,389     $ 26,863     $ 7,233     $ 6,880  
         
 
                                
Change in Plan Assets:
                                
Fair value of plan assets at beginning of year
   $ 28,237     $ 25,965     $ —     $ —  
Actual return on plan assets
     (4,146 )     2,024       —       —  
Employer contributions
     1,622       890       347       297  
Benefits paid
     (770 )     (642 )     (347 )     (297 )
         
Fair value of plan assets at end of year
     24,943       28,237       —       —  
         
Funded status at the end of the year
   $ (5,446 )   $ 1,374     $ (7,233 )   $ (6,880 )
         
The underfunded status of the qualified plan and the supplemental plan at December 31, 2008, and December 31, 2007 (in the case of the supplemental plan), are recognized in the statement of financial condition as accrued pension liability, which is a component of other liabilities. The overfunded status of the qualified plan at December 31, 2007, was recognized as prepaid pension asset, which is a component of other assets.

85

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
10. Employee Benefit Plans (continued)
Amounts recognized in accumulated other comprehensive income, net of tax, as of December 31, 2008 and 2007, are as follow:
                                 
    Qualified   Supplemental
    Pension Plan   Pension Plan
    2008   2007   2008   2007
         
Prior service cost
   $ —     $ 18     $ —     $ —  
Unrecognized net loss (gain)
     4,192       (198 )     (402 )     (398 )
         
Total
   $ 4,192     $ (180 )   $ (402 )   $ (398 )
         
The estimated net of tax costs that will be amortized from accumulated other comprehensive income into net periodic cost over the next fiscal year will be $363 for the qualified plan.
The accumulated benefit obligations for the defined benefit pension plan were $27,954 at December 31, 2008, and $24,365 at December 31, 2007.
The assumptions used to determine the benefit obligation as of December 31 is as follows:
                 
    2008   2007
     
Discount rate
     6.07 %     6.25 %
Rate of increase in compensation levels
     3.50 %     3.50 %
Expected long-term rate of return on plan assets (qualified plan)
     7.00 %     7.00 %
The assumptions used to determine the net cost for the years ended December 31 is as follows:
                         
    2008   2007   2006
     
Discount rate
     6.25 %     6.00 %     5.50 %
Rate of increase in compensation levels
     3.50 %     3.50 %     3.50 %
Expected long-term rate of return on plan assets (qualified plan)
     7.00 %     7.00 %     7.00 %
The expected long-term rate of return was estimated using a combination of the expected rate of return for immediate participation contracts and the historical rate of return for immediate participation contracts.
Using an actuarial measurement date of December 31, 2008 and October 31, 2006 and 2007, components of net periodic benefit cost follow:
                         
    2008   2007   2006
     
Qualified Pension Plan:
                        
Service cost
   $ 1,743     $ 1,789     $ 1,887  
Interest cost
     1,657       1,471       1,289  
Expected return on plan assets
     (1,953 )     (1,796 )     (1,772 )
Amortization of prior service cost
     23       30       30  
     
Net periodic cost
   $ 1,470     $ 1,494     $ 1,434  
     
Supplemental Pension Plan:
                        
Service cost
   $ 184     $ 173     $ 170  
Interest cost
     421       393       360  
Amortization of prior service cost
     —       55       70  
     
Net periodic cost
   $ 605     $ 621     $ 600  
     

86

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
10. Employee Benefit Plans (continued)
Pension plan assets which consist primarily of immediate participation guarantee contracts with an insurance company are actively managed by investment professionals.
At December 31, 2008, the projected benefit payments for each of the plans are as follows:
                         
    Qualified   Supplemental    
    Plan   Plan   Total
     
2009
   $ 969     $ 297     $ 1,266  
2010
     1,167       760       1,927  
2011
     1,332       760       2,092  
2012
     1,518       760       2,278  
2013
     1,783       760       2,543  
2014 – 2018
     12,230       2,666       14,896  
     
 
   $ 18,999     $ 6,003     $ 25,002  
     
The pension plan weighted-average asset allocations at December 31, 2008 and October 31, 2007, by asset category are as follows:
                 
    December 31   October 31
    2008   2007
     
Asset Category:
                
Equity securities
     4.8 %     10.2 %
Immediate participation guarantee contracts
     95.2       89.8  
     
Total
     100.0 %     100.0 %
     
The investment objective is to minimize risk. Asset allocation strongly favors immediate participation contracts with an insurance company. The equity securities are shares of stock issued by the insurance company when it demutualized.
The amount of the 2009 contribution will be determined based on a number of factors, including the results of the Actuarial Valuation Report as of January 1, 2009. At this time, the amount of the 2009 contribution is not known.
The Company has a deferred retirement plan for certain non-officer directors who have provided at least five years of service. All eligible directors’ benefits have vested. In the event a director dies prior to completion of these payments, payments will go to the director’s heirs. The Company has funded these arrangements through “rabbi trust” arrangements and, based on actuarial analyses, believes these obligations are adequately funded. The Company also has supplemental retirement plans for certain executives of a financial institution it acquired in 2000. Net (revenue) expense relating to these plans for the year ended December 31, 2008, 2007, and 2006 was $(86), $140, and $119, respectively.
11. Stock-Based Benefit Plans
The Company maintains an Employee Stock Ownership Plan (“ESOP”) for its employees. The ESOP is a qualifying plan under Internal Revenue Service guidelines. It covers all full-time employees who have attained at least 21 years of age and completed one year of service. In 2000 and 2001, the ESOP borrowed a total of $8,999 and purchased 3,271,946 of the Company’s common shares on various dates in 2000, 2001, and 2002. ESOP expense is recognized based on the fair value (average stock price) of shares scheduled to be released from the ESOP trust. Beginning in 2001, one-tenth of the shares are scheduled to be released each year. Also, additional

87

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
11. Stock-Based Benefit Plans (continued)
shares may be released as the ESOP trust receives cash dividends from the unallocated shares held in the trust. ESOP expense for the years ended December 31, 2008, 2007, and 2006, was $3,615, $3,729, and $3,877, respectively.
The following table summarizes shares of Company common stock held by the ESOP at December 31.
                         
    2008   2007   2006
     
Shares allocated to participants in fiscal year
     327,251       327,250       327,493  
Unallocated and unearned shares
     453,426       780,677       1,107,927  
Fair value of unearned ESOP shares
   $ 5,233     $ 8,252     $ 13,417  
12. Income Taxes
In July 2006, FASB issued its final interpretation on, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies and prescribes a threshold and measurement attributed for the financial statement recognition and measurement of tax position taken or expected to be taken in a tax return.
The Company adopted the provisions of FIN 48 on January 1, 2007. The adoption of FIN 48 did not materially impact the financial condition, results of operations, or cash flows. The Company’s tax reserve liability at December 31, 2008 and 2007, was immaterial.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and Wisconsin and Minnesota. The Company is no longer subject to U.S. federal and Minnesota income tax examinations by tax authorities for years prior to 2004, and for Wisconsin for years prior to 1997.
If any interest and/or penalties would be imposed by an appropriate taxing authority, the Company would report the interest component through miscellaneous operating expense and penalties through income tax expense.
The provision for income taxes consists of the following:
                         
    Year Ended December 31
    2008   2007   2006
     
Current income tax expense:
                        
Federal
   $ 15,281     $ 9,566     $ 11,518  
State
     83       121       84  
     
Current income tax expense
     15,364       9,687       11,602  
Deferred income tax expense (benefit):
                        
Federal
     (6,267 )     (788 )     (1,789 )
State
     (3 )     (7 )     (5 )
     
Deferred income tax expense
     (6,270 )     (795 )     (1,794 )
     
Income tax expense
   $ 9,094     $ 8,892     $ 9,808  
     

88

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
12. Income Taxes (continued)
Income tax expense differs from the provision computed at the federal statutory corporate rate as follows:
                         
    Year Ended December 31
    2008   2007   2006
     
Income before provision for income taxes
   $ 26,250     $ 25,995     $ 30,405  
     
Tax expense at federal statutory rate
   $ 9,188     $ 9,098     $ 10,642  
Increase (decrease) in taxes resulting from:
                        
State income taxes, net of federal tax benefit
     52       74       51  
Bank owned life insurance
     (873 )     (887 )     (399 )
Executive compensation in excess of Section 162(m) limit
     143       117       376  
Incentive stock option expense
     35       67       —  
Tax returns and reserve adjustment
     492       464       (930 )
Other
     57       (41 )     68  
     
Income tax expense
   $ 9,094     $ 8,892     $ 9,808  
     
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company’s deferred tax assets and liabilities are summarized as follows:
                 
    December 31
    2008   2007
     
Deferred tax assets:
                
State net operating losses
   $ 1,424     $ 1,814  
Loan loss reserves
     4,887       4,712  
Pension
     5,196       2,789  
Deferred compensation
     1,637       1,580  
Restricted stock amortization
     741       687  
Unrealized loss on investment securities
     6,919       3,957  
Other-than-temporary impairment of investment securities
     3,279       492  
Other
     839       459  
     
Total deferred tax assets
     24,922       16,490  
Valuation allowance
     (2,021 )     (1,542 )
     
Total deferred tax assets, net of valuation allowance
     22,901       14,948  
     
Deferred tax liabilities:
                
Property and equipment depreciation
     854       420  
FHLB stock dividends
     5,130       5,130  
Deferred loan fees
     258       1,395  
Purchase accounting adjustments
     3,895       4,224  
Mortgage servicing rights
     1,816       1,890  
Other
     82       74  
     
Total deferred tax liabilities
     12,035       13,133  
     
Net deferred tax asset
   $ 10,866     $ 1,815  
     
For state income tax purposes, certain subsidiaries have net operating loss carryovers of $26,364 available to offset against future income. The carryovers expire in the years 2009 through 2023 if unused. The Company continues to carry a valuation allowance to reduce these net operating loss carryovers, as well as certain other deferred tax assets. At December 31, 2008, the Company believed it was more likely than not that these items

89

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
12. Income Taxes (continued)
would not be realized. However, as time passes the Company will be able to better assess the amount of tax benefit it will realize from using these items.
13. Financial Instruments with Off-Balance-Sheet Risk
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist of commitments to extend credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated statements of financial condition. The contract amounts reflect the extent of involvement the Company has in particular classes of financial instruments and also represents the Company’s maximum exposure to credit loss.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and generally require payment of a fee. As some commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates the collateral needed and creditworthiness of each customer on a case by case basis. The Company generally extends credit only on a secured basis. Collateral obtained varies, but consists principally of one- to four-family residences.
Financial instruments whose contract amounts represent credit risk are as follows:
                 
    December 31
    2008   2007
     
Unused consumer lines of credit
   $ 153,568     $ 153,553  
Unused commercial lines of credit
     21,760       20,167  
Commitments to extend credit:
                
Fixed rate
     22,690       21,487  
Adjustable rate
     20,585       16,353  
Undisbursed commercial loans
     994       6,131  
Forward commitments to sell mortgage loans of $72,653 at December 31, 2008, represent commitments obtained by the Company from a secondary market agency to purchase mortgages from the Company. Commitments to sell loans expose the Company to interest rate risk if market rates of interest decrease during the commitment period. Commitments to sell loans are made to mitigate interest rate risk on commitments to originate loans and loans held-for-sale. Forward commitments at December 31, 2007, were $10,469.
14. Fair Value of Financial Instruments
Disclosure of fair value information about certain financial instruments, whether or not recognized in the consolidated financial statements, for which it is practicable to estimate the value, is summarized below. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.

90

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
14. Fair Value of Financial Instruments (continued)
Certain financial instruments and all nonfinancial instruments are excluded from this disclosure. Accordingly, the aggregate fair value of amounts presented does not represent the underlying value of the Company and is not particularly relevant to predicting the Company’s future earnings or cash flows.
The following methods and assumptions are used by the Company in estimating its fair value disclosures of financial instruments:
Cash and Cash Equivalents The carrying amounts reported in the statements of financial condition for cash and cash equivalents approximate those assets’ fair values.
Securities Available-for-Sale Fair values for these securities are based on quoted market prices or such prices of comparable instruments.
Loans Held-for-Sale The fair value of loans held-for-sale is based on the current market price for securities collateralized by similar loans.
Loans Receivable Loans receivable are segregated by type such as one- to four-family, multi-family, and commercial real estate mortgage loans, consumer loans, and commercial business loans. The fair value of each type is calculated by discounting scheduled cash flows through the expected maturity of the loans using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan type. The estimated maturity is based on the Company’s historical experience with prepayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions.
Mortgage Servicing Rights The Company has calculated the fair market value of mortgage servicing rights for those loans that are sold with servicing rights retained. For valuation purposes, loans are stratified by product type and, within product type, by interest rates. The fair value of mortgage servicing rights is based upon the present value of estimated future cash flows using current market assumptions for prepayments, servicing cost and other factors.
Federal Home Loan Bank Stock FHLB of Chicago stock is carried at cost, which is its redeemable (fair) value, since the market for this stock is restricted.
Accrued Interest Receivable and Payable The carrying values of accrued interest receivable and payable approximate their fair value.
Deposit Liabilities and Advance Payments by Borrowers for Taxes and Insurance Fair value for demand deposits equal book value. Fair values for other deposits are estimated using a discounted cash flow calculation that applies current market borrowing interest rates to a schedule of aggregated expected monthly maturities on deposits. The advance payments by borrowers for taxes and insurance are equal to their carrying amounts at the reporting date.
Borrowings The fair value of long-term borrowings is estimated using discounted cash flow calculations with the discount rates equal to interest rates currently being offered for borrowings with similar terms and maturities. The carrying value on short-term borrowings approximates fair value.

91

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
14. Fair Value of Financial Instruments (continued)
The carrying values and fair values of the Company’s financial instruments are presented in the following table as of the indicated dates.
                                 
    December 31   December 31
    2008   2007
    Carrying   Fair   Carrying   Fair
    Value   Value   Value   Value
         
Cash and cash equivalents
   $ 112,893     $ 112,893     $ 38,949     $ 38,949  
Securities available-for-sale
     1,270,005       1,270,005       1,199,372       1,199,372  
Loans receivable, net
     1,829,053       1,781,536       1,994,556       2,030,797  
Loans held-for-sale
     19,030       19,455       7,952       8,026  
Mortgage servicing rights
     3,703       4,696       4,708       7,701  
Federal Home Loan Bank stock
     46,092       46,092       46,092       46,092  
Accrued interest receivable
     16,532       16,532       14,625       14,625  
Deposit liabilities
     2,130,348       2,123,284       2,112,968       2,069,752  
Advance payments by borrowers
     1,929       1,929       1,815       1,815  
Borrowings
     907,971       1,060,896       912,459       943,526  
Accrued interest payable
     3,312       3,312       3,335       3,335  
Excluded from the above table are off-balance-sheet items (refer to Note 13) as the fair value of these items is not significant.
As discussed in Note 1, on January 1, 2008, the Company adopted SFAS 157, which requires enhanced disclosures about assets and liabilities carried at fair value. As defined in SFAS 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company primarily applies the market approach for recurring value measurements and endeavors to utilize the best available information. Accordingly, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company is able to classify fair value balances based on the observability of those inputs. SFAS 157 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1), the next highest priority is given to prices based on models, methodologies, and/or management judgments that rely on direct or indirect observable inputs (Level 2), and the lowest priority to prices derived from models, methodologies, and/or management judgments that rely on significant unobservable inputs (Level 3).
The following table segregates by fair value hierarchy (i.e., Level 1, 2, or 3) all of the Company’s assets and liabilities as of December 31, 2008, that are measured at fair value on a recurring basis.
                                 
    Fair Value Hierarchy    
    Level 1   Level 2   Level 3   Total
     
Securities available-for-sale:
                                
Investment securities
   $ 39,603     $ 379,535       —     $ 419,138  
Mortgage-related securities
     —       850,867       —       850,867  
     
Total securities available for sale
   $ 39,603     $ 1,230,402       —     $ 1,270,005  
     

92

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
14. Fair Value of Financial Instruments (continued)
For purposes of the impairment testing of mortgage servicing rights, the underlying mortgage loans are stratified into pools by product type and, within product type, by interest rates. Pools with an amortized cost basis greater than fair value are carried at fair value in the Company’s financial statements (refer to Note 1 for additional discussion). Although not included in the above table, the Company considers the fair value of mortgage servicing rights to be Level 3 in the fair value hierarchy. Pools determined to be impaired at December 31, 2008, had an amortized cost basis of $2,447 and a fair value of $1,625 as of that date. Accordingly, the Company recorded a valuation allowance of $822 as of December 31, 2008, as well as a corresponding charge to earnings during the twelve months then ended. Refer to Note 4 for additional disclosures related to mortgage servicing rights.
Loans held-for-sale are recorded at lower of cost or market and therefore are reported at fair value on a non-recurring basis. Such fair values are generally based on bids and are considered to be Level 2 in the fair value hierarchy. For non-accrual loans greater than an established threshold and individually evaluated for impairment and all renegotiated loans, impairment is measured based on: (1) the fair value of the loan or the fair value of the collateral less estimated selling costs (collectively the collateral value method) or (2) the present value of the estimated cash flows discounted at the loan’s original effective interest rate (the discounted cash flow method). The resulting valuation allowance, if any, is a component of the allowance for loan losses. The discounted cash flow method is a fair value measure. For the collateral value method, the Company generally obtains appraisals to support the fair value of collateral underlying the loans. Appraisals incorporate measures such as recent sales prices for comparable properties and costs of construction. The Company considers these fair values to be Level 3 in the fair value hierarchy. For those loans individually evaluated for impairment using the collateral value method, a valuation allowance of $3,351 was recorded for loans with a recorded investment of $16,554 at December 31, 2008. Refer to Note 3 for additional discussion.

93

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts
15. Condensed Parent Company Only Financial Statements
STATEMENT OF FINANCIAL CONDITION
                 
    December 31
    2008   2007
     
Assets
                
Cash and cash equivalents
   $ 17,235     $ 25,709  
Investment in subsidiary
     378,963       377,428  
Due from subsidiaries
     —       24,661  
Receivable from ESOP
     1,247       2,147  
Other assets
     2,166       1,191  
     
Total assets
   $ 399,611     $ 431,136  
     
 
                
Liabilities and shareholders’ equity
                
Other liabilities
   $ —     $ 1,101  
     
Shareholders’ equity:
                
Common stock – $.01 par value:
                
Authorized – 200,000,000 shares in 2008 and 2007 Issued – 78,783,849 shares in 2008 and 2007 Outstanding – 47,686,759 in 2008 and 49,834,756 shares in 2007
     788       788  
Additional paid-in capital
     498,501       498,408  
Retained earnings
     273,826       273,330  
Unearned ESOP shares
     (1,247 )     (2,166 )
Accumulated other comprehensive income
     (16,404 )     (6,069 )
Treasury stock – 31,097,090 shares in 2008 and 28,949,093 shares in 2007
     (355,853 )     (334,256 )
     
Total shareholders’ equity
     399,611       430,035  
     
Total liabilities and shareholders’ equity
   $ 399,611     $ 431,136  
     
STATEMENT OF INCOME
                         
    Year ended December 31
    2008   2007   2006
     
Total income
   $ 354     $ 1,627     $ 2,330  
Total expenses
     1,460       1,430       1,466  
     
Income (loss) before income taxes
     (1,106 )     197       864  
Income tax expense (benefit)
     (387 )     67       347  
     
Income (loss) before equity in earnings of subsidiary
     (719 )     130       517  
Equity in earnings of subsidiary
     17,875       16,973       20,080  
     
Net income
   $ 17,156     $ 17,103     $ 20,597  
     

94

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
15. Condensed Parent Company Only Financial Statements (continued)
STATEMENT OF CASH FLOWS
                         
    Year ended December 31
    2008   2007   2006
     
Operating activities:
                        
Net income
   $ 17,156     $ 17,103     $ 20,597  
Adjustment to reconcile net income to net cash provided by operating activities:
                        
Equity in earnings of Bank subsidiary
     (17,875 )     (16,973 )     (20,080 )
Stock-based compensation
     248       546       608  
Adoption of SAB 108
     —       —       (1,101 )
Change in other operating activities and liabilities
     (2,076 )     1,582       (1,207 )
     
Net cash provided (used) by operating activities
     (2,547 )     2,258       (1,183 )
     
Investing activities:
                        
Dividends from Bank subsidiary
     26,400       100,200       21,200  
Other investing activities
     (547 )     33       1,619  
     
Net cash provided by investing activities
     25,853       100,233       22,819  
     
Financing activities:
                        
Cash dividends
     (16,442 )     (17,227 )     (15,955 )
Purchase of treasury stock
     (29,927 )     (120,687 )     (27,828 )
Proceeds from exercise of stock options
     3,313       1,396       1,940  
Excess tax benefit from exercise of stock options
     379       433       752  
Cash received for MRP grants from Bank subsidiary
     9,997       —       —  
Payments received on ESOP
     900       900       900  
     
Net cash used in financing activities
     (31,780 )     (135,185 )     (40,191 )
     
Decrease in cash and cash equivalents
     (8,474 )     (32,694 )     (18,555 )
Cash and cash equivalents at beginning of year
     25,709       58,403       76,958  
     
Cash and cash equivalents at end of year
   $ 17,235     $ 25,709     $ 58,403  
     
16. SEC Staff Accounting Bulletin No. 108 (“SAB 108”)
In accordance with SAB 108, the Company decreased its January 1, 2006, retained earnings by $1,101, which decreased shareholders’ equity to $543,273 from $544,374 at that date. This $1,101 cumulative adjustment was the result of accounting errors related to the non-qualified pension plans. A prepaid benefit asset of $1,626 was eliminated and a deferred tax asset of $525 was created. These errors caused immaterial understatements in prior years of pension expense, but the cumulative effect of correcting these errors was material to the 2006 consolidated financial statement.
In evaluating materiality and determining the appropriateness of applying SAB 108 to these errors, the Company considered materiality both qualitatively and quantitatively as proscribed by the SEC’s Staff Accounting Bulletin No. 99 (“SAB 99”). Evaluation of materiality requires the Company to consider all the relevant circumstances including qualitative factors which may cause misstatements of quantitatively small amounts to be material.

95

Table of Contents

Bank Mutual Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
(Dollars in Thousands, Except Per Share Amounts)
17. Subsequent Event
Effective January 1, 2009, Wisconsin tax law was amended to significantly restrict the tax benefits of out-of-state investment subsidiaries such as Mutual Investment Corporation and First Northern Investments, Inc., which are wholly-owned subsidiaries of the Bank. Prior to 2009, the state of Wisconsin imposed a corporate franchise tax on the separate taxable incomes of the members of the Company’s consolidated income tax group, excluding these subsidiaries. However, beginning in 2009 the Company’s consolidated income tax group will be subject to combined reporting. The impact of this change on the Company’s future net income depends on the Company’s future taxable income. However, if the Company had been required to file a combined Wisconsin income tax return in 2008, management estimates the Company’s net income in 2008 would have been approximately $1.3 million or $0.03 per basic share and $0.02 per diluted share lower than that which was reported in that period.
As of December 31, 2008, the Company had Wisconsin net operating loss carryovers available to offset against future taxable income. The Company carried a full valuation allowance to reduce these net operating loss carryovers as of that date. As a result of the change in Wisconsin tax law to combined reporting, the Company may be able to realize some or all of these net operating loss carryovers in future periods. The Company has not completed the complex analysis necessary to determine the favorable one-time impact this event may have on its future operations or financial condition.

96

Table of Contents

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Incorporated by reference from Item 4.01 of the Company’s Current Report on Form 8-K dated March 7, 2008. See also “Independent Registered Public Accounting Firm – Change in Independent Registered Public Accounting Firm” in the Company’s definitive Proxy Statement for its Annual Meeting of Shareholders on May 6, 2008.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.
Change in Internal Control Over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the final fiscal quarter of the year to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
The internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. The Company’s management, including its Chief Executive Officer and Chief Financial Officer, has assessed the effectiveness of its internal control over financial reporting as of December 31, 2008, based on the criteria established in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based upon their assessment and those criteria, management believes that as of December 31, 2008, the Company’s internal control over financial reporting was effective.
Deloitte & Touche LLP, the Company’s independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as a part of its audit, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting. That attestation report can be found on the following page as part of this Item 9A.

97

Table of Contents

Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Bank Mutual Corporation
Milwaukee, Wisconsin
We have audited the internal control over financial reporting of Bank Mutual Corporation and Subsidiaries (the “Company”) as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assertion of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2008 of the Company and our report dated March 4, 2009, expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
March 4, 2009

98

Table of Contents

Item 9B. Other Information
Not applicable.

99

Table of Contents

Part III
Item 10. Directors, Executive Officers, and Corporate Governance
Information in response to this item is incorporated herein by reference to “Election of Directors”, “Section 16(a) Beneficial Ownership Reporting Compliance”, and “Executive Officers” in the Company’s definitive Proxy Statement for its Annual Meeting of Shareholders on May 4, 2009 (the “2009 Annual Meeting Proxy Statement”).
Item 11. Executive Compensation
Information in response to this item is incorporated by reference to “Election of Directors—Board Meetings and Committees—Compensation Committee Interlocks and Insider Participation,” “Directors’ Compensation,” “Compensation Discussion and Analysis,” and “Executive Compensation,” in the 2009 Annual Meeting Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information in response to this item is incorporated by reference to “Security Ownership of Certain Beneficial Owners” in the 2009 Annual Meeting Proxy Statement.
The following chart gives aggregate information regarding grants under all equity compensation plans of the Company through December 31, 2008.
                         
                    Number of securities  
                    remaining available  
    Number of securities             for future issuance under  
    to be issued upon     Weighted-average     equity compensation  
    exercise of     exercise price of     plans (excluding  
    outstanding options,     outstanding options,     securities reflected  
Plan category   warrants and rights (1)     warrants and rights     in 1st column) (2)  
Equity compensation plans approved by security holders
     3,445,967     $ 7.8763       2,247,083  
 
                        
Equity compensation plans not approved by security holders
   None     None     None  
 
(1)   Represents options granted under the 2001 Plan or 2004 Plan, which plans were approved by Company shareholders in 2001 and 2004, respectively.
 
(2)   Represents options or restricted stock which may be granted under the 2004 Plan. No further awards may be made under the 2001 Plan.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information in response to this item is incorporated by reference to “Election of Directors—Board Meetings and Committees—Compensation Committee Interlocks and Insider Participation,” and “Certain Transactions and Relationships with the Company” in the 2009 Annual Meeting Proxy Statement.
Item 14. Principal Accountant Fees and Services
Information in response to this item is incorporated by reference to “Independent Registered Public Accounting Firm” in the 2009 Annual Meeting Proxy Statement.

100

Table of Contents

Part IV
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of the Report:
1. and 2. Financial Statements and Financial Statement Schedules.
The following consolidated financial statements of the Company and subsidiaries are filed as part of this report under Part II, Item 8, “Financial Statements and Supplementary Data”:
  •   Reports of Deloitte & Touche LLP and Ernst & Young LLP, Independent Registered Public Accounting Firms, on consolidated financial statements.
 
  •   Consolidated Statements of Financial Condition – As of December 31, 2008 and 2007.
 
  •   Consolidated Statements of Income — Years Ended December 31, 2008, 2007 and 2006.
 
  •   Consolidated Statements of Changes In Shareholders’ Equity — Years Ended December 31, 2008, 2007 and 2006.
 
  •   Consolidated Statements of Cash Flows — Years Ended December 31, 2008, 2007 and 2006.
 
  •   Notes to Consolidated Financial Statements.
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
(b). Exhibits. See Exhibit Index following the signature page of this report, which is incorporated herein by reference. Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this report is identified in the Exhibit Index by an asterisk following its exhibit number.

101

Table of Contents

SIGNATURES
     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
             
    BANK MUTUAL CORPORATION    
March 4, 2009
            
 
            
 
  By:   /s/ Michael T. Crowley, Jr.
 
Michael T. Crowley, Jr. 		   
 
      Chairman, President and Chief Executive Officer    
 
POWER OF ATTORNEY
     Each person whose signature appears below hereby authorizes Michael T. Crowley, Jr., and Marlene M. Scholz, or any of them, as attorneys-in-fact with full power of substitution, to execute in the name and on behalf of such person, individually, and in each capacity stated below or otherwise, and to file, any and all amendments to this report.
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.*
Signature and Title
     
/s/ Michael T. Crowley, Jr.   /s/ Raymond W. Dwyer, Jr.
     
Michael T. Crowley, Jr., Chairman, President,   Raymond W. Dwyer, Jr., Director
Chief Executive Officer and Director    
(Principal Executive Officer)    
     
/s/ Michael W. Dosland   /s/ Mark C. Herr
     
Senior Vice President and Chief Financial Officer   Mark C. Herr, Director
(Principal Financial Officer)    
     
/s/ Marlene M. Scholz   /s/ Thomas J. Lopina, Sr.
     
Marlene M. Scholz, Senior Vice President and Controller   Thomas J. Lopina, Sr., Director
(Principal Accounting Officer)    
     
/s/ David C. Boerke   /s/ William J. Mielke
     
David C. Boerke, Director   William J. Mielke, Director
     
/s/ Richard A. Brown   /s/ Robert B. Olson
     
Richard A. Brown, Director   Robert B. Olson, Director
     
/s/ Thomas H. Buestrin   /s/ Jelmer G. Swoboda
     
Thomas H. Buestrin, Director   Jelmer G. Swoboda, Director
 
*   Each of the above signatures is affixed as of March 4, 2009.

102

Table of Contents

BANK MUTUAL CORPORATION
(“Bank Mutual Corporation” or the “Company”)**
Commission File No. 000-32107
EXHIBIT INDEX
TO
2008 REPORT ON FORM 10-K
The following exhibits are filed with, or incorporated by reference in, this Report on Form 10-K for the year ended December 31, 2008:
             
        Incorporated Herein   Filed
Exhibit   Description   By Reference To   Herewith
 
            
3(i)
  Restated Articles of Incorporation, as last amended May 29, 2003, of Bank Mutual Corporation (the “Articles”)   Exhibit 3(i) to the Company’s Registration Statement on Form S-1, Registration No. 333-105685    
 
            
3(ii)
  Bylaws, as last amended May 7, 2007, of Bank Mutual Corporation   Exhibit 3.1 to the Company’s Report on Form 8-K dated May 7, 2007    
 
            
4.1
  The Articles   Exhibit 3(i) above    
 
            
10.1*
  Bank Mutual Corporation Savings Restoration Plan and Bank Mutual Corporation ESOP Restoration Plan   Exhibit 10.1(b) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (“2003 10-K”)    
 
            
10.2*
  Mutual Savings Bank Outside Directors’
Retirement Plan*** 		  Exhibit 10.2 to Bank Mutual Corporation’s Registration Statement on Form S-1, Registration No. 333-39362 (“2000 S-1”)    
 
            
10.3*
  Mutual Savings Bank Executive Excess
Benefit Plan 		  Exhibit 10.3 to 2000 S-1    
 
            
10.4*
  Agreement regarding deferred compensation dated May 16, 1988 between Mutual Savings Bank and Michael T. Crowley, Sr.   Exhibit 10.4 to 2000 S-1    
 
            
10.5(a)*
  Employment Agreement between Mutual Savings Bank and Michael T. Crowley Jr. dated December 21, 1993 (continuing , as amended, through 2011)   Exhibit 10.5(a) to 2000 S-1    
 
            
10.5(b)*
  Amendment thereto dated February 17, 1998   Exhibit 10.5(b) to 2000 S-1    
 
            
10.6*
  Form of Employment Agreements of Mr. Maurer, Ms. Scholz, Mr. Anderegg, and Mr. Callen with Mutual Savings Bank, each dated as of January 1, 2001 (continuing through 2009)   Exhibit 10.7 to 2000 S-1    

103

Table of Contents

             
        Incorporated Herein   Filed
Exhibit   Description   By Reference To   Herewith
 
            
10.7(a)*
  Employment Agreement between First Northern Savings Bank and Rick B. Colberg dated as of November 1, 2000 (continued, as amended, through 2007) [terminated upon his retirement in January 2008]   Exhibit 10.9 to Bank Mutual’s Annual Report on Form 10-K for the year ended December 31, 2000 (“2000 10-K”)    
 
            
10.7(b)*
  Amendment thereto, dated as of August 2, 2002   Exhibit 10.9(b) to 2003 10-K    
 
            
10.7(c)*
  Second Amendment thereto, dated as of August 19, 2003   Exhibit 10.9(c) to 2003 10-K    
 
            
10.8(a)*
  Form of Supplemental Retirement Agreement dated as of January 1, 1994 between First Northern Savings Bank and Rick B. Colberg   Exhibit 10.11(a) to 2000 10-K    
 
            
10.8(b)*
  Form of Amendment No. 1 thereto dated as of September 20, 1995   Exhibit 10.11(b) to 2000 10-K    
 
            
10.8(c)*
  Form of Amendment No. 2 thereto, dated as of October 15, 1998   Exhibit 10.6.4 to First Northern Capital Corp.’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (“FNCC 1998
10-K”)		    
 
            
10.9(a)*
  Non-Qualified Deferred Retirement Plan for Directors of First Northern Savings Bank   Exhibit 10.10(a) to 2000 10-K    
 
            
10.9(b)*
  Amendment No. 1 thereto   Exhibit 10.3.2 to FNCC 1998 10-K    
 
            
10.10*
  Bank Mutual Corporation 2001 Stock Incentive Plan, as amended May 7, 2002 (superseded, except as to outstanding awards)   Exhibit 10.1 to Bank Mutual Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002    
 
            
10.11(a)*
  Bank Mutual Corporation 2004
Stock Incentive Plan 		  Exhibit A to Proxy Statement for 2004 Annual Meeting of Shareholders    
 
            
10.11(b)*
  Form of Option Agreement thereunder — Bank Mutual Corporation Director Stock Option Agreement   Exhibit 10.1(b) to the Company’s Report on Form 10-Q for the quarter ended June 30, 2004 (6-30-04 10-Q”)    
 
            
10.11(c)*
  Form of Option Agreement thereunder — Bank Mutual Corporation Incentive Stock Option Agreement   Exhibit 10.1(c ) to the 6-30-04 10-Q    
 
            
10.11(d)*
  Form of Restricted Stock Agreement thereunder — Bank Mutual Corporation Directors Management Recognition Award   Exhibit 10.1(d) to the 6-30-04 10-Q    

104

Table of Contents

             
        Incorporated Herein   Filed
Exhibit   Description   By Reference To   Herewith
 
            
10.11(e)*
  Form of Restricted Stock Agreement thereunder — Bank Mutual Corporation Officers Management Recognition Award   Exhibit 10.1(e) to the 6-30-04 10-Q    
 
            
10.12*
  Mutual Savings Bank/First
Northern Savings Bank
Management Incentive
Compensation Plan 		  Exhibit 10.12(b) to Post-Effective Amendment No. 1 to 2000 S-1    
 
            
10.13(a)*
  Employment Agreement of Mr. Dosland with Bank Mutual dated as of August 18, 2008   Exhibit 10.1 to the Company’s Report on Form 8-K dated August 19, 2008    
 
            
10.13(b)*
  Amendment to Employment Agreement dated August 18, 2008, between Bank Mutual and Michael W. Dosland   Exhibit 10.2 to the Company’s Report on Form 8-K dated August 19, 2008    
 
            
21.1
  List of Subsidiaries       X
 
            
23.1
  Consent of Deloitte & Touche LLP       X
 
            
23.2
  Consent of Ernst & Young LLP       X
 
            
24.1
  Powers of Attorney   Signature Page of this Report    
 
            
31.1
  Sarbanes-Oxley Act Section 302 Certification signed by the Chairman, President, and Chief Executive Officer of Bank Mutual Corporation       X
 
            
31.2
  Sarbanes-Oxley Act Section 302 Certification signed by the Senior Vice President and Chief Financial Officer of Bank Mutual Corporation       X
 
            
32.1
  Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by the Chairman, President, and Chief Executive Officer of Bank Mutual Corporation       X
 
            
32.2
  Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by the Chief Financial Officer of Bank Mutual Corporation       X
Notes to Exhibit Index
 
*   Designates management or compensatory agreements, plans or arrangements required to be filed as exhibits pursuant to Item 15(b) of Form 10-K
 
**   As used in this Exhibit Index, references to Bank Mutual Corporation and the Company also include, where appropriate, Bank Mutual Corporation, a federally-chartered corporation and the predecessor of the current registrant.
 
***   Mutual Savings Bank is now known as “Bank Mutual.”

105

EX-21.1 2 c49816exv21w1.htm EX-21.1 exv21w1
EXHIBIT 21.1
The following table sets forth the name and jurisdiction of incorporation/charter of the Registrant’s subsidiaries. Inactive subsidiaries are not listed. Except as noted, all of the subsidiaries are 100% owned by the Company or the Bank.
         
Name of Subsidiary   Jurisdiction of Incorporation/Charter
 
    
Bank Mutual (1)
  USA
First Northern Investments, Inc. (2)
  Nevada
BancMutual Financial & Insurance Services, Inc. (2)
  Wisconsin
MC Development LTD (2)
  Wisconsin
Mutual Investment Corporation (2)
  Nevada
 
(1)   Direct subsidiary of the Company.
 
(2)   Direct subsidiary of the Bank.
Two other entities are 50% owned by the Bank or its subsidiaries.
     
Name of Subsidiary   Jurisdiction of Incorporation/Charter
 
    
Savings Financial Corporation (3)
  Wisconsin
Arrowood Development LLC (4)
  Wisconsin
 
(3)   50% owned subsidiary of the Bank.
 
(4)   50% owned subsidiary of MC Development LTD.

 

EX-23.1 3 c49816exv23w1.htm EX-23.1 exv23w1
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-49592, 333-60498 and 333-115138 on Form S-8, of our reports dated March 4, 2009, relating to the consolidated financial statements of Bank Mutual Corporation and Subsidiaries (the “Company”) and the effectiveness of the Company’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of the Company for the year ended December 31, 2008.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
March 4, 2009

 

EX-23.2 4 c49816exv23w2.htm EX-23.2 exv23w2
EXHIBIT 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-49592) pertaining to the Bank Mutual Corporation 401k Plan, in the Registration Statement (Form S-8 No. 333-60498) pertaining to the Bank Mutual Corporation 2001 Stock Incentive Plan, and in the Registration Statement (Form S-8 No. 333-115138) pertaining to the Bank Mutual Corporation 2004 Stock Incentive Plan of our report dated March 5, 2008, with respect to the consolidated financial statements of Bank Mutual Corporation and Subsidiaries as of December 31, 2007 and for the two year periods then ended, included in this Annual Report (Form 10-K) for the year ended December 31, 2008.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
March 4, 2009

 

EX-31.1 5 c49816exv31w1.htm EX-31.1 exv31w1
Exhibit 31.1
CERTIFICATION
I, Michael T. Crowley, Jr., certify that:
1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2008 of Bank Mutual Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 4, 2009
     
/s/ Michael T. Crowley, Jr.
 
Michael T. Crowley, Jr.,
   
Chairman, President, and Chief Executive Officer
    

 

EX-31.2 6 c49816exv31w2.htm EX-31.2 exv31w2
Exhibit 31.2
CERTIFICATION
I, Michael W. Dosland, certify that:
1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2008 of Bank Mutual Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 4, 2009
     
/s/ Michael W. Dosland
 
Michael W. Dosland
   
Senior Vice President and Chief Financial Officer
    

 

EX-32.1 7 c49816exv32w1.htm EX-32.1 exv32w1
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Bank Mutual Corporation (the “Company”) on Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), I, Michael T. Crowley, Jr., Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2003, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
     
/s/ Michael T. Crowley, Jr.
 
Michael T. Crowley, Jr.
   
Chairman, President, and Chief Executive Officer
    
March 4, 2009
    
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Bank Mutual Corporation and will be retained by Bank Mutual Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

 

EX-32.2 8 c49816exv32w2.htm EX-32.2 exv32w2
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Bank Mutual Corporation (the “Company”) on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), I, Michael W. Dosland, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2003, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
     
/s/ Michael W. Dosland
 
Michael W. Dosland
   
Senior Vice President and Chief Financial Officer
    
March 4, 2009
    
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Bank Mutual Corporation and will be retained by Bank Mutual Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

 

GRAPHIC 9 c49816c4981601.gif GRAPHIC begin 644 c49816c4981601.gif M1TE&.#EA3@)'`=4@`$!`0,#`P("`@#\_/_#P\.#@X*"@H-#0T!`0$+^_OR`@ M(&!@8)"0D']_?S`P,%!04+"PL'!P<._O[\_/S]_?WZ^OKY^?GR\O+U]?7X^/ MCT]/3V]O;Q\?'P\/#P```/_______P`````````````````````````````` M```````````````````````````````````````````````````````````` M`````````````````````````````````"'Y!`$``"``+`````!.`D$PNF\_HM'K-;KO?\'-` M4#1`"$)#`!+O^_^`@8*#A(5G!`P`1!$!0P8&(`L%AI25EI>8F9J;1P&*0@(, M1`"3$'20P@!#*(@'D*Q10<`O;Z_P,'"P\3%QL?(R[O\/'R\_3U]O?X^?K[ M_/W^_P`#"AQ(L*#!@PCI>6CT[1,O4'04Y%J@A-RKBQ@S:MP89J$@72`<@#H0 MB:0`2$DLS=INXZJM8\O6B'J3:BDS$^K>S;LW;SRS`=?6 M=#M*``\#DBM?SKRY\^?0HTN?3KVZ]>O8LVNOWN%U<+S#,Q6'$\$ MF."$%%9HX87W+<@@>/[9!?^@!QB&*.*()!:HX8;];02A$Q*6Z.*+,)9X(HIP M.7C)BDVT&*-Z%%A@00(_QI>!!CQF4$%Z#1QY7P(9-BB>?%$@0::JFGGJ>!!),VFB;GIX7J:OF1=JJA5@".I:@E!"JA*'Q MB6FLG!08*V:D"2B;:;/*YJKIF'F:6<$&$EQ`P:(6;)`FFA]<4,&CB%+`Y@<6 M3`#_XJ(?L)O!!A-8(,$`VWHP9`,7S(N!I/X"3`$' M&VB0`;;:ONNH!F/V^V_`W9):8:^^!OJG81_BQ]R4$S`WZ:C+F8>RH M%4]``;P?P+GN``WLBNB58YII<[[M?BOT!^.J"_1Y.*NGY\,U4XIG!Q0L;>8` MO''6,%K"'")D$LF(E"ZL$$$AA)==?K*54'WZEG&U70'76B2K^\X4=ZD%TR:_T`&76>=9NWMXOZV M!J)#66FBO-^>-^5@6QX5YD:%?"AZ%&!@9P4:3.DMP?5Z`*7V!,^,P:U1'RDE MT1X<.0`&;R9@;@82="`F!]ZO^:/VZ%GP?;N15G!P`XV6WRZ;0"+:_E3%`?Y= M[P(;F$`'V*\TR1M-&#CWO/,@BVX#FA3XVJ0J6.%I M4CI+#]Y>14%*R8R%<8)4FU*5GD:]R((77%X&4^.\#OIP3QK[87QPF,.G,&\0 MFNL$IX3(Q`%9H`&W:N)[B%C$HAQ1$$DT`@>ER,4N#HB*51S*%0.1Q2)LT8MH M3"-\P!C&H(P1$&4DPAG52,2-(-G)4C[ODZ"L MBBBY1$I3NG)'J$RE658YJ%86"$JX=)1\*@!%\TC`1^2:$GHJ4($,5"P#/\I` M"]&5GAY%:9D/A!(Q*Q0]^$R@`?YB#Y,P%$M9ND9%MB20!\9)SF6V9P,7>-0* M\;0V#YI)<*F[$P9.9YX*O,Y6Z32/!I3DRP&H,U,6BI5[WM:>)4ZHF]XT#"V# M%>TXLDWV:9->\/K_UEU9?NV("(M MMV,2$UB;%D30"I>X;C0N&9%[GPX4-87M`6@%Z->C\]PM@I[UW9T4&"D+@.]< M]WI4]="3`8N6BGKZE&UY$Y6G]FEJ`E5K$KA^ASL;OE=K6K,?T$)J0V724T`\ MQ:]X]`M'_I8H?.=1YE`OFRUM70I6#KR7,KME.PZ8ZJD8H)6QQ.M9_LUT`%:; M4@/@]ZYDP:^S?T,4^^+K+S--.7H:L%H'+F!A214P:AI`\\R0J3T%DOD#R`Q7 MDK](8QD;IZ!XQZ1121P8QOV9'GZHQ^J!XMC,9 M(QV'3.;BL*\\TW-!B)^T=3+&DAX4I?^OX(TA$*#4(&`*$BP-"TQGFD1M8U\I M01UJLHV:"@2(@#F$\(!3[*0G/]'SJX>-(%K7^LX?V34$>BV$!32"`2A9M;") M36TZ'UM%MZ8"2!"1#B%(!!84*0(!`D#NA9#[W.A.M[K7K6X&N+K:\#[0`!C` M[GK;^][XSK>^]\WO?OO[WP`/N,`'SN]+8@$D=.CV+7*Q:R'PHA<>V$8O'/#N M>%L_SCQS#X%70![0`L0!(++T=%IGWQEK?'V->>=++SD(Y> M-`(`>##`*:1M6)?[G$`PCSE=LCT%D$`D#Y!`>5-Z_O.FVR?H0N^#R*M``)TS MA=R.V$.PF>[_]*X/D>A11\/4W\#J37J]Z5`/.]G!OH:R5WQ`V>H`@-O#RUO] M,ILJ2P\QP>JW9"ZSH[GZT9/0\T!E$I/3ZAE2H)\X=SA_2HII5WL;QNX&MP?T M`N.4.WW0J4X^?:Y5"7CG9N7Y8GM"+Y^T%6_6+/!B;;I7MNW)&A<1B8*)\JJB;,!I/`W?TH^?QKJ3`*WOZS11/)82]"BL%*QHJRG&Y MZG.?:%_[-%!^\BS_5W0XH-P.(/4\2C73.IT*55]>8*HG]JR>*(#5K8Z63Y## MU[6RQ=("3KE1NS,N'I0F"_,^L((M&)`F]H(FVC4WVG(HW-=]9_!]_VR0>_4A M`8YE+!J@7`63@3F#?D\S6?5D/I>%)YDU>NA7*9_5>Z*%'J35+O!"/4EF-3,3 M/(N#)A^('KH3/,K$7L+3)N>#>#`2@1)8!A38=BP7'YE%3JA7+-_U7&027=.E M*.NE4=AE@E`B/?I4@@JD@Z3"`>SC-C;X.'(#0CNX.,$U8GK7A&!"A$7(%[?G M?4FHA$8EA.PA8`3640?&/PDV6\O78`]&*Z@W80-X'A=@`<'57L%3.JUWAE2# M/K*E>8[R2PWP3ML7AV_(!4>(>W.HA&P('SAF'CIF6>[G8TG684(&)`ED-T>F M64HF)N+5-E@S.`>40&?F?]I"9G8W93)SB_\Y,U4;`#]O8EG:E2H"`X&8F(E: ML(ERR'5_Q&<#\F=VJ(,R9""Q$EMX$D4_Y(;*^`7,*':=6$K-(Y5\(T3&([M.&S<"(];((_J2(_UF&GWB(]9H(]&R(_]Z$K_ M")!7()!309`%.6OOB!?'\5"V`!4*R1<,V9"<=)"!$9'DM'-&])`6Z8P8V74: M"1@<.4X>&1H@*0;K.)).5Y)Z40`14%0I:44KV1$7Z9*(!)-R40`,0'$(0)-2 M49$LF9,Z^4<\J195!Y3.=I+K,)0W"08M.2$$,!@*>$^<-:O0=/GX-XGP-X`_!.VA@X\Z&-6ODV"B94HN@H&="80N266[%L MX_0`=9D$[J9J1$&4.-F7"+)8LC,?O:)J`Y":.,@>;[<>C_4#E"<47``'C"1-LF78&!VKP*=!%-4"+HK&X`\$(F0E.%,R)=LE+F\C)X>E40-@737S*'#R-I[61)I9%`<0`0K@ M`0[``*@6!0*``#4J%*0IE4;Y-$45F-9T`7I"+0BTG7<87O&UG4\$-#-#6_YD M/IW2`=CBF,57?*.S5<6WHFVYG"PADS&J``*0HU.@``VGHURJB3VZ6`^5FO!Q M64]5-T^C)W2"C77#>E*VG4S3-98U,YE"4#*C70:$3Y) M<0H0`:)I!C8D0CI4DV9P8F7@0A`Z:A@$`$( M8)QF2J!?8*`C8@%/HB10@E),A4N[$JV0`BG1"F(BE#.7V3)TZC=M(B4"&"7I M`6*ZM"WJ`R7F*BE8::ZP(FN^"1EP*9=T.08$,)<#2AL]>I1UU**O,*\>4*]F M``$[ZGV4&I#[RJ]JY*^L$)S#Z9]I\``*@*QZI*Q>P*P*ZY"`X;`1![%K4``( M4).-=+!8T)P9"V\,JPDO&J,S*J9J$)K)JJ^F>;+5EK)*<&I]L+(R2J.`@)PQ MZQAB`*"8.K1$6[1&>[1(F[1*N[1,V[1.^[1+2[)#```(\*AGL*@>T*A6"P<` M*J`C:[$(^10+,$Y5JP;_6*NUE'"C+NL84FL%K!:VES"VY%2V95!U`$"ODFH( M!*``/E&Q,@NW3C&3184`]FH`<3F7>6L)D>JW0`NX15$`%%=4T>8%P=F9'KL) MPDFQH02VCLL2!G"W"B"W'4FYPND!Q*FYFW"O>OFU?]NY*R&3PUF7!C!.!N!N M.)<%+\J?#("ZJ4"P;5NROTL%;^NZ<,"98%JCC^!P"D"W4Z"S+;L1`/!MEA2\ M4S"\Q/NQ-&&ZB7L$!'"W7LL$Z/"E$;"VK@"R(CM+G'N]J&"\8:H$`A!N0R`` MILN[Y_"364NL+P&SV):^ZHL)X:N]31"C-1H`"%`32+"4]$J]79!QT\N__4L) M_^Q+OD0PNP%K!`3@``@PN?.*N%#1M?O;N@]<"?_KF5$0HW*)NC/)$YP)P%>A MMIL+PB%,"!$,!;#[4`#@'Z)[NEJQMWVK2@XPQ%LQNPK[Y/X;/HVQ"[ M<`KD8'0.YPL1!W+*O,S,W,S./`SD1*;-$)1R.0Q[3$["0,W!,$X9]\S>+`P4 MU\W?7`VCK$D--\;%7*9W>1P$U\[N_,[P',_R/,_TO&Z?.TY9[&\WFK5OC&X< MN[,!$+GD5&]7''$0<&X0$*/]7,\,/<\SJ0<-'='G5LX,MPBEEIP0H,I\DZ3'/L\+U%<*,9;&IQB=).P<#?),Q"``$D00`FP<@?P\HQ M/!.S+`6P.Y=*\:),R<10P,LRVACR^P#T*Q0>[!=GB@@/0!(/UPMX,!-P[,@< MS04F)Y>2/,E9N[LS[<7WN[7_55``=TL*N5#`9!T4QKK4-Q+*4*#3Q(L(/1T% M(0T`?`"7NOO151#0`5O5=TO+1,'#3OW#69TC8TO%/FVL)#";MT23NQ3AGW8!\P`=>W5"D!O$3#4;3`3!0P)$`#(:]T2$GO9MK;9G"U' MB=W515W0`'!RXKO:9K`3$1<`D+O23T'(F@W%L6W!GBW2BTW-&+RS?(T&O&"Z M,BG&4`'*P]VXQ;TYL]WL!W%6]W84[`3U(RVJ&#:"!"4&AT4+CQ8^]T2 M-BVO_\?=GZYMQ9?\O*W`V_@^!$(-W^2]"0F-DD31UAO^XD'AX7.KVV$AXD0^ M!,%IQ*&-X:T@WO,K%(2-">R\+`A`@X_,8%=S]4`@``!&0#A!]Y(--XQBN MUS:,Y1HQ$UF+YJ[@NR*"<(-"/\'X,4.-P3,PP`+ M0!/P"P?JW0<\;;H,,;O,V[R?G@ZB?LE<7NKI$.BU;@:Y7N`CW@1)?K^T$*,D M7`@&<`#3KFU!2=DMH;]QH.JQSNO#=0`!P.@A^1+]W;Y$0--DP.X!`.JBGN?C M),V]E@[G9N=4D.YV:0#A7.-67,;,#>"*[>TQJKL`3VJ1"]PK8=YN,`D'D)=6 M^T:_.>QM0/`R"N)^<&X,D`ZOCIS*Q>_L\.]7,+:G['#""=3@6^*FZY\0`+H& M[P<%C7(Z5^KK[[&RM(/(D/W$GWPO]3F]8 MEP2BVY\%[]:M+K#L_0#!>]LY>M#_J>;=8Y#:!1QQ2$\("8X&'A_:@LP\C0'R MG+@16WV\0N'T`O``O7#-,MH+OY[WRA752Y#M`@X""D_;@\#3&53M,U\&G9R7 M%,<3&T&F9P`!I<#TZ4UCUR[L&7'7J_OX^329D[A,VWSH7\( M*EW)4&"XA)MJK1_+8QL!DPW[&'$D0@,RB`>#"PO'SP$0`X2'\H\4<<@PO@*!.`< M3OE8V1X`;G$54M?2=GV5(B<79,\P$?P0<",$!`P"GG^CQP+\JAT8B),(7CT> M*J7UB!8;HP-`J^8>&>(:`^`BR,&E'Q3BUPH\$"*R]VC7&)X%#"!*GI1>!1]! M2*2`@;TQ!1B`JE:$601^_(NSJ"R"!0'0BOP!H8^:BO'+[S:-GDGR"FIO<(RS$);(C]@CX"QFZA)P+668692)A;#:4[L`%`RT1@8$%6]!\,LXLPK`CF&$/%>%4`E!019JQM6OUBR26-W MFRC"'QUD-@D%265VE6'-`(M#X^I0H%!K0:"&@0C@R#8:6K%@R@`X MZ+49DIL6*.2*(3S0-8M$AF&62210Q&.TCJ5P1@!L'A19'DS@``!DD=!5!$,3 M6TZYWX(%.\)=GY,@HAH`VMSYCHW17H(;0N@T8$-^=D[J[)`@@B6)57+N+/!Z M:1OW7:,*0#&\*8(M0N@E6'Y`V`<8Z/F>FKB-&XH`VT06;LU-1+<3`BP_P`%* MFI#,3/96T4"9AE5-%6!V1]Y"3("#"\KQ:>Q+TO%5QS8^G!P-(NC>R18%E-+ M]H>GW')?3H0,HN:=#VEYO?.WY,2LG[`.`$BE`*``P/Q2X08YF6\)EP%?'G9T MA_"-!QS!J%83(-`U0C`F.)W43,AJCLB25#`A"8H@IG>22QD(0]2X%%:F0B"```J76(RN M72,>-%N5$O)FLETD;F+B,\.(KC@3J$4!@>?SQ'&ZD1V(2(1RI^A=LCY81N4( M10&",J&`T,7)S"`[0XNW*TRNMN20"8OH8 M,"?*S?P=8(7XZJA%_['S4^7$R0.=$((3ZG"O]S7T1@4!W*RX&2$(C`VF#T'1 M'832N#K&2J(4%>H4KDK%>6J!0E]E#Q&ZIC+CW.:AC:B#ZT(".ZCR80M#2.@7 M2(9(@VY2$0#0B1UR:M9:2>*/`B48I^(@3\'ZPF[7$&(ZDNH'3OB'+R?=XO=" MTDCO7.*N4W";'!Z&C*[J5+#(X:CRD$/:Q7K"=%V$0!DB(B3M>=FC#=QCMV7-J!O\. M,&YW#T<0PRE1RIAGQ",_5:)1^GCCTO;&%Y]RBAZSW)8T!K/J)ZA30VC1(0T4 MP5<-NX4"`P"BDSTUR8,A!@ MA#RVQ'&R[+-UK/@[N6TH=![\B&P:N;U>YA3[^#DU$""`)^`%QK\RXI:^[)G/ M??;SGP$=:$$/FM"%-O2@)4*10R\ZT%?5!Z,A'6E)3YK2E08TILX1:2'RTM(= MF4RG`7WD):"D/SQ^<[GB+(I>G+H/4`K0JV$=:UG_SYK6M;;UK7&=:UT'B4B[ M]O4M\O%K80^;V,4V]K%Q89]]$=L^;"'V))`-:U$K`2"!"(AH%,I/4E@(,G0N MEYVUH>QEA?EB256F\3BS5'+[3&W(,',3JIFY/+QFP4V8-I?B8:O^EK@[4%8Q M;*<\$96NFUGV`GP15/ M1$'F)^*76*;3JEF(:W?"AMU.RVU8%/&01YMO(_*^ M`.C*[YZW%EI#TCC+&Z?(=2H\7^(>7M,[CSG=H&2)9\_'UPP0=Y4/O!/?_H3@ MJ_CPLL]]\NS%\^/S\2<`[OTQU/I=C:-B^%7L_/*QG_T1/[,PC5-92EW/!O&4 MGOK:-__Y]V`JF3-3B+;P`/F=D'-H]>?ZZ+?__6FW(;3/6R+EVW_.#>0LZ@__ M")``6PO^'@$3)$O=>"%\6F+_]`"<"G`"M<^*E*,.!("-)@_K/$D"*?`#EZ\. M9O]H-'#(7C*LP^K-^$!P!>W/6ZY.H8J*OFKKX9)@^$+$`UDP!Q.OM5+0##"/ MG&80"VR0AW2P",_ON2J#`%IO"81,FX:P:HPP"K7O[!+CJ72$4.*O!RL#!Z6P M"Q=.0[ZE,.B!382L)YXP9+PP#6=/8F@0X3!+"I).:%YC_4J("]7P#GN,"&Y. M'ASH(5#FA>S@!=$0#PEQ[G8/`L>`XBXLT>@P?^RP$"'1N/C.^4)BO]2`6A"Q MJB)Q$PE.\J;B3>*B.*+H$3FQ%(7*5`:N(%QEXM8B$QG)%&&1W!K+%?')`]K0 M3?P"]@11!6.Q%]&KPA#P#'[0#,Y0.TC1%Y%1E!PC!G'_H@I0L`.3,1K12P13 M3]2*<0"E,1OGR0418@R)40M?41O%\:MX$(_>\`JND1?'<1W7R0+Y\/W&(!TU MD1WI<9U$D!:70!&%$!S-J![]493`,!BEP!+1D1^MXAC_,2')A0W!`10+$AH5 M,B+O"`F=:PDYD(\04B(U,D2H\!?6S"`,V88";#D2O)DE?T#Q4(<@G$ MLA_+LBTKXP!1P2'5,BLSRRWM_[(TW#$!+9(JZ))/[O(O*^,>+>$CE6`M#Q(P M$=,JN/$1O+$P^]+($C,R9Z('!,S-3,T?:$C]T`? M0<`P$40Z$.@H1;,UK61#@M$I^9)9L"%Q*(0E#BXL77,W$>YT;A&I/.`44#,/ M^JTFCN!CP(`WE=,3])`/M&LXV0``YN4F8H>LA&\YL=.'A%+\!@\ZR6053Y/) M3`07XB#:S/,\T3,]U7,]V;,]W?,]X3,^`V00A@W:O%,-`&(!MF#5<.\2`B(, M1B)`!71`";1`#?1`$31!%71!&;1!'?1!(31")71"*;1"+?1",31#(U2&)%0! MNN(Q'_^"GP"@#'B/-I(S.U&4#U"1#:BA&O8P"?E)-`R@$R0L_E+T1O5@%M6@ M1?^@30[`&1##&9P01XE4*U[(S'C4#E[4D8JT2>&#^Z9!%)>(-9UT.:D1KZ0T MA:BT2I5S,;$I2^N02\7T"BAS"IZ!1(!N2L=T3:$@+U42(]DT3H%S!&421"M. M3O&42V#S38TR3_V40GRS3D'S3^.4,[%R4`DU3DGS,N$T4?\T(`^U41W53U_R M,R5U4OT4)VO03CD&4Q/U$#<543TU3I=R-B]U5/.4*E^CH$X55?/45'`#'P_3 M50D5YF(5*FG53QO.17$U5_.TW>Y%5GO25_^TW5BU5XD53XG_X%B1-5GE]#XA MTUGS%%KE84NE53.I]4ZO]5DY=5VVE5M%]5N;-%L[55S7E%R]U5S'%%T[0UW7 MM5O;U5VYE%W=3E[G%5[KU5Z=E%XI2%_'%5_[U5^)E%]91&"+E&#+SV!Q%&%Q M3F$7%F`+UF%3E&$MP5HE-BHI]BDN%D4S=NLV%CL[=A8^%F0A-F%'EC=#MA]. M5CE3-@)7%F5+MF%?UC5;-@\L=F9)LF;9X&9Q=B-UEA=Z5C1_M@O(04AE$KV< MH;EZ!VEWL>NJ^CD:3A&?CQKN,B]56Z_$62VL7JV;E[%HTX46M%FVP M=K6\5K"X5K#2UJQJEA)`C#10K2F)_P[4[/9N_RQ"\'9O^580^/9O[Q99`'=P M*\UO"?=P(ZUE3TV5^',\@4T^(9?6)B-R*??53J=R,=*(1Y=:XSK9K^U-M8[8PVO:K:K8[!,`0;*@93A1UE[2B7E>HUM:L=O>G M:G9&-Z\L<#,*5M>L(N!IC^E$T$OBR#$5S>J`'$8U@[9ZK?=ZL3=[M7=[N;=[ MO?=[P3=\Q7=\R1=5B<%1N(1]LB$;Q*``["%-F848`,DX#`%]C<,>;H5]3&0A M@4$ZQ&!^@8%^*418?8$8X#=_[5<;WO<2^*$`FA;A^C=]1V%]!7@4NBX+\->2 MI,.@LH"!@?_A,5_C52(`7>(!,I*LD$@,&+P`3^9@A"DQ1+JK*);A&@+C16+E M6-WA&^RG>)-@1Q;F(`P@`AX`W$SX%6XBA6L8!%CX$NS`=.$%:X?@%2K!?FZ8 M''*8VIRH(G0CP%,D,5G$UX%]PZ9G[I#>1/#D87"=P)CDA'C\3PY M=DQ!17B/7`Z"CE*YK$!9/%?91%_"B9+)6E#YZ^SLD%4DDD'`E0W_`99)U*V8 M\@MH!!"0H$3T39>CF0L(8D1[F(#WP)&5H#LP00F4XO%\JSJWP",T&0KSD1RD M&3%8[9M-])C=EWBZ.'4`8_30A!C">8JCR4(Z86K@MY8N19U7B9U+[)ME)7;@ M!YCK65=\BT)^Y?'L)\[Z.19R-V*5``]B8V?.A-7$V)$MYCB:V1>X&4WF0$L* M:):/69_#-<0D.2HZ_KN58C3`\^@@@`H:89:3=Y!1BXZ3C`:+G=G2O MQSSF62UA6E?$>*8WNL0(`^^JXI^VA*<9*C9^0J6$^M0<67*T&:FQ2"@\V24B MN:8MY)JG.#LG;JL_:42 MS$&A!>5,0,:M_YI]UBO55EJ5F64]M`AD^"Z45SFE3U?%R&6D?W2R,::5_S>Q M_9I)0*6K:W"5SN2*"KG$.,.>2;>M!3MMR.&;LR`V\*ZA2]0C(*7E`+KC$,.T M)5M%;D*U$?J[6KLLC*:A7T6VQ2`VNF-,NL,Z6:4J9E>F65N781N:$3FAA]LV M[UEN.+N:$_F/CR!V;+WE_J8B5=%RH`DAGO&2())K*,16@CO M,IIJ>[NQ`^-(S`Z]U_K4WH=M(J$LRD"]6IN+Z=H-+,J^90&_TX9$+<0+DI:_ MO\Z_U[M^H8N?3*7:"F8T":1ZJ@E"P1O"JIE&"2"\)B3\F!L!`GY3#TIB#I*, M&83@%'!%:GT[NC&#IPB#%(2I32"":K:B(RQ8F*EJ*WH -----END PRIVACY-ENHANCED MESSAGE-----