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, 2014

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 ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 x No ¨

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)

Yes x No ¨

Indicate by check mark 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.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the act).

Yes ¨ No x

As of February 27, 2015, 46,666,089 shares of Common Stock were validly issued and outstanding. The aggregate market value of the Common Stock (based upon the $5.80 last sale price on The NASDAQ Global Select Market on June 30, 2014, the last trading date of the Company’s second fiscal quarter) held by non-affiliates (excluding outstanding shares reported as beneficially owned by directors and executive officers; does not constitute an admission as to affiliate status) was approximately $249.8 million.

	Part of Form 10-K Into Which
Documents Incorporated by Reference	Portions of Document are Incorporated
Proxy Statement for Annual Meeting of Shareholders on May 4, 2015	Part III

BANK MUTUAL CORPORATION

FORM 10-K ANNUAL REPORT TO

THE SECURITIES AND EXCHANGE COMMISSION

FOR THE YEAR ENDED DECEMBER 31, 2014

Table of Contents

Item		Page
Part I
1	Business	3
1A	Risk Factors	21
1B	Unresolved Staff Comments	25
2	Properties	25
3	Legal Proceedings	25
4	Mine Safety Disclosures	25
Part II
5	Market for Registrant's Common Equity, Related Stockholders Matters, and  Issuer Purchases of Equity Securities	26
6	Selected Financial Data	28
7	Management's Discussion and Analysis of Financial Condition and Results of Operations	30
7A	Quantitative and Qualitative Disclosures About Market Risk	52
8	Financial Statements and Supplementary Data	56
9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	101
9A	Controls and Procedures	101
9B	Other Information	103
Part III
10	Directors, Executive Officers, and Corporate Governance	104
11	Executive Compensation	104
12	Security Ownership of Certain Beneficial Owners, Management, and Related Stockholder Matters	104
13	Certain Relationships and Related Transactions and Director Independence	104
14	Principal Accountant Fees and Services	104
Part IV
15	Exhibits, Financial Statement Schedules	105
SIGNATURES		106

2

Part I

Cautionary Statement

This report 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 contain, and are intended to be identified by, words such as “anticipate,” “believe,” “estimate,” “expect,” “objective,” “projection,” “intend,” and similar expressions; the use of verbs in the future tense and discussions of periods after the date on which this report is issued 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 stated or 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 volatility in credit, lending, and financial markets; weakness and declines in the real estate market, which could affect both collateral values and loan activity; periods of relatively high unemployment or economic weakness and other factors which could affect borrowers’ ability to repay their loans; negative developments affecting particular borrowers, which could further adversely impact loan repayments and collection; legislative and regulatory initiatives and changes, including action taken, or that may be taken, in response to difficulties in financial markets and/or which could negatively affect the rights of creditors; monetary and fiscal policies of the federal government; the effects of further regulation and consolidation within the financial services industry; regulators’ strict expectations for financial institutions’ capital levels and restrictions imposed on institutions, as to payments of dividends, share repurchases, or otherwise, to maintain or achieve those levels, including the possible effects of new regulatory capital requirements under Basel III; recent, pending, and/or potential rulemaking or other actions by the Consumer Financial Protection Bureau (“CFPB”); potential regulatory or other actions affecting the Company or the Bank; potential changes in the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), which could impact the home mortgage market; increased competition and/or disintermediation within the financial services industry; changes in tax rates, deductions and/or policies; potential further changes in Federal Deposit Insurance Corporation (“FDIC”) premiums and other governmental assessments; 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; illiquidity of financial markets and other negative developments affecting particular investment and mortgage-related securities, which could adversely impact the fair value of and/or cash flows from such securities; changes in customers’ demand for other financial services; the Company’s potential inability to carry out business plans or strategies; changes in accounting policies or guidelines; natural disasters, acts of terrorism, or developments in the war on terrorism or other global conflicts; the risk of failures in computer or other technology systems or data maintenance, or breaches of security relating to such systems; and the factors discussed in “Item 1A. Risk Factors,” as well as “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.”

Item 1. Business

The discussion in this section should be read in conjunction with “Item 1A. Risk Factors,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Item 7A. Quantitative and Qualitative Disclosures about Market Risk,” and “Item 8. Financial Statements and Supplementary Data.”

General

Bank Mutual Corporation (the “Company”) is a Wisconsin corporation headquartered in Milwaukee, Wisconsin. 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 Board of Governors of the Federal Reserve (“FRB”). 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 Office of the Comptroller of the Currency (“OCC”) and its deposits are insured within limits established by the 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 commercial and industrial loans, multi-family residential loans, non-residential commercial real estate loans, one- to four-family loans, home equity loans, and other consumer loans. 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.

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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.

Market Area

At December 31, 2014, the Company had 75 banking offices in Wisconsin and one in Minnesota. At June 30, 2014, the Company had a 1.28% market share of all deposits held by FDIC-insured institutions in Wisconsin. The Company is the third largest financial institution headquartered in Wisconsin based on total assets and the fourth largest based on deposit market share.

The largest concentration of the Company’s offices is in southeastern Wisconsin, consisting of the Milwaukee Metropolitan Statistical Area (“MSA”), and Racine and Kenosha Counties. The Company has 26 offices in these areas. The Company has also five offices in south central Wisconsin, consisting of the Madison MSA and the Janesville/Beloit MSA, as well as six other offices in communities in east central Wisconsin. The Company also operates 20 banking offices in northeastern Wisconsin, including the Green Bay MSA. Finally, the Company has 18 offices in northwestern Wisconsin, including the Eau Claire MSA, and one office in Woodbury, Minnesota, which is part of the Minneapolis-St. Paul MSA. A number of the Company’s banking offices are located near the northern Michigan and Illinois borders. Therefore, the Company may also draw customers from nearby regions in those states.

The services provided through the Company's banking offices are supplemented by services offered through ATMs located in the Company’s market areas, as well as internet and mobile banking, a customer service call center, and 24-hour telephone banking.

On February 9, 2015, the Company announced that it was closing seven retail branch offices in connection with an efficiency and expense reduction effort. Four of these offices are located in northwestern Wisconsin (including one in Eau Claire), two are located in northeastern Wisconsin (including one in Green Bay), and one is located in southeastern Wisconsin. Management anticipates the closures will be completed in the second quarter of 2015, and that the Company will continue to provide products and services to the affected customers through its other nearby locations, as well as its internet, mobile banking, and telephone channels. For additional discussion, refer to “Results of Operations—Non-Interest Expense” in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.”

Competition

The Company faces significant competition in attracting deposits, making loans, and selling other financial products and services. Wisconsin has many banks, savings banks, savings and loan associations, and tax-exempt credit unions, which offer the same types of banking products and services as the Company. The Company also faces competition from other types of financial service companies, such as mortgage brokerage firms, finance companies, insurance companies, investment brokerage firms, and mutual funds. As a result of electronic commerce, the Company also competes with financial service providers outside of Wisconsin.

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, and brokerage services through a wholly-owned subsidiary.

4

Lending Activities

General At December 31, 2014, the Company’s total loans receivable was $1.6 billion or 68.6% of total assets. The Company’s loan portfolio consists of loans to both commercial and retail borrowers. Loans to commercial borrowers include loans secured by real estate such as multi-family properties, non-residential commercial properties (referred to as “commercial real estate”), and construction and development projects secured by these same types of properties, as well as land. In addition, commercial loans include loans to businesses that are not secured by real estate (referred to as “commercial and industrial loans”). Loans to retail borrowers include loans to individuals that are secured by real estate such as one- to four-family first mortgages, home equity term loans, and home equity lines of credit. In addition, retail loans include student loans, automobile loans, and other loans not secured by real estate (collectively referred to as “other consumer loans”).

The nature, type, and terms of loans originated or purchased by the Company are subject to federal and state laws and regulations. The Company has no significant concentrations of loans to particular borrowers or to borrowers engaged in similar activities. In addition, the Company limits its lending activities primarily to borrowers and related loan collateral located in its primary market areas, which consist of Wisconsin and contiguous regions of Illinois, Minnesota, and northern Michigan. However, from time-to-time the Company will make loans secured by properties outside of its primary market areas provided the borrowers are located within such areas and are well-known to the Company. For specific information related to the Company’s loans receivable for the periods covered by this report, refer to “Financial Condition—Loans Receivable” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Commercial and Industrial Loans    At December 31, 2014, the Company’s portfolio of commercial and industrial loans was $226.5 million or 12.5% of its gross loans receivable. This portfolio consists of loans and lines of credit to businesses for equipment purchases, working capital, debt refinancing or restructuring, business acquisition or expansion, Small Business Administration (“SBA”) loans, and domestic standby letters of credit. Typically, these loans are secured by general business security agreements and personal guarantees. The Company offers variable, adjustable, and fixed-rate commercial and industrial loans. The Company also has commercial and industrial loans that have an initial period where interest rates are fixed, generally for one to five years, and thereafter are adjustable based on various market indices. Fixed-rate loans are priced at either a margin over various market indices 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. Commercial lines of credit generally have a term of one year and are subject to annual renewal thereafter. The Company performs an annual credit review of all commercial and industrial borrowers having an exposure to the Company of $500,000 or more.

Multi-family and Commercial Real Estate Loans    At December 31, 2014, the Company’s aggregate portfolio of multi-family and commercial real estate loans was $585.9 million or 32.2% of its gross loans receivable. 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 market indices. This portfolio generally consists of loans secured by apartment buildings, office buildings, retail centers, warehouses, and industrial buildings. Loans in this portfolio may be secured by either owner or non-owner occupied properties. Loans in this portfolio typically do not exceed 80% of the lesser of the purchase price or an independent 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. However, if a multi-family or commercial real estate borrower desires a fixed-rate with a balloon maturity beyond five years, the Company generally enters into a series of interest rate swap agreements with the borrower and a third-party financial institution which converts the Company’s interest rate risk exposure to floating rate. Refer to “Financial Derivatives,” below, for additional discussion.

Loans secured by multi-family and commercial real estate are granted based on the income producing potential of the property, the financial strength and/or income producing potential of the borrower, and the appraised value of the property. In most cases, the Company also obtains personal guarantees from the principals involved, the assessment of which is also based on financial strength and/or income producing potential. The Company’s approval process includes a review of the other debt obligations and overall sources of cash flow available to the borrower and guarantors. The property’s expected net operating income must be sufficient to cover the payments relating to the outstanding debt. The Company generally requires an assignment of rents or leases 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 or licensed 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, the Company performs an annual credit review of its multi-family and commercial real estate loans over $500,000.

5

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. The Bank has internal lending limits to single borrowers or a group of related borrowers that are adjusted from time-to-time, but are generally well below the Bank’s legal lending limit of approximately $43.0 million as of December 31, 2014. 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. Furthermore, borrowers’ problems in areas unrelated to the properties that secure the Company’s loans may have an adverse impact on such borrowers’ ability to comply with the terms of the Company’s loans.

Construction and Development Loans At December 31, 2014, the Company’s portfolio of construction and development loans was $258.7 million or 14.2% of its gross loans receivable. These 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. Construction loans typically convert to permanent loans at the completion of a project, but may or may not remain in the Company’s loan portfolio depending on the competitive environment for permanent financing at the end of the construction term. Development loans are typically repaid as the underlying lots or housing units are sold. Construction and development 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 and development 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, the appropriate application of loan proceeds to the work performed, the borrower's ability to advance additional construction funds if necessary, and the stabilization period for lease-up after the completion of construction. 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. The Company performs an annual credit review of its construction and development loans over $500,000.

Residential Mortgage Loans At December 31, 2014, the Company’s portfolio of one- to four-family first mortgage loans was $504.0 million or 27.7% of its gross loans receivable. Most of these loans are for owner-occupied residences; however, the Company also originates first mortgage loans secured by second homes, seasonal homes, and investment properties.

The Company originates primarily conventional fixed-rate residential mortgage loans and adjustable-rate residential 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. Conventional fixed-rate residential mortgage loans are generally sold in the secondary market without recourse, although the Company typically retains the servicing rights to such loans. When the Company sells residential mortgage loans in the secondary market, it makes representations and warranties to the purchasers about various characteristics of each loan, including the underwriting standards applied and the documentation being provided. Failure of the Company to comply with the requirements established by the purchaser of the loan may result in the Company being required to repurchase the loan. There have not been any material instances where the Company has been required to repurchase 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. The Company also originates “jumbo” single family mortgage loans in excess of the Fannie Mae maximum loan amount, which was $417,000 for single family homes in its primary market areas in 2013. Fannie Mae has higher limits for two-, three- and four-family homes. The Company generally retains fixed-rate jumbo single family mortgage loans in its portfolio.

From time-to-time the Company also originates fixed-rate and ARM loans under special programs for low- to moderate-income households and first-time home buyers. These programs are offered to help meet the credit needs of the communities the Company serves 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. These loans generally have maturities up to 30 years.

6

From time-to-time the Company also originates loans under programs administered by various federal and state government agencies such as 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 the Federal Housing Administration (“FHA”). Loans originated under these programs may or may not be held by the Company in its loan portfolio and the Company may or may not retain the servicing rights for such loans.

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 generally have an initial fixed-rate term of one to seven years. Thereafter, they are adjusted on an annual basis up to a maximum of 200 basis points per year. 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 or with interest-only payment features. 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 base 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 for terms of up to seven years in which the borrower may convert the ARM loan to a fixed-rate mortgage 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 to allow the Company to sell the loan into the secondary market upon conversion. 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. ARM loans are susceptible to early prepayment during periods of lower interest rates as borrowers refinance into fixed-rate loans.

The Company requires an appraisal of the real estate that secures a residential mortgage loan, which must be performed by an independent certified appraiser approved by the board of directors. 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 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. Generally, no interest is paid on these escrow deposits. If borrowers with loans having a lower loan-to-value ratio want to handle their own taxes and insurance, an escrow waiver fee is charged. With respect to escrowed real estate taxes, the Company generally makes this disbursement directly to the borrower as obligations become due.

The Company’s staff underwriters review all pertinent information prior to making a credit decision on 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 application. The Company’s lending policies generally limit the maximum loan-to-value ratio on single family mortgage loans secured by owner-occupied properties to 95% of the lesser of the appraised value or purchase price of the property. This limit is lower for loans secured by two-, three-, and four-family homes. Loans above 80% loan-to-value ratios are subject to private mortgage insurance 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 (“loans serviced for third-party investors”). Servicing mortgage loans, whether for its own portfolio or for third-party investors, includes such functions as collecting monthly principal and interest payments from borrowers, maintaining escrow accounts for real estate taxes and insurance, and making certain payments on behalf of 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, 2014, loans serviced for third-party investors amounted to $1.1 billion. These loans are not reflected in the Company’s Consolidated Statements of Financial Condition.

When the Company services loans for third-party investors, it is compensated 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 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.

7

Management believes that servicing mortgage loans for third-party investors partially mitigates 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 generally be offset 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 allowances 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 assess the impairment of MSRs. Although most of the Company's serviced loans that prepay are replaced by new serviced loans (thus preserving the future servicing cash flow), GAAP requires impairment losses resulting from a change in future prepayment assumptions to be recorded when the change occurs. MSRs 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.

Home Equity Loans At December 31, 2014, the Company’s portfolio of home equity loans was $219.7 million or 12.1% of its gross loans receivable. Home equity loans include fixed term home equity loans and home equity lines of credit. These loans are typically secured by junior liens on owner-occupied one- to four-family residences, but in many instances are secured by first liens on such properties. 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 Company originates fixed-rate home equity term loans with loan-to-value ratios of up to 89.99% (when combined with any other mortgage on the property). Pricing on fixed-rate home equity term loans is periodically reviewed by management. Generally, loan terms are in the three to fifteen year range in order to minimize interest rate risk.

The Company also originates home equity lines of credit. Home equity lines of credit are variable-rate loans secured by first liens or junior liens on owner-occupied one- to four-family residences. Current interest rates on home equity lines of credit are tied to an index rate, adjust monthly after an initial interest rate lock period, and generally have floors that vary depending on the loan-to-value ratio. Home equity line of credit loans are made for terms up to 10 years and require minimum monthly payments.

Other Consumer Loans At December 31, 2014, the Company’s portfolio of other consumer loans was $22.4 million or 1.2% of its gross loans receivable. Other consumer loans include student loans, automobile loans, recreational vehicle and boat loans, deposit account loans, overdraft protection lines of credit, and unsecured consumer loans, including loans through credit card programs that are administered by third parties. The Company no longer originates student loans through programs guaranteed by the federal government. Student loans that continue to be held by the Company are administered by a third party.

Other consumer loans generally have shorter terms and higher rates of interest than conventional mortgage loans, but typically involve more credit risk because of the nature of the collateral and, in some instances, the absence of collateral. In general, other 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. In addition, various laws, including bankruptcy and insolvency laws, may limit the amount that may be recovered from a borrower. The Company believes that the higher yields earned on other 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.

8

Asset Quality

General The Company has policies and procedures in place to manage its exposure to credit risk related to its lending operations. As a matter of policy, the Company limits its lending to geographic areas in which it has substantial familiarity and/or a physical presence. Currently, this is limited to certain specific market areas in Wisconsin and contiguous states. In addition, from time-to-time the Company will prohibit or restrict lending in situations in which the underlying business operations and/or collateral exceed management’s tolerance for risk. The Company obtains appraisals of value prior to the origination of mortgage loans or other secured loans. It also manages its exposure to risk by regularly monitoring loan payment status, conducting periodic site visits and inspections, obtaining regular financial updates from large borrowers and/or guarantors, corresponding regularly with large borrowers and/or guarantors, and/or updating appraisals as appropriate, among other things. These procedures are emphasized when a borrower has failed to make scheduled loan payments, has otherwise defaulted on the terms of the loan agreement, or when management has become aware of a significant adverse change in the financial condition of the borrower, guarantor, or underlying collateral. For specific information relating to the Company’s asset quality for the periods covered by this report, refer to “Financial Condition—Asset Quality” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Internal Risk Ratings and Classified Assets OCC regulations require thrift institutions to review and, if necessary, classify their assets on a regular basis. Accordingly, the Company has internal policies and procedures in place to evaluate and/or maintain risk ratings on all of its loans and certain other assets. In general, these internal risk ratings correspond with regulatory requirements to adversely classify problem loans and certain other assets as “substandard,” “doubtful,” or “loss.” A loan or other asset is adversely classified as substandard if it is determined to involve a distinct possibility that the Company could sustain some loss if deficiencies associated with the loan are not corrected. A loan or other asset is adversely classified as doubtful if full collection is highly questionable or improbable. A loan or other asset is adversely classified as loss if it is considered uncollectible, even if a partial recovery could be expected in the future. The regulations also provide for a “special mention” designation, described as loans or assets which do not currently expose the Company to a sufficient degree of risk to warrant adverse classification, but which demonstrate clear trends in credit deficiencies or potential weaknesses deserving management's close attention (refer to the following paragraph for additional discussion). As of December 31, 2014, $43.5 million or 2.7% the Company’s loans were classified as special mention and $45.4 million or 2.8% were classified as substandard. The latter includes all loans placed on non-accrual in accordance with the Company’s policies, as described below. In addition, as of December 31, 2014, $23.3 million of the Company’s mortgage-related securities, consisting of private-label collateralized mortgage obligations (“CMOs”) rated less than investment grade, were classified as substandard in accordance with regulatory guidelines. The Company had no loans or other assets classified as doubtful or loss at December 31, 2014.

Loans that are not classified as special mention or adversely classified as substandard, doubtful, or loss are classified as “pass” or “watch” in accordance with the Company’s internal risk rating policy. Pass loans are generally current on contractual loan and principal payments, comply with other contractual loan terms, and have no noticeable credit deficiencies or potential weaknesses. Watch loans are also generally current on payments and in compliance with loan terms, but a particular borrower’s financial or operating conditions may exhibit early signs of credit deficiencies or potential weaknesses that deserve management’s close attention. Such deficiencies and/or weaknesses typically include, but are not limited to, the borrower’s financial or operating condition, deterioration in liquidity, increased financial leverage, declines in the condition or value of related collateral, recent changes in management or business strategy, or recent developments in the economic, competitive, or market environment of the borrower. If adverse observations noted in these areas are not corrected, further downgrade of the loan may be warranted.

Delinquent Loans 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 late charge notices, telephone contacts, and letters. If these efforts are unsuccessful, foreclosure notices will eventually be sent. The Company may also send 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 of the collateral. Many borrowers pay before the agreed upon payment deadline and it is not necessary to start a foreclosure action. The Company follows collection procedures and guidelines outlined by Fannie Mae, Freddie Mac, State VA, WHEDA, and the Guaranteed Rural Housing Program.

The collection procedures for retail loans, excluding student loans and credit card loans, include sending periodic late notices to a borrower and 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 efforts, seek foreclosure or repossession of the collateral (if any), and/or charge-off the loan. All student loans are serviced by a third party that guarantees that its servicing complies 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.

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The collection procedures for commercial 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 regularly review loans that are 10 days or more delinquent. 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.

In working with delinquent borrowers, if the Company cannot develop a repayment plan that substantially complies with the original terms of the loan agreement, the Company’s practice has been to pursue foreclosure or repossession of the underlying collateral. As a matter of practice, the Company has not restructured or modified troubled loans in a manner that has resulted in a loss under accounting rules. However, the Company’s policies do not preclude such practice and the Company may elect in the future to restructure certain troubled loans in a manner that could result in losses under accounting rules. In most cases the Company continues to report restructured or modified troubled loans as non-performing loans unless the borrower has clearly demonstrated the ability to service the loan in accordance with the new terms.

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 classified loans, delinquent loans, restructured or modified loans, allowance for loan losses, and foreclosed real estate.

Non-Accrual Policy With the exception of student loans that are guaranteed by the U.S. government, the Company generally stops accruing interest income on loans when interest or principal payments are 90 days or more in arrears or earlier when the future collectability of such interest or principal payments may no longer be certain. In such cases, borrowers have often been able to maintain a current payment status, but are experiencing financial difficulties and/or the properties that secure the loans are experiencing increased vacancies, declining lease rates, and/or delays in unit sales. In such instances, the Company generally stops accruing interest income on the loans even though the borrowers are current with respect to all contractual payments. Although the Company generally no longer accrues interest on these loans, the Company may continue to record periodic interest payments received on such loans as interest income provided the borrowers remain current on the loans and provided, in the judgment of management, the Company’s net recorded investment in the loans are deemed to be collectible. The Company designates loans on which it stops accruing interest income as non-accrual loans and establishes a reserve for outstanding interest that was previously credited to income. All loans on non-accrual are considered to be impaired. The Company returns a non-accrual loan to accrual status when factors indicating doubtful or uncertain collection no longer exist. In general, non-accrual loans are also classified as substandard, doubtful, or loss in accordance with the Company’s internal risk rating policy. As of December 31, 2014, $12.0 million or 0.74% of the Company’s loans were considered to be non-performing in accordance with the Company’s policies.

Foreclosed Properties and Repossessed Assets As of December 31, 2014, $4.7 million or 0.20% of the Company’s total assets consisted of foreclosed properties and repossessed assets. In the case of loans secured by real estate, foreclosure action generally starts when the loan is between the 90th and 120th day of delinquency following review by a senior officer and the executive loan committee of the board of directors. If, based on this review, the Company determines that repayment of a loan is solely dependent on the liquidation of the collateral, the Company will typically seek the shortest redemption period possible, thus waiving its right to collect any deficiency from the borrower. Depending on whether the Company has waived this right and a variety of other factors outside the Company’s control (including the legal actions of borrowers to protect their interests), an extended period of time could transpire between the commencement of a foreclosure action by the Company and its ultimate receipt of title to the property.

When the Company ultimately obtains title to the property through foreclosure or deed in lieu of foreclosure, it transfers the property to “foreclosed properties and repossessed assets” on the Company’s Consolidated Statements of Financial Condition. In cases in which a borrower has surrendered control of the property to the Company or has otherwise abandoned the property, the Company may transfer the property to foreclosed properties as an “in substance foreclosure” prior to actual receipt of title. Foreclosed properties and repossessed assets are adversely classified in accordance with the Company’s internal risk rating policy.

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 5% to 10%). Foreclosed real estate is inspected periodically to evaluate its condition. Additional outside appraisals are obtained as deemed necessary or appropriate. 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.

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In the case of loans secured by assets other than real estate, action to repossess the underlying collateral generally starts when the loan is between the 90th and 120th day of delinquency. The accounting for repossessed assets is similar to that described for real estate, above.

Loan Charge-Offs The Company typically records loan charge-offs when foreclosure or repossession becomes likely or legal proceedings related to such have commenced, the secondary source of repayment (consisting of a guarantor or operating entity) files for bankruptcy, or the loan is otherwise deemed uncollectible. The amount of the charge-off will depend on the fair value of the underlying collateral, if any, 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. All charge-off activity is reviewed by the board of directors.

Allowance for Loan Losses As of December 31, 2014, the Company’s allowance for loan losses was $22.3 million or 1.37% of loans receivable and 185.68% of non-performing loans. 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 factors such as the size and current risk characteristics of the portfolio, an assessment of individual problem loans and pools of homogenous loans within the portfolio, and actual loss, delinquency, and/or risk rating experience within the portfolio. The Company also considers current economic conditions and/or events in specific industries and geographical areas, including unemployment levels, trends in real estate values, peer comparisons, and other pertinent factors, including regulatory guidance. Finally, as appropriate, the Company also considers individual borrower circumstances and the condition and fair value of the loan collateral, if any. For additional information relating to the Company’s allowance for loan losses for the periods covered by this report, refer to “Results of Operations—Provision for Loan Losses” and “Financial Condition—Asset Quality” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Determination of the allowance is inherently subjective as it requires significant management judgment and estimates, including the amounts and timing of expected future cash flows on loans, the fair value of underlying collateral (if any), estimated losses on pools of homogeneous loans based on historical loss experience, changes in risk characteristics of the loan portfolio, and consideration of current economic trends, all of which may be susceptible to significant change. Higher rates of loan defaults than anticipated would likely result in a need to increase provisions in future years. Also, increases in the Company’s multi-family, commercial real estate, construction and development, and commercial and industrial loan portfolios could result in a higher allowance for loan losses as these loans typically carry a higher risk of loss. Finally, various regulatory agencies, as an integral part of their examination processes, periodically review the Company’s loan and foreclosed real estate portfolios and the related allowance for loan losses and valuations of foreclosed real estate. One or more of these agencies, particularly the OCC, may require the Company to increase the allowance for loan losses or reduce the recorded value of 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. As a result of applying management judgment, it is possible that there may be periods when the amount of the allowance and/or its percentage to total loans or non-performing loans may decrease even though non-performing loans may increase.

Periodic adjustments to the allowance for loan loss are recorded through provision for loan losses in the Company’s Consolidated Statements of Income. Actual losses on loans are charged off against the allowance for loan losses. In the case of loans secured by real estate, charge-off typically occurs when foreclosure or repossession is likely or legal proceedings related to such have commenced, when the secondary source of repayment (consisting of a guarantor or operating entity) files for bankruptcy, or when the loan is otherwise deemed uncollectible in the judgment of management. Loans not secured by real estate, as well as unsecured loans, are charged off when the loan is determined to be uncollectible in the judgment of management. Recoveries of loan amounts previously charged off are credited to the allowance as received. Management reviews the adequacy of the allowance for loan losses on a monthly basis. The board of directors reviews management’s judgments related to the allowance for loan loss on at least a quarterly basis.

The Company maintains general allowances for loan loss against certain homogenous pools of loans. These pools generally consist of smaller loans of all types that do not warrant individual review due to their size. In addition, pools may also consist of larger commercial loans that have not been individually identified as impaired by management. Certain of these pools are further segmented by management’s internal risk rating of the loans. Management has developed factors for each pool or segment based on the historical loss experience of each pool or segment, recent delinquency performance, internal risk ratings, and consideration of current economic trends, in order to determine what it believes is an appropriate level for the general allowance. Given the significant amount of management judgment involved in this process there could be significant variation in the Company’s allowance for loan losses and provision for loan losses from period to period.

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The Company maintains specific allowances for loan loss against individual loans that have been identified by management as impaired. These loans are generally larger loans, but management may also establish specific allowances against smaller loans from time-to-time. The allowance for loan loss established against these loans is based on one of two methods: (1) the present value of the future cash flows expected to be received from the borrower, discounted at the loan’s effective interest rate, or (2) the fair value of the loan collateral, if the loan is considered to be collateral dependent. In the Company’s experience, loss allowances using the first method have been rare. In working with problem borrowers, if the Company cannot develop a repayment plan that substantially complies with the original terms of the loan agreement, the Company’s practice has been to pursue foreclosure or repossession of the underlying collateral. As a matter of practice, the Company does not restructure troubled loans in a manner that results in a loss under the first method. As a result, most loss allowances are established using the second method because the related loans have been deemed collateral dependent by management.

Management considers loans to be collateral dependent when, in its judgment, there is no source of repayment for the loan other than the ultimate sale or disposition of the underlying collateral and foreclosure is probable. Factors management considers in making this determination typically include, but are not limited to, the length of time a borrower has been delinquent with respect to loan payments, the nature and extent of the financial or operating difficulties experienced by the borrower, the performance of the underlying collateral, the availability of other sources of cash flow or net worth of the borrower and/or guarantor, and the borrower’s immediate prospects to return the loan to performing status. In some instances, because of the facts and circumstances surrounding a particular loan relationship, there could be an extended period of time between management’s identification of a problem loan and a determination that it is probable that such loan is collateral dependent.

Management generally measures impairment of impaired loans whether or not foreclosure is probable based on the estimated fair value of the underlying collateral. Such estimates are based on management’s judgment or, when considered appropriate, on an updated appraisal or similar evaluation. Updated appraisals are also typically obtained on impaired loans on at least on annual basis or when foreclosure or repossession of the underlying collateral is considered to be imminent. Prior to receipt of an updated appraisal, management has typically relied on the latest appraisal and knowledge of the condition of the collateral, as well as the current market for the collateral, to estimate the Company’s exposure to loss on impaired loans.

Investment Activities

At December 31, 2014, the Company’s portfolio of mortgage-related securities available-for-sale was $321.9 million or 13.8% of its total assets. As of the same date its portfolio of mortgage-related securities held-to-maturity was $132.5 million or 5.7% of total assets. Mortgage-related securities consist principally of mortgage-backed securities (“MBSs”) and CMOs. Most of the Company’s mortgage-related securities are directly or indirectly insured or guaranteed by Freddie Mac, Fannie Mae, or the Government National Mortgage Association (“Ginnie Mae”). The remaining securities are private-label CMOs. Private-label CMOs generally carry higher credit risks and higher yields than mortgage-related securities insured or guaranteed by the aforementioned agencies of the U.S. Government. Although the latter securities have less exposure to credit risk, like private-label CMOs they remain exposed to fluctuating interest rates and instability in real estate markets, which may alter the prepayment rate of underlying mortgage loans and thereby affect the fair value of the securities. For additional information related to the Company’s mortgage-related securities, refer to “Financial Condition—Mortgage-Related Securities Available-for-Sale” and “Financial Condition—Mortgage-Related Securities Held-to-Maturity” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

In addition to the mortgage-related securities previously described, the Company’s investment policy authorizes investment in various other types of securities, including U.S. Treasury obligations, federal agency obligations, state and municipal obligations, certain certificates of deposit of insured banks and savings institutions, certain bankers’ acceptances, repurchase agreements, federal funds, commercial paper, mutual funds, and, subject to certain limits, corporate debt and equity securities.

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The objectives of the Company’s investment policy are to meet the liquidity requirements of the Company and to generate a favorable return on investments without compromising objectives related to overall exposure to risk, including interest rate risk, credit risk, and investment portfolio concentrations. In addition, the Company pledges eligible securities as collateral for certain deposit liabilities, FHLB of Chicago advances, financial derivatives, and other purposes permitted or required by law.

The Company’s investment policy requires that securities be classified as trading, available-for-sale, or held-to-maturity at the date of purchase. The Company’s available-for-sale securities are carried at fair value with the change in fair value recorded as a component of shareholders’ equity rather than affecting results of operations. The Company’s held-to-maturity securities are carried at amortized cost. The Company has not engaged in trading activities.

The Company’s investment policy prohibits the purchase of non-investment grade securities, although the Company may continue to hold investments that are reduced to less than investment grade after their purchase. Securities rated less than investment grade are adversely classified as substandard in accordance with federal guidelines (refer to Asset Quality—Internal Ratings and Classified Assets,” above).

Financial Derivatives

The Company’s policies permit the use of financial derivatives such as financial futures, options, forward commitments, and interest rate swaps, to manage its exposure to interest rate risk, but only with prior approval of the board of directors. At December 31, 2014, the Company was using forward commitments to manage interest rate risk related to its sale of residential loans in the secondary market, as well as interest rate swaps to manage interest rate risk related to certain fixed-rate commercial loans. For additional information, refer to “Note 13. Financial Instruments with Off-Balance-Sheet Risk” in “Item 8. Financial Statements and Supplementary Data.”

Deposit Liabilities

At December 31, 2014, the Company’s deposit liabilities were $1.7 billion or 73.8% of its total liabilities and equity. 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, 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. When the Company determines its deposit rates, it considers rates offered by local competitors, benchmark rates on U.S. Treasury securities, and rates on other sources of funds such as FHLB of Chicago advances. For additional information, refer to “Financial Condition—Deposit Liabilities” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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 the market 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. The Company does not rely on a particular customer or related group of individuals, organizations, or institutions for its deposit funding. From time to time the Company has used third-party brokers and a nationally-recognized reciprocal deposit gathering network to obtain wholesale deposits.

Borrowings

At December 31, 2014, the Company’s borrowed funds were $256.5 million or 11.0% of its total liabilities and equity. The Company borrows funds to finance its lending, investing, operating, and, when active, 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. The Company’s FHLB of Chicago borrowings typically carry fixed rates of interest, have stated maturities, and are generally subject to significant prepayment penalties if repaid prior to their stated maturity. The Company has pledged certain one- to four-family first and second mortgage loans, as well as certain multi-family mortgage loans, as blanket collateral for current and future advances.

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Shareholders’ Equity

For additional information regarding the Company’s outstanding advances from the FHLB of Chicago as of December 31, 2014, refer to “Financial Condition—Borrowings” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

At December 31, 2014, the Company’s shareholders’ equity was $280.7 million or 12.06% of its total liabilities and equity. Beginning in 2015 the Company will be required to maintain minimum regulatory capital at the holding company level. Refer to “Regulation and Supervision—Regulation of the Company,” below, for additional information related to regulatory capital requirements for the Company.

The Bank is required to maintain specified amounts of regulatory capital pursuant to regulations promulgated by the OCC 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, 2014, the Bank exceeded all regulatory minimum requirements, as well as the amount required to be classified as a “well capitalized” institution. For additional discussion relating to regulatory capital standards refer to “Regulation and Supervision of the Bank—Regulatory Capital Requirements,” below. For additional information related to the Company’s equity and the Bank’s regulatory capital for the periods covered by this report, refer to “Financial Condition—Shareholders’ Equity” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as “Note 8. Shareholders’ Equity” in “Item 8. Financial Statements and Supplementary Data.”

The Company has paid quarterly cash dividends since its initial stock offering in 2000. The payment of dividends is discretionary with the Company’s board of directors and depends on the Company’s operating results, financial condition, compliance with regulatory capital requirements, and other considerations. In addition, the Company’s ability to pay dividends is highly dependent on the Bank’s ability to pay dividends to the Company. As such, there can be no assurance that the Company will be able to continue the payment of dividends or that the level of dividends will not be reduced in the future. For additional information, refer to “Regulation and Supervision of the Bank—Dividend and Other Capital Distribution Limitations,” below.

From time to time, the Company has repurchased shares of its common stock which has had the effect of reducing the Company’s capital. However, as with the payment of dividends above, the repurchase of common stock is discretionary with the Company’s board of directors and depends on a variety of factors, including market conditions for the Company’s stock, the financial condition of the Company and the Bank, compliance with regulatory capital requirements, and other considerations. The Company currently has an active stock repurchase program in effect. However, because of the aforementioned considerations there can be no assurances the Company will repurchase shares of its common stock under the current stock repurchase program. For additional discussion relating to the Company’s current stock repurchase program, refer to “Financial Condition—Shareholders’ Equity,” in “Item 7. Management’s Discussion and Analysis.”

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, mortgage protection products, and investment advisory services are also offered by BMFIS. Certain of BMFIS’s brokerage services are provided through an operating agreement with a third-party, registered broker-dealer.

Mutual Investment Corporation (“MIC”) and First Northern Investment Inc. (“FNII”) were wholly-owned subsidiaries of the Bank that formerly owned and managed certain mortgage-related securities and, in the case of FNII, a small amount of one- to four-family mortgage loans. In 2014 the Company transferred substantially all of the assets and liabilities of MIC and FNII to the Bank. Subsequent to the transfer, FNII was dissolved as a legal entity. MIC will continue as a legal entity in an inactive status. These developments did not have a significant impact on the Company’s financial condition or results of operations.

MC Development LTD (“MC Development”), a wholly-owned subsidiary of the Bank, is involved in land development and sales. It owns five parcels of developed land totaling 15 acres in Brown Deer, Wisconsin. In addition, in 2004, MC Development established Arrowood Development LLC with an independent third party to develop approximately 300 acres for residential purposes 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.

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In addition, the Bank has four other wholly-owned subsidiaries that are inactive, but are reserved for possible future use in related or other areas.

Employees

At December 31, 2014, the Company employed 616 full time and 99 part time associates. Management considers its relations with its associates to be good.

Regulation and Supervision

General

The Company is a Wisconsin corporation and a registered savings and loan holding company under federal law. The Company files reports with and is subject to regulation and examination by the FRB. The Bank is a federally-chartered savings bank and is subject to OCC requirements as well as those of the FDIC. Any change in these laws and regulations, whether by the FRB, the OCC, the FDIC, or through legislation, could have a material adverse impact on the Company, the Bank, and the Company’s shareholders.

Certain current laws and regulations applicable to the Company and the Bank, and other material consequences of recent legislation, are summarized below. These summaries do not purport to be complete and are qualified in their entirety by reference to such laws, regulations, or administrative considerations.

Financial Services Industry Legislation and Related Actions

In response to instability in the U.S. financial system, lawmakers and federal banking agencies have taken various actions intended to stabilize the financial system and housing markets, and to strengthen U.S. financial institutions.

Dodd-Frank Act

In 2010 Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which significantly changed the U.S. financial institution regulatory structure, as well as the lending, investment, trading, and operating activities of financial institutions and their holding companies. Many of the provisions of the Dodd-Frank Act have become effective since 2010 and management believes the Company and the Bank are in compliance with the new provisions, as applicable, and that the impacts of such provisions (if any) are fully reflected in the financial condition and/or results of operations of the Company and the Bank. However, a number of the provisions of the Dodd-Frank Act remain subject to future rule-making procedures and studies. As such, the full impact of such future provisions cannot yet be determined at this time, although management does not expect them to have a material adverse impact on the Company or the Bank. The Dodd-Frank Act requires the FRB to apply to savings and loan holding companies the same consolidated leverage and risk-based capital standards that insured depository institutions must follow, which include capital requirements for the Company effective in 2015 (refer to “Regulation and Supervision—Regulation of the Company,” below, for additional information related to regulatory capital requirements for the Company).

Regulation and Supervision of the Bank

General As a federally-chartered, FDIC-insured savings bank, the Bank is subject to extensive regulation by the OCC, as well as the regulations of the FDIC. This federal regulation and supervision establishes a comprehensive framework of activities in which a federal savings bank may engage and is intended primarily for the protection of the FDIC and depositors rather than the shareholders of the Company. This regulatory structure gives 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 OCC 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. The Bank must file reports with the OCC and the FDIC concerning its activities and financial condition, and must obtain regulatory approvals prior to entering into transactions such as mergers or acquisitions.

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Regulatory Capital Requirements In periods prior to January 1, 2015, federal regulations required savings associations such as the Bank to meet specified minimum regulatory capital standards to be classified as “adequately capitalized” under the regulations. At December 31, 2014, the Bank’s regulatory capital ratios exceeded the minimum requirements to be classified as “adequately capitalized,” as well as those necessary to be classified as a “well capitalized”. For additional information related to the Bank’s regulatory capital for the periods covered by this report, refer to “Note 8. Shareholders’ Equity” in “Item 8. Financial Statements and Supplementary Data.”

On January 1, 2015, regulatory capital standards as specified by the Basel Committee of Banking Supervision (known as Basel III) became effective for financial institutions such as the Bank (although certain aspects of the new standards are phased in over the following four years). These new regulatory capital standards, which supersede the standards in effect prior to that date, require financial institutions such as the Bank to meet the following minimum regulatory capital standards to be classified as “adequately capitalized” under the regulations: (i) common equity Tier 1 (“CET1”) capital equal to at least 4.5% of total risk-weighted assets, (ii) Tier 1 capital equal to at least 4% of adjusted total assets (continuing as the “leverage ratio”), (iii) Tier 1 risk-based capital equal to at least 6% of total risk-weighted assets, and (iv) total risk-based capital equal to at least 8% of total risk-weighted assets. In the Bank’s case, the dollar amount of Tier 1 capital and total capital are expected to be substantially the same under the Basel III standards as they were under the previous regulatory capital standards. As such, the Bank’s ratio of Tier 1 capital to adjusted assets (leverage ratio) is not expected to be significantly impacted by the Basel III regulatory capital standards. However, the Bank’s Tier 1 risk-based capital ratio and total risk-based capital ratio could decline by up to 100 basis points each in 2015 due to changes required by Basel III that impact the computation of the Bank’s total risk-weighted assets. Despite this expectation, management anticipates that in 2015 all of these regulatory capital ratios will exceed the minimum requirements established by Basel III for the Bank to be classified as “adequately capitalized.” The Bank’s CET1 capital is expected to differ from its Tier 1 capital only to the extent of deferred tax assets, which will phase in as a disallowance to CET1 capital over the following four years. Similar to the other Basel III regulatory capital ratios, management anticipates that in 2015 the Bank’s ratio of CET1 capital to total risk-weighted assets will exceed the minimum requirement established by Basel III to be classified as “adequately capitalized.” Furthermore, management anticipates that all of the Bank’s Basel III regulatory capital ratios will exceed the minimums necessary for the Bank to be classified as a “well capitalized” institution under the new standards, which are higher than the percentages previously described.

In addition to the requirements described in the previous paragraph, the Basel III regulatory capital regulations also introduced an element known as the “capital conservation buffer.” In order to avoid limitations on capital distributions and certain discretionary bonus payments to executive officers, a banking organization such as the Bank must hold a capital conservation buffer composed of CET1 capital above the minimum risk-based capital requirements specified in the previous paragraph. This additional requirement is 2.5% of risk-weighted assets, although the requirement will phase-in at a rate of 0.625% per year from 2016 to 2019. Therefore, management’s objective is to maintain all of the Bank’s regulatory capital ratios in amounts that exceed than the Basel III minimums described in the preceding paragraph including the capital conservation buffer. As such, management does not believe the capital conservation buffer will have any impact on the Bank’s capital contributions or discretionary bonus payments to executive officers.

Dividend and Other Capital Distribution Limitations OCC regulations generally govern capital distributions by savings associations such as the Bank, which include cash dividends and stock repurchases. Currently, as a subsidiary of a savings and loan holding company, the Bank generally must give the FRB and the OCC at least 30 days notice before the board of directors declares a dividend or approves a capital distribution. In certain other circumstances, a savings association must file an application with the OCC for approval of a capital distribution if, among other things, the total amount of capital distributions for the applicable calendar year exceeds the sum of the savings association’s net income for that year to date plus the savings association’s retained net income for the preceding two years.

The FRB or the OCC may disapprove a notice or application if (i) the savings association would be undercapitalized, significantly undercapitalized or critically undercapitalized following the distribution; (ii) the proposed capital distribution raises safety and soundness concerns; or (iii) the capital distribution would violate any applicable statute, regulation, agreement or regulatory-imposed condition. The FRB and OCC have substantial discretion in making these decisions.

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For additional discussion related to the Bank and Company’s dividends and the Company’s common stock repurchases refer to “Financial Condition—Shareholders’ Equity” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.” Also, the new requirements under Basel III, as discussed above, have the potential to impact capital distributions such as dividends and common stock repurchases. Refer to “Regulatory Capital Requirements,” above, for additional discussion.

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, 2014, and anticipates that it will maintain an appropriate level of mortgage-related investments (which must be at least 65% of portfolio assets as defined in the regulations) and will otherwise continue to meet the QTL test requirements.

Federal Home Loan Bank System The Bank is a member of the FHLB of Chicago. The FHLB of Chicago makes loans (“advances”) to its members and provides certain other financial services to its members pursuant to policies and procedures established by its board of directors. The FHLB of Chicago imposes limits on advances made to member banks, including limitations relating to the amount and type of collateral and the amount of advances.

As a member of the FHLB of Chicago, the Bank must meet certain eligibility requirements and must purchase and maintain common stock in the FHLB of Chicago in an amount equal to the greater of (i) 1% of its mortgage-related assets at the most recent calendar year end, (ii) 5% of its outstanding advances from the FHLB of Chicago, or (iii) $10,000. At December 31, 2014, the Bank owned $14.2 million in FHLB of Chicago common stock, which was in compliance with the minimum common stock ownership guidelines established by the FHLB of Chicago. For additional discussion related to the Bank’s investment in the common stock of the FHLB of Chicago, refer to “Item 1A. Risk Factors” and “Financial Condition—Other Assets” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Deposit Insurance The deposit accounts held by customers of the Bank are insured by the FDIC 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 OCC. 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 poses to its deposit insurance fund. Under the risk-based assessment system, the FDIC assigns an institution to one of three capital categorizations based on the institution’s financial information; institutions are classified as well capitalized, adequately capitalized or undercapitalized using ratios that are substantially similar to the capital ratios discussed above. The FDIC also assigns an institution to one of three supervisory sub-categorizations within each capital group. This assignment is based on a supervisory evaluation provided 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 fund.

An institution’s assessment rate depends on the capital categorizations and supervisory sub-categorizations to which it is assigned. Under the risk-based assessment system, there are four assessment risk categories to which different assessment rates are applied. The assessment rates range from 2.5 to 45 basis points, depending on the institution’s capital category and supervisory sub-category. The assessment base used by the FDIC in determining deposit insurance premiums consists of an insured institution’s average consolidated total assets minus average tangible equity and certain other adjustments. For additional discussion, refer to “Results of Operations—Non-Interest Expense” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Consumer Financial Protection Bureau The CFPB, which was created by the Dodd-Frank Act, has broad rule-making and enforcement authority related to a wide range of consumer protection laws that apply to all banks and savings institutions, such as the Bank. Accordingly, the activities of the CFPB could have a significant impact on the financial condition and/or operations of the Company Management does not believe the activities of the CFPB have had a significant impact on the Bank to date. Although CFPB regulations apply to the Bank, institutions with $10 billion or less in assets (such as the Bank) are examined for compliance with CFPB directives by their applicable bank regulators rather than the CFPB itself.

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Transactions With Affiliates Sections 23A and 23B of the Federal Reserve Act and FRB Regulation W govern transactions between an insured federal savings association, such as the Bank, and any of its affiliates, such as the Company. An affiliate is any company or entity that controls, is controlled by or is under common control with it. Sections 23A and 23B limit the extent to which an institution or a subsidiary may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such savings association’s capital stock and surplus, and limit all such transactions with all affiliates to 20% of such stock and surplus. The term “covered transaction” includes the making of loans, purchase of assets, issuance of guarantees, derivatives transactions, securities borrowing, and lending transactions to the extent that they result in credit exposure to an affiliate. Further, most loans by a savings association to any of its affiliates must be secured by specified collateral amounts. All such transactions must be on terms that are consistent with safe and sound banking practices and must be on terms that are at least as favorable to the savings association as those that would be provided to a non-affiliate. At December 31, 2014, the Company and Bank did not have any covered transactions.

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 OCC, or the primary federal regulator of the resulting entity if it is not an OCC-regulated institution. Refer also to “Regulation and Supervision of the Company—Acquisition of Bank Mutual Corporation,” below.

Prohibitions Against Tying Arrangements Savings associations are subject to the prohibitions of 12 U.S.C. Section 1972 on certain tying arrangements. A savings association is prohibited, subject to exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor.

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 are made to finance the construction of a building or other improvements to real estate. All insured depository institutions must adopt and maintain written policies that establish appropriate limits and standards for such extensions of credit. These policies must establish loan portfolio diversification standards, prudent underwriting standards that are clear and measurable, loan administration procedures, and documentation, approval and reporting requirements.

These lending policies must reflect consideration of the Interagency Guidelines for Real Estate Lending Policies that have been adopted by the federal bank regulators. These 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 specified supervisory limits, which generally vary and provide for lower loan-to-value limits for types of collateral that are perceived as having more risk, are subject to fluctuations in valuation, or are difficult to dispose. Although there is no supervisory loan-to-value limit for owner-occupied one- to four-family and home equity loans, the guidelines provide that an institution should require credit enhancement in the form of mortgage insurance or readily marketable collateral for any such loan with a loan-to-value ratio that equals or exceeds 90% at origination. The guidelines also clarify expectations for prudent appraisal and evaluation policies, procedures, and practices, and make other changes, in light of the Dodd-Frank Act and other recent federal statutory changes affecting appraisals.

Other Mortgage Lending Regulations In 2013 the CFPB issued a regulation commonly known as the “qualified mortgage” rule, which generally requires mortgage lenders such as the Bank to make a reasonable, good faith determination of a borrower’s ability to repay loans secured by single family residential properties (excluding home equity lines of credit and certain other types of loans) in order to obtain certain protections from liability under the rule for such qualified mortgages. These new rules were effective on January 10, 2014. This new rule has not had a significant impact on the Bank’s single family mortgage lending or sales operations.

In January 2015 federal regulators issued a regulation relating to risk retention requirements on sales of single family residential mortgage loans. The risk retention requirements generally require institutions such as the Bank to retain no less than 5% of the credit risk in loans it sells into a securitization and prohibits such institutions from directly or indirectly hedging or otherwise transferring the credit risk that the institution is required to retain, subject to limited exceptions. One significant exception is for securities entirely collateralized by “qualified residential mortgages” (“QRMs”), which are defined the same as the “qualified mortgage” rule issued by the CFPB, as discussed in the previous paragraph. The new risk retention requirements apply to securitizations of residential loans that are issued after December 24, 2015. Management does not expect this new requirement to have an impact on the Bank’s single family mortgage lending or sales operations.

Community Reinvestment Act Under the Community Reinvestment Act (“CRA”), any insured depository institution, including the Bank, must, consistent with its safe and sound operation, 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 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 OCC to assess the institution’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 institution, including applications for additional branches and acquisitions.

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Among other things, the CRA regulations contain an evaluation system that rates an institution based on its actual performance in meeting community needs. In particular, the evaluation system focuses on three tests: (i) a lending test, to evaluate the institution’s record of making loans in its service areas, (ii) an investment test, to evaluate the institution’s record of making community development investments, and (iii) a service test, to evaluate the institution’s delivery of services through its branches, ATMs and other offices. The CRA requires the OCC to provide a written evaluation of the Bank’s CRA performance utilizing a four-tiered descriptive rating system and requires public disclosure of the 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 OCC, has guidelines establishing general standards relating to internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, customer privacy, liquidity, earnings, and compensation and benefits. The guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines also prohibit excessive compensation as an unsafe and unsound practice.

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 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 FRB’s Regulation O thereunder. Under these restrictions, the aggregate amount of the loans to any insider and related interests may not exceed the loans-to-one-borrower limit applicable to national banks. All loans by a savings association to all insiders and related interests in the aggregate may not exceed the savings association’s unimpaired capital and surplus. With certain exceptions, the Bank’s loans to an executive officer (other than certain education loans and residential mortgage loans) may not exceed $100,000. Regulation O also requires that any proposed loan to an insider or a related interest be approved in advance by a majority of the Bank’s board of directors, without the vote of any interested director, if such loan, when aggregated with any existing loans to that insider and related interests, would exceed $500,000. Generally, such loans must be made on substantially the same terms as, and follow credit underwriting procedures that are no less stringent than, those for comparable transactions with other persons and must not present more than a normal risk of collectability. There is an exception for extensions of credit pursuant to a benefit or compensation plan of a savings association that is widely available to employees that does not give preference to officers, directors, and other insiders. As of December 31, 2014, total loans to insiders were $624,000 (including $509,000 which relates to residential mortgages that have been sold in the secondary market).

Regulation and Supervision of the Company

General The Company is a registered savings and loan holding company under federal law and is subject to regulation, supervision, and enforcement actions by the FRB. Among other things, this authority permits the FRB 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 activities such as dividends and share repurchases that can affect capital. Under long-standing FRB policy, holding companies are expected to serve as a source of strength for their depository subsidiaries, and may be called upon to commit financial resources and support to those subsidiaries. The requirement that the Company act as a source of strength for the Bank, and the future capital requirements at the Company level (refer to “Regulatory Capital Requirements,” below), may affect the Company's ability to pay dividends or make other distributions.

The Company may engage in activities permissible for a savings and loan holding company, a bank holding company, or a financial holding company, which generally encompass a wider range of activities that are financial in nature. The Company may not engage in any activities beyond that scope without the approval of the FRB.

Federal law prohibits a savings and loan holding company from acquiring control of another savings institution or holding company without prior regulatory approval. With some exceptions, it also prohibits the acquisition or retention of 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 an institution that is not federally-insured. In evaluating applications to acquire savings institutions, the regulator must consider the financial and managerial resources, future prospects of the institution involved, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community and competitive factors.

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Regulatory Capital Requirements Prior to January 1, 2015, the Company was not required by the FRB to maintain minimum regulatory capital at the consolidated level. However, under the Dodd-Frank Act, the FRB imposed capital requirements on savings and loan holding companies beginning January 1, 2015. These capital requirements are substantially the same as those required for bank holding companies under Basel III, which also became effective on January 1, 2015 (although certain aspects of Basel III are phased in over the next four years). In particular, Basel III sets forth new minimum regulatory capital standards that affect which financial institutions or holding companies (including the Company) qualify as “adequately capitalized.” Basel III standards (and in particular a capital buffer requirement) may also affect the Company’s ability to make certain capital distributions, stock repurchases, and discretionary bonus payments. The minimum capital requirements applicable to banks, as described above, are separately applied to the Company on a consolidated basis. For more specific information on these requirements, and their potential impact, see “Regulation and Supervision of the Bank – Regulatory Capital Requirements,” above.

Management anticipates that the Company will be meet or exceed the requirements to be “well capitalized” for regulatory capital purposes at the consolidated level when it becomes subject to such capital requirements in 2015. In addition, management does not expect the new capital requirements to have a significant impact on the Company’s financial condition or results of operations.

Acquisition of Bank Mutual Corporation No person may acquire control of the Company without first obtaining the approval of such acquisition by the appropriate federal regulator. Currently, any person, including a company, or group acting in concert, seeking to acquire 10% or more of the outstanding shares of the Company (or otherwise gain the ability to control the Company) must, depending on the circumstances, obtain the approval of, and/or file a notice with the FRB.

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 and its subsidiaries have been examined or closed without examination by the Internal Revenue Service (“IRS”) for tax years prior to 2011.

State Taxation The Company and its subsidiaries are subject to combined reporting in the state of Wisconsin, which includes the Bank’s out-of-state investment subsidiaries since 2009. The state income tax returns for the Company and its subsidiaries have been examined and closed by the Wisconsin Department of Revenue for tax years prior to 2010.

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Item 1A. Risk Factors

In addition to the discussion and analysis set forth in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the cautionary statements set forth in “Item 1. Business,” the following risk factors should be considered when evaluating the Company’s results of operations, financial condition, and outlook. These risk factors should also be considered when evaluating any investment decision with respect to the Company’s common stock.

The Company’s Actual Loan Losses May Exceed its Allowance for Loan Losses, Which Could Have a Material Adverse Effect on the Company’s Results of Operations

The Company has policies and procedures in place to manage its exposure to risk related to its lending operations. However, despite these practices, 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. Economic weakness, including high unemployment rates and lower values for the collateral underlying loans, may affect borrowers’ ability or willingness to repay their loan obligations that could lead to increased loan losses or provisions. As a result, the Company may experience significant loan losses, including losses that may exceed the amounts established in the allowance for loan losses, which could have a material adverse effect on its operating results and capital.

Declines in Real Estate Values Could Adversely Affect Collateral Values and the Company’s Results of Operations

From time-to-time the Company’s market areas have experienced lower real estate values, higher levels of residential and non-residential tenant vacancies, and weakness in the market for sale of new or existing properties, for both commercial and residential real estate. Such developments could negatively affect the value of the collateral securing the Company’s mortgage and related loans and could in turn lead to increased losses on loans and foreclosed real estate. 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 and capital.

A Significant Portion of the Company’s Lending Activities Are Focused on Commercial Lending

The Company has identified multi-family, commercial real estate, commercial and industrial, and construction loans as areas for lending emphasis. In addition, the Company has employed the appropriate management, sales, and administrative personnel, as well as installed appropriate systems and procedures, to support this lending emphasis. However, these types of loans have historically carried greater risk of payment default than loans to retail borrowers. As the volume of commercial lending increases, credit risk increases. In the event of increased defaults from commercial borrowers, the Company’s provision for loan losses would further increase and loans may be written off and, therefore, earnings would be reduced. In addition, costs associated with the administration of problem loans increase and, therefore, earnings would be further reduced.

Further, as the portion of the Company's loans secured by the assets of commercial enterprises increases, the Company becomes increasingly exposed to environmental liabilities and related compliance burdens. Even though the Company is also subject to environmental requirements in connection with residential real estate lending, the possibility of liability increases in connection with commercial lending, particularly in industries that use hazardous materials and/or generate waste or pollution or that own property that was the subject of prior contamination. If the Company does not adequately assess potential environmental risks, the value of the collateral it holds may be less than it expects; further, regulations expose the Bank to potential liability for remediation and other environmental compliance.

Regulators Continue to be Strict, which may Affect the Company's Business and Results of Operations

In addition to the effect of new laws and regulations, the regulatory climate in the U.S., particularly for financial institutions, continues to be strict. As a consequence, regulatory activity affecting financial institutions relating to a wide variety of safety and soundness and compliance issues continues to be elevated. Such regulatory activity, if directed at the Company or the Bank, could have an adverse effect on the Company's or the Bank's costs of compliance and results of operations.

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The Bank’s Ability to Pay Dividends to the Company Is Subject to Limitations that May Affect the Company’s Ability to Pay Dividends to its Shareholders and/or Repurchase Its Stock

The Company is a separate legal entity from the Bank and engages in no substantial activities other than its ownership of the common stock of the Bank. Consequently, the Company’s net income and cash flows are derived primarily from the Bank’s operations and capital distributions. The availability of dividends from the Bank to the Company is limited by various statutes and regulations, including those of the OCC and FRB. In addition, new requirements imposed by Basel III could limit the capital distributions of the Bank. As a result, it is possible, depending on the results of operations and the financial condition of the Bank and other factors, that the OCC and/or the FRB could restrict the payment by the Bank of dividends or other capital distributions or take other actions which could negatively affect the Bank's results and dividend capacity. The federal regulators continue to be stringent in their interpretation, application and enforcement of banks' capital requirements, which could affect the regulators’ willingness to allow Bank dividends to the Company. If the Bank is required to reduce its dividends to the Company, or is unable to pay dividends at all, or the FRB separately does not allow the Company to pay dividends, the Company may not be able to pay dividends to its shareholders at existing levels or at all and/or may not be able to repurchase its common stock.

Global Credit Market Volatility and Weak Economic Conditions May Significantly Affect the Company’s Liquidity, Financial Condition, and Results of Operations

Global financial markets continue to be unstable and unpredictable, and economic performance has been inconsistent in various countries. Developments relating to the federal budget, federal borrowing authority, and/or other political issues could also negatively impact these markets, as could global developments such as a foreign sovereign debt crisis. Volatility and/or instability in global financial markets could also 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. These factors could also affect the prices at which the Company could make any such sales, which could adversely affect its results of operations 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 volatility of the markets and weakness of global economies could affect the strength of the Company’s customers or counterparties, their willingness to do business with, and/or their ability or willingness to fulfill their obligations to the Company, which could further affect the Company’s results of operations. Conditions such as high unemployment, weak corporate performance, and soft real estate markets, 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 or willingness to repay loan obligations, all of which could adversely impact the Company’s results of operations and financial condition.

Future Events May Result in a Valuation Allowance Against the Company’s Deferred Tax Asset Which May have a Significant Effect on the Company’s Results of Operations and Financial Condition

As of December 31, 2014, the Company’s net deferred tax asset was $25.6 million. Management evaluates this asset on an on-going basis to determine if a valuation allowance is required. Management determined that no valuation allowance was required to be recorded against the Company’s net deferred tax asset as of December 31, 2014. This determination required significant management judgment based on positive and negative considerations. Such considerations included recent trends in earnings, expectations for the Company’s future earnings, the duration of federal and state net operating loss carryforward periods, and other factors. Future events or circumstances could result in conditions that differ significantly from management’s current assessment of these positive and negative considerations, particularly as such relate to the Company’s future earnings. Changes in these considerations could result in a significant valuation allowance being recorded against the Company’s net deferred tax asset, which could have a significant effect on the Company’s future results of operations and financial condition.

Recent and Future Legislation and Rulemaking May Significantly Affect the Company’s Results of Operations and Financial Condition

Instability, volatility, and failures in the credit and financial institutions markets in recent years have led regulators and legislators to consider and/or adopt proposals that will significantly affect financial institutions and their holding companies, including the Company. Legislation such as the Emergency Economic Stabilization Act of 2008, the American Recovery and Reinvestment Act of 2009, and the Dodd-Frank Act, were adopted. Although designed to address safety, soundness, and compliance issues in the banking system, there can be no assurance as to the ultimate impact of these actions on financial markets, which could have a material, adverse effect on the Company’s business, financial condition, results of operations, access to credit or the value of the Company’s securities. Further legislative and regulatory proposals to reform the U.S. financial system would also affect the Company and the Bank.

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The Dodd-Frank Act created the CFPB, which has broad rulemaking and enforcement authority with respect to entities, including financial institutions, that offer to consumers covered financial products and services. The CFPB is required to adopt rules identifying practices or acts that are unfair, deceptive or abusive relating to any customer transaction for a consumer financial product or service, or the offering of a consumer financial product or service. Although management does not expect rules implemented to date to have a significant adverse impact on the Company, the full scope of the impact of the CFPB’s authority has not yet been determined as all related rules have not all yet been adopted. The Company cannot yet determine the costs and limitations related to these additional regulatory requirements; however, the costs of compliance and the effect on its business may have a material adverse effect on the Company's operations and results.

The Interest Rate Environment May Have an Adverse Impact on the Company’s Net Interest Income

Volatile interest rate environments make 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. These factors have a direct impact on the Company’s net interest income, and consequently, its net income. Future interest rates could continue to be volatile and management is unable to predict the impact such volatility would have on the net interest income and profits of the Company.

Strong Competition Within the Company’s Market Area May Affect Net Income

The Company encounters strong competition both in attracting deposits from customers and originating loans to commercial and retail borrowers. 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. 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.

Developments in the Marketplace, Such as Alternatives to Traditional Financial Institutions, or Adverse Publicity Could Affect the Company's Ongoing Business

Changes in the marketplace are allowing consumers to use alternative means to complete financial transactions that previously had been conducted through banks. For example, consumers can increasingly maintain funds in accounts other than bank deposits or through the internet, or complete payment transactions without the assistance of banks. Continuation or acceleration of these trends, including newly developing means of communications and technology, could cause consumers to utilize fewer of the Company's services, which could have a material adverse affect on its results.

Financial institutions such as the Company continue to be under a high level of governmental, media, and other scrutiny, as to the conduct of their businesses, and potential issues and adverse developments (real and perceived) often receive widespread media attention. If there were to be significant adverse publicity about the Company, that publicity could affect its reputation in the marketplace. If the Company's reputation is diminished, it could affect its business and results of operations as well as the price of the Company's common stock.

The Company Is Subject to Security Risks and Failures and Operational Risks Relating to the Use of Technology that Could Damage Its Reputation and Business

The protection of customer data from potential breaches of the Company’s computer systems is an increasing concern, as is the potential for disruption of the Company’s internet banking services, through which it increasingly provides services, as well as other systems through which the Company provides services. The security of company and customer data and protection against disruptions of companies’ computer systems are increasing matters of industry, customer, and regulatory scrutiny given the significant potential consequences of failures in these matters and the potential negative publicity surrounding instances of cybersecurity breaches. In addition, these risks can be difficult to predict or defend against, as the persons committing such attacks often employ novel methods of accessing or disrupting the computer systems of their targets.

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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 or other banking services that involve the transmission and/or retention 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 and affect its results of operations.

Additionally, as a financial institution, the Company’s business is data intensive. Beyond the inherent nature of a financial institution that requires it to process and track extremely large numbers of financial transactions and accounts, the Company is required to collect, maintain, and keep secure significant data about its customers. These operations require the Company to obtain and maintain technology and security-related systems that are mission critical to its business. The Company’s failure to do so could significantly affect its ability to conduct business and its customers' confidence in it. Further, 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 or if there is a breach of security, it will significantly affect the Company’s ability to adequately process and account for customer transactions, which would significantly affect the Company’s business operations and reputation.

Further, the technology affecting the financial institutions industry and consumer financial transactions is rapidly changing, with the frequent introduction of new products, services, and alternatives. The future success of the Company requires that it continue to adapt to these changes in technology to address its customers' needs. Many of the Company's competitors have greater technological resources to invest in these improvements. These changes could be costly to the Company and if the Company does not continue to offer the services and technology demanded by the marketplace, this failure to keep pace with change could materially affect its business, financial condition, and results of operation.

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 growing internally, acquiring other financial institutions or branches, acquiring other financial services providers, and opening new offices. 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 that 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 Depends on Certain Key Personnel and the Company’s Business Could Be Harmed by the Loss of Their Services or the Inability to Attract Other Qualified Personnel

The Company’s success depends in large part on the continued service and availability of its management team, and on its ability to attract, retain and motivate qualified personnel, particularly customer relationship managers. The competition for these individuals can be significant, and the loss of key personnel could harm the Company’s business. The Company cannot provide assurances that it will be able to retain existing key personnel or attract additional qualified personnel.

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Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The Company and its subsidiaries currently conduct their business through an executive office and 76 banking offices, which had an aggregate net book value of $48.5 million as of December 31, 2014, excluding furniture, fixtures, and equipment. As of December 31, 2014, the Company owned the building and land for 69 of its property locations and leased the space for eight.

On February 9, 2015, the Company announced that it was closing seven retail branch offices in connection with an efficiency and expense reduction effort. The real property at these locations had an aggregate net book value of $1.2 million as of December 31, 2014. Furniture, fixtures, and equipment had an aggregate net book value of $108,000. Management anticipates that these closures will be completed in the second quarter of 2015. The Company owns the building and land for six of these locations and leases the space for one. For additional discussion, refer to “Results of Operations—Non-Interest Expense” in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.”

The Company also owns 15 acres of developed land in a suburb of Milwaukee, Wisconsin, through its MC Development subsidiary, as well as approximately 300 acres of undeveloped land in another community located near Milwaukee through MC Development’s 50% ownership in Arrowood Development LLC. The net book value of these parcels of land was $6.2 million at December 31, 2014.

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. Mine Safety Disclosures

Not applicable.

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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, 2015, there were 46,666,089 shares of common stock outstanding and approximately 8,700 shareholders of record.

The Company paid a total cash dividend of $0.15 per share in 2014. A cash dividend of $0.04 per share was paid on February 27, 2015, to shareholders of record on February 13, 2015. For additional discussion relating to the Company’s dividends, refer to “Financial Condition—Shareholders’ Equity” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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, financial condition, and other considerations. Interest on deposits will be paid prior to payment of dividends on the Company’s common stock. Refer also to “Item 1. Business—Regulation and Supervision” for information relating to regulatory limitations on the Company’s payment of dividends to shareholders, as well as the payment of dividends by the Bank to the Company, which in turn could affect the payment of dividends by the Company.

The high and low trading prices of the Company’s common stock from January 1, 2013, through December 31, 2014, by quarter, and the dividends paid in each quarter, were as follows:

	2014 Stock Prices				2013 Stock Prices				Cash Dividends Paid
	High		Low		High		Low		2014		2013
1st Quarter	$	7.34	$	6.21	$	5.88	$	4.43	$	0.03	$	0.02
2nd Quarter		6.46		5.80		5.90		5.04		0.04		0.02
3rd Quarter		6.62		5.93		6.73		5.65		0.04		0.03
4th Quarter		6.99		6.17		7.17		6.04		0.04		0.03
								Total	$	0.15	$	0.10

From January 1, 2015, to February 27, 2015, the trading price of the Company's common stock ranged between $6.37 to $7.22 per share, and closed this period at $7.17 per share.

The Company did not repurchase any of its common stock during 2014. However, the Company’s board of directors authorized a stock repurchase program on February 2, 2015. For additional information relating to this stock repurchase program, refer to “Financial Condition—Shareholders’ Equity,” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” For additional discussion relating to the Company’s ability to repurchase of its common stock, refer to “Item 1. Business—Shareholders’ Equity” and “Item 1. Business—Regulation and Supervision.”

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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”) and the NASDAQ Stock Market Bank Index. The graph assumes that $100 was invested on December 31, 2009, in Company common stock and each of those indices.

			Period Ending December 31
Index	2009		2010		2011		2012		2013		2014
Bank Mutual Corporation		100.00		71.32		48.20		66.00		109.36		109.55
NASDAQ Composite Index		100.00		118.02		117.04		137.47		192.62		221.02
NASDAQ Bank Index		100.00		111.35		83.04		111.88		152.85		170.93

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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 “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.”

	At December 31
	2014		2013		2012		2011		2010
	(Dollars in thousands, except number of shares and per share amounts)
Selected financial condition data:
Total assets	$	2,328,446	$	2,347,349	$	2,418,264	$	2,498,484	$	2,591,818
Loans receivable, net		1,631,303		1,508,996		1,402,246		1,319,636		1,323,569
Loans held-for-sale		3,837		1,798		10,739		19,192		37,819
Investment securities available-for-sale		–		–		–		–		228,023
Mortgage-related securities available-for-sale		321,883		446,596		550,185		781,770		435,234
Mortgage-related securities held-to-maturity		132,525		155,505		157,558		–		–
Foreclosed properties and repossessed assets		4,668		6,736		13,961		24,724		19,293
Goodwill		–		–		–		–		52,570
Mortgage servicing rights, net		7,867		8,737		6,821		7,401		7,769
Deposit liabilities		1,718,756		1,762,682		1,867,899		2,021,663		2,078,310
Borrowings		256,469		244,900		210,786		153,091		149,934
Shareholders' equity		280,717		281,037		271,853		265,771		312,953
Tangible shareholders' equity		280,717		281,037		271,853		265,771		260,383
Number of shares outstanding, net of treasury stock		46,568,284		46,438,284		46,326,484		46,228,984		45,769,443
Book value per share	$	6.03	$	6.05	$	5.87	$	5.75	$	6.84
Tangible shareholders’ equity per share		6.03		6.05		5.87		5.75		5.69

	For the Year Ended December 31
	2014		2013		2012		2011			2010
	(Dollars in thousands, except per share amounts)
Selected operating data:
Total interest income	$	79,265	$	79,456	$	83,022	$	89,345		$	112,569
Total interest expense		9,416		13,112		21,641		26,756			66,276
Net interest income		69,849		66,344		61,381		62,589			46,293
Provision for loan losses		233		4,506		4,545		6,710			49,619
Total non-interest income		22,349		26,116		29,259		23,158			40,603
Total non-interest expense (1)		68,461		71,504		76,057		124,900			159,825
Income (loss) before income taxes		23,504		16,450		10,038		(45,863	)		(122,548	)
Income tax expense (benefit)		8,850		5,702		3,336		1,752			(49,909	)
Net income (loss) before non-controlling interest		14,654		10,748		6,702		(47,615	)		(72,639	)
Net loss (income) attributable to non-controlling interest		11		48		52		50			(1	)
Net income (loss)	$	14,665	$	10,796	$	6,754	$	(47,565	)	$	(72,640	)
Earnings (loss) per share-basic	$	0.32	$	0.23	$	0.15	$	(1.03	)	$	(1.59	)
Earnings (loss) per share-diluted		0.31		0.23		0.15		(1.03	)		(1.59	)
Cash dividends paid per share		0.15		0.10		0.05		0.06			0.20

(1) Total non-interest expense in 2011 includes a goodwill impairment of $52.6 million and in 2010 includes $89.3 million in loss on early repayment of FHLB borrowings.

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	At or For the Year Ended December 31
	2014			2013			2012			2011			2010
Selected financial ratios:
Net interest margin (2)		3.32	%		3.11	%		2.67	%		2.76	%		1.47	%
Net interest rate spread		3.24			3.02			2.57			2.64			1.26
Return on average assets		0.63			0.46			0.27			(1.87	)		(2.12	)
Return on average shareholders'  equity		5.14			3.93			2.50			(16.37	)		(18.47	)
Efficiency ratio (3)		74.34			77.34			84.04			85.07			99.36
Non-interest expense as a percent of  adjusted average assets (4)		2.94			3.03			3.03			2.84			2.06
Shareholders' equity to total assets		12.06			11.97			11.24			10.64			12.07
Tangible shareholders' equity to  adjusted total assets (5)		12.06			11.97			11.24			10.64			10.25
Selected asset quality ratios:
Non-performing loans to loans receivable, net		0.74	%		0.86	%		1.84	%		5.69	%		9.29	%
Non-performing assets to total assets		0.72			0.84			1.64			4.00			5.49
Allowance for loan losses to non-performing loans		185.68			181.62			83.64			37.17			39.03
Allowance for loan losses to total loans receivable, net		1.37			1.56			1.54			2.12			3.63
Charge-offs to average loans		0.10			0.18			0.78			1.96			1.26

(2) Net interest margin is calculated by dividing net interest income by average earnings assets.

(3) Efficiency ratio is calculated by dividing non-interest expense (excluding goodwill impairment and loss on early repayment of FHLB borrowings) by the sum of net interest income and non-interest income (excluding gains and losses on investments).

(4) The ratio in 2011 excludes the impact of the goodwill impairment and in 2010 excludes the impact of the prepayment penalty on the early repayment of FHLB borrowings.

(5) This ratio is calculated by dividing total shareholders’ equity less intangible assets (net of deferred taxes) divided by total assets less intangible assets (net). Intangible assets consist of goodwill and other intangible assets. Deferred taxes have been established only on other intangible assets and are immaterial in amount.

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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 “Item 1. Business” and “Item 1A. Risk Factors.”

Results of Operations

Overview The Company’s net income for the years ended December 31, 2014, 2013, and 2012, was $14.7 million, $10.8 million, and $6.8 million, respectively. Diluted earnings per share during these periods were $0.31, $0.23, and $0.15, respectively. The Company’s net income during these periods represented a return on average assets (“ROA”) of 0.63%, 0.46%, and 0.27%, respectively, and a return on average equity (“ROE”) of 5.14%, 3.93%, and 2.50%, respectively.

The Company’s net income in 2014 was impacted by the following favorable developments compared to 2013:

• a $3.5 million or 5.3% increase in net interest income;

• a $4.3 million or 94.8% decrease in provision for loan losses;

• a $2.6 million or 5.8% decrease in compensation-related expenses; and

• a $1.3 million or 57.0% decrease in net losses and expenses on foreclosed real estate.

These favorable developments were partially offset by the following unfavorable developments in 2014 compared to 2013:

• a $3.9 million or 56.5% decrease in net mortgage banking revenue;

• a $906,000 or 7.6% increase in occupancy and equipment expense;

• a $518,000 non-recurring charge related to state income taxes, net of federal benefit; and

• a $2.6 million or 46.1% increase in income expense, excluding the non-recurring charge.

The Company’s net income in 2013 was impacted by the following favorable developments compared to 2012:

• a $5.0 million or 8.1% increase in net interest income;

• a $4.4 million or 65.9% decrease in net losses and expenses on foreclosed real estate; and

• a $1.4 million or 43.7% decrease in federal deposit insurance premiums.

These favorable developments were partially offset by the following unfavorable developments in 2013 compared to 2012:

• a $3.7 million or 35.1% decrease in net mortgage banking revenue;

• a $1.6 million or 3.7% increase in compensation-related expenses; and

• a $2.4 million or 70.9% increase in income tax expense.

The following paragraphs discuss these developments in greater detail, as well as other changes in the components of net income during the years ended December 31, 2014, 2013, and 2012.

Net Interest Income The Company’s net interest income increased by $3.5 million or 5.3% during the twelve months ended December 31, 2014, compared to 2013. This increase was primarily attributable to a 21 basis point increase in the Company’s net interest margin, from 3.11% in 2013 to 3.32% in 2014. This increase was due primarily to an improved earning asset mix and an improved funding mix in 2014 compared to 2013. Specifically, the Company’s average loans receivable increased by $109.3 million or 7.6% in 2014 compared to the prior year, and its average mortgage-related securities, investment securities, and overnight investments declined by $140.1 million or 20.0% in the aggregate in 2014 compared to 2013. Loans receivable generally have a higher yield than securities and overnight investments.

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With respect to the Company’s funding mix, its average transaction deposits, which consist of checking, savings, and money market accounts, increased by $29.0 million or 3.1% in the aggregate in 2014 compared to 2013. In contrast, its average certificates of deposit declined by $148.5 million or 20.8% in 2014 compared to the prior year. Transaction deposits generally have a lower interest cost (or no interest cost) relative to certificates of deposit. Also contributing to the improvement in funding mix in 2014 was a $44.7 million or 21.6% increase in average borrowings from the FHLB of Chicago compared to 2013. This increase, which funded loan growth and net deposit outflows, had a marginal average interest cost in 2014 that was lower than the average cost of the Company’s certificates of deposit.

Also contributing to the improvement in net interest margin in 2014 was a 38 basis point decline in the average cost of the Company’s certificates of deposit compared to 2013. However, it should be noted that decline in the Company’s average cost of certificates of deposit slowed significantly during the last half of 2014. Also, in recent months the Company has increased the rates and lengthened maturity terms on certain of the certificates of deposit it offers customers. Accordingly, management believes that the average cost of the Company’s certificates of deposit is likely to increase in the near term and that such trend could continue for the foreseeable future.

Finally, net interest income was favorably impacted in 2014 by a $512,000 call premium the Company received on a $20.4 million mortgage-related security that was called by the issuer during the year. Excluding the impact of this premium, the Company’s net interest margin would have been two basis points lower in 2014.

The favorable impact of the aforementioned developments on net interest income in 2014 was partially offset by a $30.8 million or 1.4% decrease in average earning assets in 2014 compared to 2013. The Company’s earning assets have declined in recent years as it has used available cash flow to fund a net decrease in its deposit liabilities, particularly its certificates of deposit, as previously described. However, management anticipates that certificates of deposit will increase in 2015 (due in part to the change in pricing strategy described in above) and that such increase could be used to fund continued growth in the Company’s loan portfolio in 2015. As such, management anticipates that, unlike recent years, average earning assets will increase in 2015. However, there can be no assurances.

Management believes the Company’s net interest margin may begin to trend modestly lower in the near term due to the deposit pricing strategy mentioned above. In addition, management anticipates that the yield on earning assets will also trend lower due principally to a declining yield on the Company’s loan portfolio in the current rate environment. Although a decline in net interest margin would generally have a negative impact on the Company’s net interest income, management anticipates such impact will be more than offset by future growth in the Company’s earning assets, as described in the preceding paragraph.

Net interest income increased by $5.0 million or 8.1% during the year ended December 31, 2013, compared to 2012.This increase was primarily attributable to a 44 basis point improvement in the Company’s net interest margin, from 2.67% in 2012 to 3.11% in 2013. Similar to the improvement in 2014, this improvement was due in part to an improved earning asset mix and an improved deposit funding mix in 2013 compared to 2012. Also contributing was a 39 basis point decline in the average cost of the Company’s certificates of deposit, as well as the Company’s repayment of $100.0 million in high-cost borrowings from the FHLB of Chicago.

The favorable impact of the aforementioned developments on net interest income was partially offset by a $165.9 million or 7.2% decrease in average earning assets in 2013 compared to 2012. The Company’s earning assets declined in 2013 as it has used cash flows from its mortgage-related securities portfolio to fund a decline in its certificates of deposit.

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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-earning 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. The Company’s tax exempt investments are insignificant, so no tax equivalent adjustments have been made.

	Year Ended December 31
	2014								2013								2012
				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)	$	1,541,879		$	66,261		4.30	%	$	1,432,606		$	64,638		4.51	%	$	1,389,313		$	65,478		4.71	%
Mortgage-related securities		533,902			12,850		2.41			626,084			14,666		2.34			792,989			17,309		2.18
Investment securities (2)		13,633			139		1.02			12,168			54		0.44			25,443			73		0.29
Interest-earning deposits		13,339			15		0.11			62,742			98		0.16			91,801			162		0.18
Total interest-earning assets		2,102,753			79,265		3.77			2,133,600			79,456		3.72			2,299,546			83,022		3.61
Non-interest-earning assets		225,444								228,010								210,599
Total average assets	$	2,328,197							$	2,361,610							$	2,510,145
Liabilities and equity:
Interest-bearing liabilities:
Savings deposits	$	222,930			55		0.02		$	226,307			62		0.03		$	217,255			63		0.03
Money market accounts		503,090			735		0.15			478,938			694		0.14			434,549			716		0.16
Interest-bearing demand accounts		228,578			30		0.01			220,381			32		0.01			219,038			51		0.02
Certificates of deposit		564,505			3,834		0.68			713,043			7,537		1.06			954,047			13,825		1.45
Total deposit liabilities		1,519,103			4,684		0.31			1,638,669			8,325		0.51			1,824,889			14,655		0.80
Advance payment by borrowers for taxes and insurance		20,949			1		0.00			21,881			2		0.01			21,141			2		0.01
Borrowings		252,128			4,731		1.88			207,404			4,785		2.31			227,573			6,984		3.07
Total interest-bearing liabilities		1,792,180			9,416		0.53			1,867,954			13,112		0.70			2,073,603			21,641		1.04
Non-interest-bearing liabilities:
Non-interest-bearing deposits		184,479								122,677								130,734
Other non-interest-bearing liabilities		66,067								96,215								35,208
Total non-interest-bearing liabilities		250,546								218,892								165,942
Total liabilities		2,042,726								2,086,846								2,239,545
Total equity		285,471								274,764								270,600
Total average liabilities and equity	$	2,328,197							$	2,361,610							$	2,510,145
Net interest income and net interest rate spread				$	69,849		3.24	%				$	66,344		3.02	%				$	61,381		2.57	%
Net interest margin							3.32	%							3.11	%							2.67	%
Average interest-earning assets to interest-bearing liabilities		1.17	x							1.14	x							1.11	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.

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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, 2014, Compared to Year Ended December 31, 2013
	Increase (Decrease)
	Volume			Rate			Net
	(Dollars in thousands)
Interest-earning assets:
Loans receivable	$	4,718		$	(3,095	)	$	1,623
Mortgage-related securities		(2,243	)		427			(1,816	)
Investment securities		7			78			85
Interest-earning deposits		(61	)		(22	)		(83	)
Total interest-earning assets		2,421			(2,612	)		(191	)
Interest-bearing liabilities:
Savings deposits		16			(23	)		(7	)
Money market deposits		35			6			41
Interest-bearing demand deposits		1			(3	)		(2	)
Certificates of deposit		(1,368	)		(2,305	)		(3,673	)
Advance payment by borrowers for taxes and insurance		–			(1	)		(1	)
Borrowings		930			(984	)		(54	)
Total interest-bearing liabilities		(386	)		(3,310	)		(3,696	)
Net change in net interest income	$	2,807		$	698		$	3,505

	Year Ended December 31, 2013, Compared to Year Ended December 31, 2012
	Increase (Decrease)
	Volume			Rate			Net
	(Dollars in thousands)
Interest-earning assets:
Loans receivable	$	1,989		$	(2,829	)	$	(840	)
Mortgage-related securities		(3,843	)		1,200			(2,643	)
Investment securities		(48	)		29			(19	)
Interest-earning deposits		(48	)		(16	)		(64	)
Total interest-earning assets		(1,950	)		(1,616	)		(3,566	)
Interest-bearing liabilities:
Savings deposits		(1	)		–			(1	)
Money market deposits		67			(89	)		(22	)
Interest-bearing demand deposits		–			(19	)		(19	)
Certificates of deposit		(3,040	)		(3,248	)		(6,288	)
Advance payment by borrowers for taxes and insurance		–			–			–
Borrowings		(579	)		(1,620	)		(2,199	)
Total interest-bearing liabilities		(3,553	)		(4,976	)		(8,529	)
Net change in net interest income	$	1,603		$	3,360		$	4,963

Provision for Loan Losses The Company’s provision for loan losses was $233,000, $4.5 million, and $4.5 million during the years ended December 31, 2014, 2013, and 2012, respectively. The decline in the provision for loan loss in 2014 was due in part to an improvement in the general credit quality of the Company’s loan portfolio, as evidenced by a continued decrease in non-performing loans, as well as a decrease in the overall level of the Company’s classified loans, as described in “Financial Condition—Asset Quality,” below. These improvements resulted in a decline in the portion of the Company’s allowance for loan loss that is determined primarily by internal risk ratings and the level of loans within each rating. In addition, a continued decline in actual loan charge-off experience in 2014 had a favorable impact on the methodology the Company uses to compute general valuation allowances.

The Company’s provision in 2013 was due largely to increases in general loan loss allowances related to growth in its multi-family, commercial real estate, and commercial business loan portfolios, as well as an increase in classified loans during the period. In contrast, the provision in 2012 was influenced by $6.3 million in specific loan loss allowances on a number of multi-family, commercial real estate, and business loan relationships, as well as residential and other consumer loans. The losses on these loans were based on updated independent appraisals and/or internal management evaluations of the collateral that secures the loan, as well as management’s knowledge of current market conditions. These losses were partially offset by $1.8 million in loss recaptures related to certain non-performing loans that paid off in 2012, as well as recoveries related to previously charged-off loans.

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General economic, employment, and real estate conditions continue to improve in the Company’s markets. If such trends continue in the near term, management anticipates that the Company’s provision for loan losses may be nominal in 2015 or could even be a net recovery, as in the fourth quarter of 2014 (refer to “Quarterly Financial Information,” below). However, there can be no assurances that these trends will continue or that classified loans, non-performing loans, and/or loan charge-off experience will continue to trend lower in future periods. Finally, there can be no assurances that the Company’s provision for loan losses will not vary considerably from period to period.

Non-Interest Income Total non-interest income for the years ended December 31, 2014, 2013, and 2012, was $22.3 million, $26.1 million, and $29.3 million, respectively. The following paragraphs discuss the principal components of non-interest income and primary reasons for their changes from 2013 to 2014, as well as 2012 to 2013.

Deposit-related fees and charges were $12.0 million, $12.2 million, and $12.0 million in 2014, 2013, and 2012, respectively. Deposit-related fees and charges consist of overdraft fees, ATM and debit card fees, merchant processing fees, account services charges, and other revenue items related to services performed by the Company for its retail and commercial deposit customers. In previous years, the Company had reported ATM and debit card fees, merchant processing fees, and certain other items as a component of other income (for additional discussion refer to “Note 1. Summary of Significant Accounting Policies” in the Company’s Audited Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data”). Management attributes the decrease in deposit-related fees and charges in 2014 to changes in deposit customer spending behavior in recent years which have resulted in lower revenue from overdraft charges and from check printing commissions. These developments were partially offset by increased revenue from a debit card reward program that the Company implemented in 2013, as well as increased revenue from treasury management and merchant card processing services that the Company offers to commercial depositors.

Brokerage and insurance commissions were $2.6 million, $3.1 million, and $3.0 million for the years ended December 31, 2014, 2013, and 2012, respectively. This revenue item consists of commissions earned on sales of tax-deferred annuities, mutual funds, and certain other securities, as well as personal and business insurance products. The decrease in 2014 was primarily due to a decline in customer demand for tax-deferred annuities. This development was offset somewhat by an increase in commission revenue from the sale of mutual funds and other securities. The increase in 2013 was due to increased customer demand for tax-deferred annuities, as well as higher commission revenue from sales of mutual funds and other securities. As a result of personnel, system, and product offering improvements made by the Company in recent months, management anticipates that brokerage and insurance commissions may increase in 2015. However, there can be no assurances.

Mortgage banking revenue, net, was $3.0 million, $6.9 million, and $10.6 million in 2014, 2013, and 2012, respectively. The following table presents the components of mortgage banking revenue, net, for the periods indicated (in previous years these components had been presented as separate line items in the Consolidated Statements of Income):

	Year Ended December 31
	2014			2013			2012
	(Dollars in thousands)
Gross loan servicing fees	$	2,796		$	2,885		$	2,826
MSR amortization		(1,772	)		(2,809	)		(3,904	)
MSR valuation (loss) recovery		1			2,395			(1,528	)
Loan servicing revenue, net		1,025			2,471			(2,606	)
Gain on sales of loan activities, net		1,965			4,405			13,206
Mortgage banking revenue, net	$	2,990		$	6,876		$	10,600

Loan servicing revenue, net, was $2.7 million, $2.9 million, and $2.8 million in 2014, 2013, and 2012, respectively. Gross loan servicing fees are highly correlated with loans serviced for third-party investors. As of December 31, 2014, 2013, and 2012, loans serviced for third-party investors were $1.09 billion, $1.15 billion, and $1.15 billion, respectively.

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The change in the valuation allowance that the Company maintains against its MSRs is recorded as a recovery or loss, as the case may be, in the period in which the change occurs. Higher market interest rates for residential loans beginning in 2013 and continuing through much of 2014 resulted in lower future prepayment expectations on the loans underlying the Company’s MSRs, which resulted in a recovery of substantially all of the related valuation allowance in 2013 and the remainder in 2014. Higher rates during these years also resulted in a decline in MSR amortization in both years, due to lower levels of actual loan prepayment activity. In contrast, lower market interest rates in 2012 resulted in higher future prepayment expectations and in increase in the valuation allowance, as well as higher MSR amortization in that year. As of December 31, 2014 and 2013, the Company’s MSRs had a net book value of $7.9 and $8.7 million, respectively.

As of December 31, 2014, the Company did not have a valuation allowance against its MSRs. The valuation of MSRs, as well as the periodic amortization of MSRs, is significantly influenced by the level of market interest rates and loan prepayments. If market interest rates for one- to four-family loans decrease and/or actual or expected loan prepayment expectations increase in future periods, the Company could record significant charges to earnings related to increases in the valuation allowance on MSRs, as well as record increased levels of MSR amortization expense.

Net gains on loan sales activities were $2.0 million, $4.4 million, and $13.2 million during the years ended December 31, 2014, 2013, and 2012, 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. During 2014, 2013, and 2012, sales of one- to four-family mortgage loans were $77.8 million, $252.3 million, and $454.6 million, respectively. Higher market interest rates for mortgage loans in 2013 and much of 2014, as well as lackluster sales of new and used homes in the Company’s market areas, generally resulted in declining originations and sales of fixed-rate, one- to four-family loans during those years.In recent months, however, a decline in market interest rates for mortgage loans, combined with management expectations for an improved housing market in 2015, could result in a modest increase in originations and sales of one- to four-family mortgage loans by the Company in 2015 compared to 2014. However, the origination and sale of residential loans is subject to variations in market interest rates and other factors and conditions outside of management’s control. Accordingly, there can be no assurances that such originations and sales will increase or will not fluctuate considerably from period to period.

Income from BOLI was $2.8 million, $2.4 million, and $2.1 million during the years ended December 31, 2014, 2013, and 2012, respectively. The increases in 2014 and 2013 were primarily caused by higher payouts associated with excess death benefits, which can vary considerably from period to period. Excess death benefits were $948,000, $639,000, and zero in 2014, 2013, and 2012, respectively. Income from BOLI is also not subject to income taxes.

Gains on sales of investments in 2014 and 2012 were $102,000 and $543,000, respectively. The Company did not sell any securities in 2013. In 2014 the Company sold $17.6 million in mortgage-related securities that management felt no longer met its yield objectives for the portfolio. In 2012 the Company sold $20.4 million in mortgage-related securities to provide additional liquidity to fund the repayment of $100.0 million in borrowings from the FHLB of Chicago that matured in that year.

The Company’s operating results in 2012 included $400,000 in net OTTI charges. This loss consisted of the credit portion of the total OTTI loss related to the Company’s investment in certain private-label CMOs rated less than investment grade. Management attributes the net OTTI losses in that periods to low real estate values for residential properties on a nationwide basis. The Company did not record any OTTI losses in 2014 or 2013 and none of its private-label CMOs were deemed to be other-than-temporarily impaired as of the end of those years. However, the collection of the amounts due on private-label CMOs is subject to numerous factors outside of the Company’s control and a future determination of OTTI could result in additional losses being recorded through earnings in future periods. As of December 31, 2014, the Company’s total investment in private-label CMOs was $29.5 million, of which $22.8 million was rated less than investment grade. Refer to “Financial Condition—Available-for-Sale Securities,” below, for additional discussion.

Other non-interest income was $1.9 million, $1.5 million, and $1.4 million for the years ended December 31, 2014, 2013, and 2012, respectively. The increase in 2014 was due primarily to increased fee revenue from interest rate swaps related to certain commercial lending relationships. In late 2013 the Company began to mitigate the interest rate risk associated with these types of lending relationships by executing interest rate swaps, the accounting for which resulted in the recognition of a certain amount of fee revenue at the time the swap contracts were executed. Management expects that this source of revenue will vary from period to period depending on borrower preference for the types of lending relationships that generate the need for the interest rate swaps.

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Non-Interest Expense Total non-interest expense for the years ended December 31, 2014, 2013, and 2012 was $68.5 million, $71.5 million, and $76.1 million, respectively. The following paragraphs discuss the principal components of non-interest expense and the primary reasons for their changes from 2013 to 2014, as well as 2012 to 2013.

Compensation and related expenses were $41.3 million, $43.9 million, and $42.3 million during the years ended December 31, 2014, 2013, and 2012, respectively. The decrease in 2014 was caused in part by lower costs associated with the Company’s defined benefit pension plan due to an increase in the discount rate used to determine the present value of the pension obligation. Also contributing was a change in the manner in which the Company accounts for how employees earn vacation and other paid time off benefits. This change, which is non-recurring, reduced full-year compensation expense in 2014 by $1.5 million compared to 2013. These favorable developments were partially offset by an increase in employer contributions to the Company’s defined contribution savings plan. This increase was intended to partially offset the effects of the changes that were made to the defined benefit pension plan in 2013. Also offsetting the favorable developments in 2014 was the impact of normal annual merit increases granted to most employees during the year, as well as an increase in costs related to certain non-qualified employee benefit plans. This latter development, which is also not expected to be recurring, increased compensation expense by $602,000 in 2014 compared to 2013.

The increase compensation and related expenses in 2013 compared to 2012 was due primarily to annual merit increases, as well as increases in certain payroll taxes and pension-related costs. These developments were partially offset by a decline in commissions due to lower originations of single-family loans, as well as a modest decline in employee healthcare costs due to a renegotiation of such costs with the insurance provider.

In 2015 management expects the cost of the Company’s defined benefit plan to increase by approximately $2.0 million compared to 2014. Although benefits under the plan were frozen for most plan participants in 2013, the annual cost of the plan continues to be impacted by changes in actuarial assumptions such as the expected lives of plan participants and the discount rate used to determine the present value of the pension obligation. Adverse changes in both of these assumptions are expected to increase the Company’s pension expense in 2015 by the amount previously noted. In addition, as of December 31, 2014, these changes had an adverse impact on the Company’s accumulated other comprehensive loss, which is a component of stockholders’ equity. Refer to “Financial Condition—Shareholders’ Equity,” below, for additional discussion.

As of December 31, 2014, the Company had 616 full-time associates and 99 part-time associates. This compared to 637 full-time and 85 part-time employees at December 31, 2013, and 639 full-time and 81 part-time associates at December 31, 2012.

Occupancy and equipment expense during the years ended December 31, 2014, 2013, and 2012 was $12.8 million, $11.9 million, and $11.4 million, respectively. The increases in 2014 and 2013 were principally caused by increases in data processing costs, certain repairs and maintenance on the Company’s facilities, and snow removal and utility costs due to increasingly harsh winter conditions.

Federal insurance premiums were $1.5 million, $1.9 million, and $3.3 million in 2014, 2013, and 2012, respectively. The decreases in 2014 and 2013 were caused by continued improvements in the Company’s financial condition and operating results that, under the FDIC’s risk-based premium assessment system, resulted in lower insurance assessment rates. Also contributing to the decreases were lower levels of average total assets in both periods. The FDIC uses average total assets as the assessment base for determining the insurance premium. (for additional information, refer to “Regulation and Supervision of the Bank—Deposit Insurance” in Item 1. Business—Regulation and Supervision,” above).

Advertising and marketing expenses were $1.8 million, $1.8 million, and $2.1 million in 2014, 2013, and 2012, respectively. The Company reduced its advertising and marketing expenses in 2013 and maintained it in 2014 in an effort to control the growth of its overall expenses. Management expects that advertising and marketing expenditures in 2015 will continue to be managed in a manner consistent with recent periods. However, such expenditures depend on future management decisions and there can be no assurances that such expenditures will remain at the current level in the future.

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Net losses and expenses on foreclosed properties were $1.0 million, $2.3 million, and $6.7 million in 2014, 2013, and 2012, respectively. The Company has experienced lower losses and expenses on foreclosed real estate in recent periods due to lower levels of foreclosed properties. Management expects this trend to continue in the near term, although there can be no assurances.

Other non-interest expense was $10.1 million, $9.8 million, and $10.2 million during the years ended December 31, 2014, 2013, and 2012, respectively. The increase in 2014 compared to 2013 was due primarily to the payment of a $242,000 prepayment penalty to the FHLB of Chicago. In 2014 the Company prepaid $20.0 million in fixed-rate term advances that had been drawn in 2012 to fund the purchase of the mortgage-related security that was called by the issuer in 2014, as previously noted. Management elected to prepay the advances concurrent with the call of the security. The decrease in other non-interest income in 2013 compared to 2012 was primarily caused by lower professional fees, due principally to reduced expenditures for loan workouts, as well as lower regulatory assessments related to the Company’s improved financial condition.

On February 9, 2015, the Company announced that it was closing seven retail branch offices in connection an efficiency and expense reduction effort. Management anticipates that this action will result in annual net cost savings of approximately $1.5 million and that the closures will be completed in the second quarter of 2015. The Company will continue to provide products and services to affected customers through its other nearby locations, as well as its internet, mobile banking, and telephone channels. Management also believes that it will retain the majority of deposits and loans currently serviced through these locations, which were $76.1 million and $$26.4 million, respectively, at December 31, 2014, although there can be no assurances. In connection with the closures, management intends to dispose of the related properties and equipment and expects that the Company will incur one-time costs less than $600,000, composed primarily of asset disposition costs, employment severance costs, data processing costs, and professional fees. These costs will be recorded in the quarter ending March 31, 2015. For additional discussion, refer to “Item 1. Business—Market Area.”

Income Tax Expense Income tax expense was $8.9 million, $5.7 million, and $3.3 million in 2014, 2013, and 2012, respectively. The most recent year includes a non-recurring charge of $518,000 (net of federal income tax benefit) that was related to a payment by the Company to the Wisconsin Department of Revenue to settle a tax matter that was previously disclosed. Excluding the impact of this non-recurring charge, the Company’s effective tax rate (“ETR”) in 2014, 2013, and 2012 was 35.4%, 34.7%, and 33.2%, respectively. The Company’s ETR will vary from period to period depending primarily on the impact of non-taxable revenue, such as earnings from BOLI and tax-exempt interest income. The ETR will generally be higher in periods in which non-taxable revenue comprises a smaller portion of pre-tax income or loss.

Financial Condition

Overview Total assets decreased by $18.9 million or 0.8% during the year ended December 31, 2014. During the year the Company’s mortgage-related securities declined by $147.7 million due primarily to the receipt of periodic principal repayments, as well as the sale or call of certain securities, as previously described. In addition, other borrowings, which consist of advances from the FHLB of Chicago, increased by $11.6 million during the period. Cash flows from these sources funded a $122.3 million increase in the Company’s loans receivable and a $43.9 million decrease in its deposit liabilities. The Company’s total shareholders’ equity decreased slightly from $281.0 million at December 31, 2013, to $280.7 million at December 31, 2014. The following paragraphs describe these changes in greater detail, as well as other changes in the Company’s financial condition during the twelve months ended December 31, 2014.

Mortgage-Related Securities Available-for-Sale The Company’s portfolio of mortgage-related securities available-for-sale decreased by $124.7 million or 27.9% during the year ended December 31, 2014. This decrease was principally caused by periodic repayments. Also contributing, however, was the sale of $17.6 million in securities, as previously described. The Company did not purchase any available-for-sale securities during 2014.

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The following table presents the carrying value of the Company’s mortgage-related securities available-for-sale at the dates indicated (carrying value is equal to fair value for all securities and for all periods presented):

	December 31
	2014		2013		2012
	(Dollars in thousands)
Freddie Mac	$	169,168	$	228,873	$	343,682
Fannie Mae		123,209		179,021		155,895
Ginnie Mae		29		33		42
Private-label CMOs		29,477		38,669		50,566
Total	$	321,883	$	446,596	$	550,185

The following table presents the activity in the Company’s portfolio of mortgage-related securities available-for-sale for the periods indicated:

	Year Ended December 31
	2014			2013			2012
	(Dollars in thousands)
Carrying value at beginning of period	$	446,596		$	550,185		$	781,770
Purchases		–			88,094			51,374
Sales		(17,692	)		–			(20,395	)
Principal repayments		(104,430	)		(186,674	)		(260,953	)
Premium amortization, net		(1,213	)		(1,460	)		(4,152	)
Other-than-temporary impairment		–			–			(400	)
Increase (decrease) in net unrealized gain or loss		(1,378	)		(3,549	)		2,941
Net decrease		(124,713	)		(103,589	)		(231,585	)
Carrying value at end of period	$	321,883		$	446,596		$	550,185

The table below presents information regarding the carrying values, weighted-average yields, and contractual maturities of the Company’s mortgage-related securities available-for-sale at December 31, 2014:

						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)
Securities by issuer and type:
Freddie Mac, Fannie Mae, and Ginnie Mae MBSs	$	5		7.23	%	$	170		6.43	%	$	83,601		2.18	%	$	29		6.68	%	$	83,805		2.19	%
Freddie Mac and Fannie Mae CMOs		–		–			2,590		1.56			72,069		2.67			133,942		2.49			208,601		2.54
Private-label CMOs		–		–			4,674		5.01			3,216		5.15			21,587		2.70			29,477		3.32
Total	$	5		7.23	%	$	7,434		3.84	%	$	158,886		2.46	%	$	155,558		2.52	%	$	321,883		2.52	%
Securities by coupon:
Adjustable-rate coupon		–		–			–		–		$	434		1.60	%	$	20,643		2.56	%	$	21,077		2.54	%
Fixed-rate coupon	$	5		7.23	%	$	7,434		3.84	%		158,452		2.47			134,915		2.52			300,806		2.52
Total	$	5		7.23	%	$	7,434		3.84	%	$	158,886		2.46	%	$	155,558		2.52	%	$	321,883		2.52	%

Changes in the fair value of mortgage-related securities available-for-sale are recorded through accumulated other comprehensive loss, net of related income tax effect, which is a component of shareholders’ equity. The fair value adjustment on the Company’s mortgage-related securities available-for-sale was a net unrealized gain of $5.7 million at December 31, 2014, compared to a net unrealized gain of $7.1 million at December 31, 2013.

The Company maintains an investment in private-label CMOs that were purchased from 2004 to 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 purchase. However, all of the securities in the portfolio have been downgraded since their purchase. Securities rated less than investment grade are adversely classified as substandard in accordance with regulatory guidelines (refer to “Item 1. Business—Asset Quality”). As of December 31, 2014 and 2013, the carrying value of the Company’s investment in private-label CMOs was $29.5 million and $38.7 million, respectively. The net unrealized gain on the securities as of such dates was $479,000 and $580,000, respectively. As of December 31, 2014, $23.3 million of the Company’s private-label CMOs were rated less than investment grade by at least one credit rating agency. These securities had a net unrealized gain of $480,000 as of that date. As of December 31, 2013, $28.8 million of the Company’s private-label CMOs were rated less than investment grade and had a net unrealized gain of $502,000.

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In 2012 management determined that it was unlikely the Company would collect all amounts due according to the contractual terms on certain of its securities rated less than investment grade. Accordingly, the Company recorded $400,000 in net OTTI loss on such securities in those periods, respectively (for additional discussion refer to “Results of Operations—Non-Interest Income,” above). As of December 31, 2014 and 2013, management determined that none of the Company’s private-label CMOs had incurred additional OTTI as of those dates. The Company does not intend to sell these securities and it is unlikely it would be required to sell them before recovery of their amortized cost. However, collection is subject to numerous factors outside of the Company’s control and a future determination of OTTI could result in significant losses being recorded through earnings in future periods. For additional discussion refer to “Critical Accounting Policies—Other-Than-Temporary Impairment,” below, and “Item 1. Business—Investment Activities,” above.

Mortgage-Related Securities Held-to-Maturity The Company’s mortgage-related securities held-to-maturity consist of fixed-rate mortgage-backed securities issued and guaranteed by Fannie Mae and backed by multi-family residential loans. All of these securities had final maturities of five to ten years as of December 31, 2014. The weighted-average yield on these securities was 2.26% as of that date. The Company has classified these securities as held-to-maturity because it has the ability and intent to hold them until they mature.

The following table presents the activity in the Company’s portfolio of mortgage-related securities held-to-maturity for the periods indicated:

	Year Ended December 31
	2014			2013			2012
	(Dollars in thousands)
Carrying value at beginning of period	$	155,505		$	157,558			–
Purchases		–			–		$	158,915
Principal repayments		(21,977	)		(1,354	)		(902	)
Premium amortization		(1,003	)		(699	)		(455	)
Net increase (decrease)		(22,980	)		(2,053	)		157,558
Carrying value at end of period	$	132,525		$	155,505		$	157,558

In 2014 a $20.4 million mortgage-related security held-for-investment was called by the issuer. The Company recorded a $512,000 call premium in connection with this call.

Loans Held-for-Sale The Company’s policy is to sell substantially all of its fixed-rate, one- to four-family mortgage loan originations in the secondary market. The following table presents a summary of the activity in the Company’s loans held-for-sale for the periods indicated:

	Year Ended December 31
	2014			2013			2012
	(Dollars in thousands)
Balance outstanding at beginning of period	$	1,798		$	10,739		$	19,192
Origination of loans intended for sale (1)		79,714			243,669			446,358
Principal balance of loans sold		(77,776	)		(252,348	)		(454,584	)
Change in net unrealized gains or losses (2)		101			(262	)		(227	)
Total loans held-for-sale	$	3,837		$	1,798		$	10,739

(1) Does not include one- to four-family loans originated for the Company’s loan portfolio.

(2) Refer to “Note 1. Basis of Presentation” in the Company’s consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data.”

The origination of one- to four-family mortgage loans intended for sale and the corresponding sales of such loans have declined significantly since 2012 in response to generally higher market interest rates since that time, which resulted in fewer borrowers refinancing higher-rate loans into lower rate loans in 2014 and 2013. For additional discussion, refer to “Results of Operations—Non-Interest Income,” above.

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Loans Receivable Loans receivable increased by $122.3 million or 8.1% during the year ended December 31, 2014. In 2014 commercial and industrial loans increased by $59.7 million or 35.8% due to increased originations and credit line utilization by borrowers. Also, multi-family real estate loans increased by $56.6 million or 21.3% as a result of sustained demand from borrowers in this market segment. In addition, one- to four-family permanent loans increased by $30.9 million or 6.9% despite a lower level of originations in 2014 compared to 2013. This was caused by higher market interest rates during much of the year (as previously noted), which significantly reduced the amount of prepayment activity in the Company’s one- to four-family loan portfolio. In contrast to these increases, the Company’s portfolio of commercial real estate loans declined by $13.0 million or 4.7% during the year ended December 31, 2014, due to lower borrower demand and aggressive competition for these types of loans in recent periods. The Company’s portfolios of home equity and consumer loans have also declined in recent periods for similar reasons. Finally, construction loans, net of the undisbursed portion, decreased by $2.8 million or 2.3% during the twelve months ended December 31, 2014. Construction loans consist principally of loans secured by multi-family, commercial, and residential properties, and to a much lesser degree, developed and undeveloped land.

In light of current economic conditions and recent trends, management currently expects growth in the Company’s total loans in 2015 to be similar to what it has been in recent years. However, growth in loans is subject to economic, market, and competitive factors outside of its control and there can be no assurances that expected loan growth will continue or that total loans will not decrease in future periods.

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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.

	December 31
	2014						2013						2012						2011						2010
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
Commercial loans:
Commercial and industrial	$	226,537			12.47	%	$	166,788			10.10	%	$	132,436			8.82	%	$	87,715			6.31	%	$	50,123			3.56	%
Commercial real estate		263,512			14.50			276,547			16.75			263,775			17.57			226,195			16.27			248,253			17.68
Multi-family		322,413			17.74			265,841			16.10			264,013			17.58			247,040			17.77			247,210			17.60
Construction and development:
Commercial real estate		42,405			2.33			27,815			1.68			11,116			0.74			19,907			1.43			24,939			1.78
Multi-family		211,239			11.62			164,685			9.97			86,904			5.79			29,409			2.12			19,308			1.37
Land and land development		5,069			0.28			6,962			0.42			6,445			0.43			8,078			0.60			15,808			1.13
Total construction and development loans		258,713			14.24			199,462			12.08			104,465			6.96			57,394			4.15			60,055			4.28
Total commercial loans		1,071,175			58.94			908,638			55.03			764,689			50.93			618,344			44.50			605,641			43.12
Retail loans:
One- to four-family first mortgages:
Permanent		480,102			26.42			449,230			27.21			471,551			31.40			516,854			37.17			541,830			35.58
Construction		23,905			1.32			40,968			2.48			18,502			1.23			16,263			1.17			13,479			0.96
Total first mortgages		504,007			27.73			490,198			29.69			490,053			32.63			533,117			38.34			555,309			39.54
Home equity loans:
Fixed term home equity		139,046			7.65			148,688			9.01			141,898			9.45			126,798			9.12			128,170			9.13
Home equity lines of credit		80,692			4.44			79,470			4.81			81,898			5.45			86,540			6.23			87,383			6.22
Total home equity		219,738			12.09			228,158			13.82			223,796			14.90			213,338			15.35			215,553			15.35
Other consumer loans:
Student		9,692			0.53			11,177			0.68			12,915			0.86			15,711			1.13			17,695			1.26
Other		12,681			0.70			12,942			0.78			10,202			0.68			9,405			0.68			10,250			0.73
Total other consumer		22,373			1.23			24,119			1.46			23,117			1.54			25,116			1.81			27,945			1.99
Total retail loans		746,118			41.06			742,475			44.97			736,966			49.07			771,571			55.50			798,807			56.88
Gross loans receivable		1,817,293			100.00	%		1,651,113			100.00	%		1,501,655			100.00	%		1,389,915			100.00	%		1,404,448			100.00	%
Undisbursed loan proceeds		(162,471	)					(117,439	)					(76,703	)					(41,859	)					(32,345	)
Allowance for loan losses		(22,289	)					(23,565	)					(21,577	)					(27,928	)					(47,985	)
Deferred fees and costs, net		(1,230	)					(1,113	)					(1,129	)					(492	)					(549	)
Total loans receivable, net	$	1,631,303					$	1,508,996					$	1,402,246					$	1,319,636					$	1,323,569

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The following table presents a summary of the Company’s activity in loans receivable for the periods indicated.

	Year Ended December 31
	2014			2013			2012
	(Dollars in thousands)
Balance outstanding at beginning of period	$	1,508,996		$	1,402,246		$	1,319,636
Loan originations:
Commercial loans:
Commercial and industrial		73,630			52,701			110,941
Commercial real estate		37,444			80,157			70,200
Multi-family		101,260			50,323			66,724
Construction and development		154,940			164,028			88,389
Total commercial loans		367,274			347,209			336,254
Retail loans:
One- to four-family first mortgages (1)		75,402			84,822			110,512
Home equity		33,850			52,827			71,832
Other consumer		1,427			3,775			4,984
Total retail loans		110,679			141,424			187,328
Total loan originations		477,953			488,633			523,582
Principal payments and repayments:
Commercial loans		(204,737	)		(199,507	)		(183,540	)
Retail loans		(104,782	)		(134,225	)		(215,248	)
Total principal payments and repayments		(309,519	)		(333,732	)		(398,788	)
Transfers to foreclosed properties, real estate owned, and repossessed assets		(2,254	)		(5,443	)		(13,054	)
Net change in undisbursed loan proceeds, allowance for loan losses, and deferred fees and costs		(43,873	)		(42,708	)		(29,130	)
Total loans receivable, net	$	1,631,303		$	1,508,996		$	1,402,246

(1) Does not include one- to four-family loans originated for sale.

The following table presents the contractual maturity of the Company’s commercial and industrial loans and construction and development loans at December 31, 2014. The table does not include the effect of prepayments or scheduled principal amortization.

	Commercial and Industrial		Construction and Development		Total
	(Dollars in thousands)
Amounts due:
Within one year or less	$	96,385	$	38,550	$	134,935
After one year through five years		121,458		214,133		335,591
After five years		8,694		29,935		38,629
Total due after one year		130,152		244,068		374,220
Total commercial and construction loans	$	226,537	$	282,618	$	509,155

The following table presents, as of December 31, 2014, the dollar amount of the Company’s commercial and industrial loans and construction and development loans due after one year and whether these loans have fixed interest rates or adjustable interest rates.

	Due After One Year
	Fixed Rate		Adjustable Rate		Total
	(Dollars in thousands)
Commercial and industrial	$	54,357	$	75,795	$	130,152
Construction and development		27,475		216,593		244,068
Total loans due after one year	$	81,832	$	292,388	$	374,220

Mortgage Servicing Rights The carrying value of the Company’s MSRs was $7.9 million at December 31, 2014, compared to $8.7 million at December 31, 2013, net of valuation allowances of zero and $1,400, respectively. As of December 31, 2014 and 2013, the Company serviced $1.09 billion and $1.15 billion in loans for third-party investors, respectively. For additional information refer to “Results of Operations—Non-Interest Income” and “Item 1. Business—Lending Activities,” above.

42

Other Assets  Other assets consist of the following items on the dates indicated:

	December 31
	2014		2013
	(Dollars in thousands)
Accrued interest receivable:
Loans receivable	$	4,748	$	4,582
Mortgage-related securities		1,027		1,328
Total accrued interest receivable		5,775		5,910
Foreclosed properties and repossessed assets:
Commercial real estate		2,566		4,236
Land and land development		1,693		2,171
One- to four- family first mortgages		409		329
Total foreclosed and repossessed assets		4,668		6,736
Bank-owned life insurance		59,830		59,451
Premises and equipment		52,594		51,565
Deferred tax asset, net		25,595		27,387
Federal Home Loan Bank stock, at cost		14,209		12,245
Other assets		22,183		19,967
Total other assets	$	184,854	$	183,261

The Company’s foreclosed properties and repossessed assets were $4.7 million and $6.7 million at December 31, 2014 and 2013, respectively. Management expects foreclosed properties and repossessed assets to trend modestly lower in the near term. However, there can be no assurances that foreclosed properties and repossessed assets will not fluctuate significantly from period to period.

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. Its cash surrender value is an asset that the Company uses to partially offset the future cost of employee benefits. 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 2014 was a result of the increase in the accumulated cash value of the insurance policies during the period, partially offset by the impact of death benefit payments.

The Company and its subsidiaries conduct their business through an executive office and 76 banking offices, which had an aggregate net book value of $48.5 million as of December 31, 2014, excluding furniture, fixtures, and equipment. As of December 31, 2014, the Company owned the building and land for 69 of its office locations and leased the space for eight. However, refer to “Results of Operations—Non-Interest Expense,” above, for discussion related to the Company’s expected closure of certain banking office locations in 2015.

The Company’s net deferred tax asset decreased by $1.8 million or 6.5% during the year ended December 31, 2014. Management evaluates this asset on an on-going basis to determine if a valuation allowance is required. Management determined that no valuation allowance was required as of December 31, 2014. The evaluation of the net deferred tax asset requires significant management judgment based on positive and negative evidence. Such evidence includes the Company’s recent trend in earnings, expectations for the Company’s future earnings, the duration of federal and state net operating loss carryforward periods, and other factors. There can be no assurance that future events, such as adverse operating results, court decisions, regulatory actions or interpretations, changes in tax rates and laws, 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 financial conditions, results of operations, and capital of the Company.

The FHLB of Chicago requires its members to own its common stock as a condition of membership, which is redeemable at par. As of December 31, 2014, the Company’s ownership of FHLB of Chicago common stock exceeded the amount required under the FHLB of Chicago’s minimum guidelines. For additional discussion refer to the section entitled “Federal Home Loan Bank System” in “Item 1. Business—Regulation and Supervision.”

43

Deposit Liabilities The Company’s deposit liabilities decreased by $43.9 million or 2.5% during the year ended December 31, 2014. Certificates of deposit declined by $109.8 million or 17.3% during the period while transaction deposits, consisting of checking, savings, and money market accounts, increased by $65.9 million or 5.8%. In recent months the Company has increased the rates and lengthened maturity terms on certain of the certificates of deposit it offers customers. Accordingly, management believes that the average cost of the Company’s certificates of deposit may increase modestly in the near term and that such trend could continue for the foreseeable future. Furthermore, management anticipates that certificates of deposit will increase in 2015 as a result of this strategy and that such increase will be used to fund continued growth in Company’s loan portfolio in 2015, although there can be no assurances.

The Company’s transaction deposits have increased in recent years largely in response to management’s efforts to increase sales of such products and related services to commercial businesses, as well as efforts to focus its retail sales efforts on such products and related services. Also contributing to this increase in transaction deposits, however, has been customer reaction to the low interest rate environment for deposit products. Management believes that this environment has encouraged some customers to switch to transaction deposits in an effort to retain flexibility in the event interest rates increase in the future. If interest rates increase in the future, customer preference may shift from transaction deposits back to certificates of deposit, which typically have a higher interest cost to the Company. This development could increase the Company’s cost of funds in the future, which would have an adverse impact on its net interest margin.

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.

	December 31
	2014								2013								2012
			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)
Non-interest-bearing demand	$	187,852		10.93	%		0.00	%	$	161,639		9.20	%		0.00	%	$	143,684		7.69	%		0.00	%
Interest-bearing demand		253,595		14.76			0.01			245,923		13.95			0.01			236,380		12.65			0.01
Money market savings		532,705		30.99			0.14			501,020		28.40			0.14			458,762		24.56			0.19
Savings accounts		220,557		12.83			0.03			220,236		12.50			0.03			217,170		11.63			0.03
Total demand accounts		1,194,709		69.51			0.07			1,128,818		64.05			0.07			1,055,996		56.53			0.09
Certificates of deposit:
With original maturities of:
Three months or less		6,081		0.35			0.25			20,665		1.17			1.44			9,259		0.50			0.07
Over three to 12 months		177,748		10.34			0.44			121,350		6.88			0.17			184,194		9.86			0.20
Over 12 to 24 months		204,499		11.90			0.53			346,565		19.66			0.51			315,189		16.87			0.77
Over 24 to 36 months		84,507		4.92			0.58			80,370		4.56			1.88			148,503		7.95			1.94
Over 36 to 48 months		–		–			–			–		–			–			–		–			–
Over 48 to 60 months		51,212		2.98			1.37			64,914		3.68			2.08			154,758		8.29			3.48
Total certificates of deposit		524,047		30.49			0.58			633,864		35.95			0.81			811,903		43.47			1.36
Total deposit liabilities	$	1,718,756		100.00	%		0.23	%	$	1,762,682		100.00	%		0.34	%	$	1,867,899		100.00	%		0.64	%

At December 31, 2014, the Company had certificates of deposit with balances of $100,000 and over maturing as follows:

	Amount
	(In thousands)
Maturing in:
Three months or less	$	26,060
Over three months through six months		80,641
Over six months through 12 months		14,318
Over 12 months through 24 months		13,944
Over 24 months through 36 months		1,977
Over 36 months		5,201
Total certificates of deposit greater than $100,000	$	142,141

44

The following table presents the Company’s activity in its deposit liabilities for the periods indicated:

	Year Ended December 31
	2014			2013			2012
	(Dollars in thousands)
Total deposit liabilities at beginning of period	$	1,762,682		$	1,867,899		$	2,021,663
Net withdrawals		(48,358	)		(113,058	)		(167,096	)
Interest credited, net of penalties		4,432			7,841			13,332
Total deposit liabilities at end of period	$	1,718,756		$	1,762,682		$	1,867,899

Borrowings Borrowings, which consist of advances from the FHLB of Chicago, increased by $11.6 million or 4.7% during the twelve months ended December 31, 2014. This increase, which was used to fund loan growth and deposit outflows during the year, was partially offset by the Company’s prepayment of $20.0 million in fixed-rate term advances during the year. These advances had been drawn in 2012 to fund the purchase of the mortgage-related security that was called by the issuer in 2014, as previously noted. Management elected to prepay the advances concurrent with the call of the security. Refer to “Results of Operations—Non-Interest Expense,” above, for additional discussion.

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
	2014			2013			2012			2011			2010
	(Dollars in thousands)
Balance outstanding at end of year:
FHLB term advances	$	213,669		$	204,900		$	210,786		$	153,091		$	149,934
Overnight borrowings from FHLB		42,800			40,000			–			–			–
Weighted-average interest rate at end of year:
FHLB term advances		2.01	%		2.26	%		2.34	%		4.69	%		4.79	%
Overnight borrowings from FHLB		0.13	%		0.13	%		–			–			–
Maximum amount outstanding during the year:
FHLB term advances	$	234,085		$	210,786		$	311,419		$	199,493		$	906,979
Overnight borrowings from FHLB		80,000			40,000			5,000			–			–
Average amount outstanding during the year:
FHLB term advances	$	213,566		$	206,828		$	227,573		$	156,521		$	871,212
Overnight borrowings from FHLB		38,562			207			14			–			–
Weighted-average interest rate during the year:
FHLB term advances		2.19	%		2.31	%		3.07	%		4.59	%		4.32	%
Overnight borrowings from FHLB		0.13	%		0.13	%		0.30	%		–			–

Management believes that additional funds are available to be borrowed from the FHLB of Chicago or other sources in the future to fund loan originations or security purchases or to fund existing advances as they mature if needed or desirable. However, there can be no assurances of the future availability of borrowings or any particular level of future borrowings. For additional information refer to “Item 1. Business—Borrowings.”

Shareholders’ Equity The Company’s shareholders’ equity decreased slightly from $281.0 million at December 31, 2013, to $280.7 million at December 31, 2014. This decrease was due primarily to an $8.8 million increase in accumulated other comprehensive loss during the period, which was principally the result of an unrecognized loss related to the Company’s defined benefit pension obligation. This loss was caused by adverse changes in certain actuarial assumptions used to value the obligation (refer to “Results of Operations—Non-Interest Expense,” above, for additional information). Also contributing to the decrease in shareholders’ equity in 2014 was the payment of regular quarterly cash dividends. The impact of these developments on shareholders’ equity was almost entirely offset by net income during the period. The Company’s ratio of shareholders’ equity to total assets was 12.06% at December 31, 2014, compared to 11.97% at December 31, 2013. The increase in this ratio was due primarily to a decrease in the Company’s total assets, offset in part by the decrease in the shareholders’ equity during the year. The book value of the Company’s common stock was $6.03 per share at December 31, 2014, compared to $6.05 per share at December 31, 2013.

The Bank is required to maintain specified amounts of regulatory capital pursuant to regulations promulgated by the OCC and the FDIC. The Bank is “well capitalized” for regulatory capital purposes. As of December 31, 2014, the Bank had a total risk-based capital ratio of 18.19% and a Tier 1 capital ratio of 11.44%. The minimum ratios to be considered “well capitalized” under current supervisory regulations are 10% for total risk-based capital and 6% for Tier 1 capital. The minimum ratios to be considered “adequately capitalized” are 8% and 4%, respectively. For additional discussion refer to “Note 8. Shareholders’ Equity” in “Item 8. Financial Statements and Supplementary Data.” Beginning in 2015 the Bank will be subject to new regulatory capital standards as specified under Basel III. Management anticipates that all of the Bank’s Basel III regulatory capital ratios will exceed the minimums necessary for the Bank to be classified as a “well capitalized” institution under the new standards. For additional discussion refer to “Regulation and Supervision of the Bank” in “Item 1. Business—Regulation and Supervision.”

45

As of December 31, 2014, the Company was not required to maintain minimum regulatory capital at the consolidated level. However, this changes in 2015 and the Company is also required to maintain specified amounts of regulatory capital pursuant to regulations promulgated by the FRB. These capital regulations are substantially the same as those required for banks and bank holding companies under Basel III. Management anticipates that the Company will meet or exceed the requirements to be categorized as “well capitalized” for regulatory capital purposes at the consolidated level when it becomes subject to such capital requirements in 2015. For additional discussion refer to “Regulation and Supervision of the Company” in “Item 1. Business—Regulation and Supervision”.

On February 2, 2015, the Company’s board of directors declared a $0.04 per share dividend payable on February 27, 2015, to shareholders of record on February 13, 2015. On February 2, 2015, the Company’s board of directors also approved a plan to repurchase up to 2.3 million shares of its common stock. From February 2, 2015, to February 27, 2015, the Company repurchased 126,995 shares of its common stock at an average price of $7.04.

The payment of dividends and/or the repurchase of common stock by the Company is highly dependent on the ability of the Bank to pay dividends or otherwise distribute capital to the Company. Such payments are subject to requirements imposed by law or regulations and to the application and interpretation thereof by the OCC and FRB. The Company cannot provide any assurances that dividends will continue to be paid, the amount of any such dividends, or whether additional shares of common stock will be repurchased under its current stock repurchase plan. For further information regarding the factors which could affect the Company’s payment of dividends and/or the repurchase of its common stock, refer to “Item 1. Business—Regulation and Supervision,” as well as “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchase of Equity Securities,” above.

Asset Quality The following table presents information regarding non-accrual loans, accruing loans delinquent 90 days or more, and foreclosed properties and repossessed assets as of the dates indicated.

	December 31
	2014			2013			2012			2011			2010
	(Dollars in thousands)
Non-accrual commercial loans:
Commercial and industrial	$	201		$	284		$	693		$	1,642		$	2,779
Commercial real estate		4,309			4,401			6,994			23,997			41,244
Multi-family		1,402			1,783			6,824			22,905			31,660
Construction and development		803			728			865			9,108			26,559
Total commercial loans		6,715			7,196			15,376			57,652			102,242
Non-accrual retail loans:
One- to four-family first mortgages		4,148			4,556			8,264			15,128			18,888
Home equity		493			676			1,514			1,457			1,369
Other consumer		108			104			59			207			275
Total non-accrual retail loans		4,749			5,336			9,837			16,792			20,532
Total non-accrual loans		11,464			12,532			25,213			74,444			122,574
Accruing loans delinquent 90 days or more (1)		540			443			584			696			373
Total non-performing loans		12,004			12,975			25,797			75,140			122,947
Foreclosed real estate and repossessed assets		4,668			6,736			13,961			24,724			19,293
Total non-performing assets	$	16,672		$	19,711		$	39,758		$	99,864		$	142,240
Non-performing loans to total loans		0.74	%		0.86	%		1.84	%		5.69	%		9.29	%
Non-performing assets to total assets		0.72	%		0.84	%		1.64	%		4.00	%		5.49	%
Interest income that would have been recognized if non-accrual loans had been current	$	634		$	1,265		$	1,998		$	4,535		$	4,734

(1) Consists of student loans that are guaranteed under programs sponsored by the U.S. government.

46

The Company’s non-performing loans were $12.0 million or 0.74% of loans receivable as of December 31, 2014, compared to $13.0 million or 0.86% of loans receivable as of December 31, 2013. Non-performing assets, which includes non-performing loans, were $16.7 million or 0.72% of total assets and $19.7 million or 0.84% of total assets as of these same dates, respectively. Most of the declines in non-performing loans and non-performing assets in recent years have been caused by repayments of the related loans or disposition of the foreclosed properties. Contributing to a lesser degree were upgrades of loans to performing status due to improvements in the financial condition or performance of the borrowers and/or the underlying collateral, as permitted by the Company’s credit policies.

Non-performing assets are classified as “substandard” in accordance with the Company’s internal risk rating policy. In addition to non-performing assets, at December 31, 2014, management was closely monitoring $43.5 million in additional loans that were classified as “special mention” and $33.4 million in additional loans that were classified as “substandard” in accordance with the Company’s internal risk rating policy. These amounts compared to $52.7 million and $36.1 million, respectively, as of December 31, 2013. As of December 31, 2014, most of these additional loans that were classified as “special mention” or “substandard” were secured by commercial real estate, multi-family real estate, land, and certain commercial business assets. The decrease in loans classified as “special mention” was due primarily to the downgrade of certain loans to “substandard” in 2014. Management does not believe any of these particular loans were impaired as of December 31, 2014, although there can be no assurances that the loans will not become impaired in future periods. The impact of these downgrades on total loans classified as “substandard” was more than offset by a number of other “substandard” loans that paid-off during the period or were upgraded due to the improved financial condition and operating results of the borrowers.

Trends in the credit quality of the Company’s loan portfolio are subject to many factors that are outside of the Company’s control, such as economic and market conditions. As such, there can be no assurances that there will not be significant fluctuations in the Company’s non-performing assets and/or classified loans in future periods or that there will not be significant variability in the Company’s provision for loan losses from period to period.

Loans considered to be impaired by the Company at December 31, 2014, were $12.0 million compared to $13.0 million at December 31, 2013, $25.8 million at December 31, 2012, $75.1 million at December 31, 2011, and $131.4 million at December 31, 2010. The average annual balance of loans impaired as of December 31, 2014, was $10.7 million and the interest received and recognized on these loans while they were impaired was $483,000.

47

The following table presents the activity in the Company’s allowance for loan losses at or for the periods indicated.

	At or For the Year Ended December 31
	2014			2013			2012			2011			2010
	(Dollars in thousands)
Balance at beginning of period	$	23,565		$	21,577		$	27,928		$	47,985		$	17,028
Provision for loan losses		233			4,506			4,545			6,710			49,619
Charge-offs:
Commercial and industrial		(59	)		(199	)		(136	)		(551	)		(2,140	)
Commercial real estate		(561	)		(514	)		(4,894	)		(15,286	)		(11,621	)
Multi-family		(241	)		(536	)		(857	)		(5,035	)		(140	)
Construction and development		(34	)		(148	)		(2,693	)		(2,737	)		(3,515	)
One- to four-family first mortgages		(871	)		(1,205	)		(3,182	)		(3,047	)		(528	)
Home equity		(103	)		(1,000	)		(327	)		(524	)		(211	)
Other consumer		(431	)		(389	)		(485	)		(512	)		(565	)
Total charge-offs		(2,300	)		(3,991	)		(12,574	)		(27,692	)		(18,720	)
Recoveries:
Commercial and industrial		64			5			26			18			–
Commercial real estate		169			666			956			40			1
Multi-family		15			102			568			248			–
Construction and development		142			109			1			550			–
One- to four-family first mortgages		344			492			86			49			20
Home equity		27			68			1			–			–
Other consumer		30			31			40			20			37
Total recoveries		791			1,473			1,678			925			58
Net charge-offs		(1,509	)		(2,518	)		(10,896	)		(26,768	)		(18,662	)
Balance at end of period	$	22,289		$	23,565		$	21,577		$	27,928		$	47,985
Net charge-offs to average loans		0.10	%		0.18	%		0.78	%		1.96	%		1.26	%
Allowance for loan losses to total loans		1.37	%		1.56	%		1.54	%		2.12	%		3.63	%
Allowance for loan losses to non-performing loans		185.68	%		181.62	%		83.64	%		37.17	%		39.03	%

The changes in the Company’s allowance for loan losses in recent years has been consistent with overall changes in the Company’s level of non-performing loans, changes in loan charge-off activity, and industry trends. The changes are also consistent with changes in management’s assessment of overall economic conditions, unemployment, and real estate values during the periods. The Company’s ratio of allowance for loan losses as a percent of non-performing loans increased from 83.6% at December 31, 2012, to 181.6% at December 31, 2013, and further to 185.68% at December 31, 2014. The increase over this two year period was caused by a substantial decline in non-performing loans relative to the allowance for loan losses. This change is to be expected when non-performing loans (which are generally evaluated for impairment on an individual basis) decline in a period and, as a result, a larger portion of the allowance for loan losses relates to loans that are evaluated for impairment on a collective basis (refer to “Note 3. Loans Receivable” in “Item 8. Financial Statements and Supplementary Data”).

Although management believes the Company’s allowance for loan losses at December 31, 2014, was adequate, there can be no assurances that future adjustments to the allowance will not be necessary, which could adversely affect the Company’s results of operations. For additional discussion, refer to “Item 1. Business—Asset Quality,” above, and “Critical Accounting Policies—Allowance for Loan Losses,” below.

48

The following table represents the Company’s allocation of its allowance for loan losses by loan category on the dates indicated:

	December 31
	2014					2013					2012					2010					2010
			Percent					Percent					Percent					Percent					Percent
	Amount		to Total			Amount		to Total			Amount		to Total			Amount		to Total			Amount		to Total
	(Dollars in thousands)
Loan category:
Commercial and industrial	$	2,349		10.54	%	$	2,603		11.05	%	$	1,686		7.81	%	$	2,098		7.51	%	$	1,541		3.21	%
Commercial real estate		6,880		30.86			6,377		27.06			7,354		34.08			9,467		33.90			21,885		45.61
Multi-family		6,078		27.27			5,931		25.17			5,195		24.08			7,442		26.65			9,265		19.31
Construction and development		2,801		12.57			4,160		17.65			2,617		12.13			4,506		16.13			10,141		21.13
One- to four-family first mortgages		3,004		13.48			3,220		13.66			3,267		15.14			3,201		11.46			3,726		7.76
Home equity and other consumer		1,177		5.28			1,274		5.41			1,458		6.76			1,214		4.35			1,427		2.97
Total allowance for loan losses	$	22,289		100.00	%	$	23,565		100.00	%	$	21,577		100.00	%	$	27,928		100.00	%	$	47,985		100.00	%

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 probable losses inherent in the loan portfolio and is based on factors such as the size and current risk characteristics of the portfolio, an assessment of individual problem loans and pools of homogenous loans within the portfolio, and actual loss, delinquency, and/or risk rating experience within the portfolio. The Company also considers current economic conditions and/or events in specific industries and geographical areas, including unemployment levels, trends in real estate values, peer comparisons, and other pertinent factors, to include regulatory guidance. Finally, as appropriate, the Company also considers individual borrower circumstances and the condition and fair value of the loan collateral, if any.

Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on loans, the fair value of underlying collateral (if any), estimated losses on pools of homogeneous loans based on historical loss experience, changes in risk characteristics of the loan portfolio, and consideration of current economic trends, all of which may be susceptible to significant change. Higher rates of loan defaults than anticipated would likely result in a need to increase provisions in future years. 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.

Other-Than-Temporary Impairment Generally accepted accounting principles require 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 OTTI 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 OTTI on its securities could result in significant charges to earnings in future periods.

Income Taxes The assessment of the Company’s tax assets and liabilities involves the use of estimates, forecasts, assumptions, interpretations, and judgment concerning the Company’s estimated future results of operations, as well as certain accounting pronouncements and federal and state tax codes. Management evaluates the Company’s net deferred tax asset on an on-going basis to determine if a valuation allowance is required. This evaluation requires significant management judgment based on positive and negative evidence. Such evidence includes the Company’s recent trends in earnings, the duration of federal and state net operating loss carryforward periods, and other factors. There can be no assurance that future events, such as adverse operating results, court decisions, regulatory actions or interpretations, changes in tax rates and laws, 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 financial conditions and results of operations.

49

The Company describes all of its significant accounting policies in “Note 1. Basis of Presentation” in “Item 8. Financial Statements and Supplementary Data.”

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, 2014, significant fixed and determinable contractual obligations to third parties by payment date. All amounts in the table exclude interest costs to be paid in the periods indicated, if applicable.

	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	$	1,194,709		–		–		–	$	1,194,709
Certificates of deposit		383,814	$	114,914	$	25,319		–		524,047
Borrowed funds		61,250		81,215		56,600	$	57,404		256,469
Operating leases		1,009		1,507		1,147		2,820		6,483
Purchase obligations		2,400		4,800		4,200		–		11,400
Deferred retirement plans and
deferred compensation plans		906		1,578		1,632		5,200		9,316

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. Employee Benefit Plans” in “Item 8. Financial Statements and Supplementary Data.”

The following table details the amounts and expected maturities of significant off-balance sheet commitments to extend credit as of December 31, 2014.

	Payments Due In
			One to		Three to		Over
	One Year		Three		Five		Five
	Or Less		Years		Years		Years		Total
	(Dollars in thousands)
Commercial lines of credit	$	104,406		–		–		–	$	104,406
Commercial loans		4,491		–	$	118		–		4,609
Standby letters of credit		3,729	$	45		–		–		3,774
Multi-family and commercial real estate		227,647		1,168		50		–		228,865
Residential real estate		20,889		–		–		–		20,889
Revolving home equity and credit card lines		165,600		–		–		–		165,600
Net commitments to sell residential loans		7,415		–		–		–		7,415

50

 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.

Quarterly Financial Information

The following table sets forth certain unaudited quarterly data for the periods indicated:

	2014 Quarter Ended
	March 31		June 30		September 30		December 31
	(Dollars in thousands, except per share amounts)
Interest income	$	19,673	$	19,798	$	19,671	$	20,123
Interest expense		2,526		2,396		2,291		2,203
Net interest income		17,147		17,402		17,380		17,920
Provision for loan losses		13		321		98		(199	)
Total non-interest income		4,895		5,704		6,093		5,657
Total non-interest expense		16,759		17,220		16,684		17,798
Income before taxes		5,270		5,565		6,691		5,978
Income tax expense		2,438		1,988		2,284		2,140
Net loss (gain) attributable to non-controlling interest		12		1		2		(4	)
Net income	$	2,844	$	3,578	$	4,409	$	3,834
Earnings per share-basic	$	0.06	$	0.08	$	0.09	$	0.08
Earnings per share-diluted		0.06		0.08		0.09		0.08
Cash dividend paid per share		0.03		0.04		0.04		0.04

	2013 Quarter Ended
	March 31		June 30		September 30		December 31
	(Dollars in thousands, except per share amounts)
Interest income	$	20,175	$	19,560	$	19,758	$	19,962
Interest expense		3,990		3,371		2,977		2,773
Net interest income		16,185		16,189		16,781		17,189
Provision for loan losses		891		1,730		707		1,178
Total non-interest income		7,432		7,067		6,143		5,475
Total non-interest expense		18,996		17,411		17,825		17,272
Income before taxes		3,730		4,115		4,392		4,214
Income tax expense		1,199		1,478		1,497		1,529
Net loss attributable to non-controlling interest		14		12		13		9
Net income	$	2,545	$	2,649	$	2,908	$	2,694
Earnings per share-basic	$	0.05	$	0.06	$	0.06	$	0.06
Earnings per share-diluted		0.05		0.06		0.06		0.06
Cash dividend paid per share		0.02		0.02		0.03		0.03

51

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. Interest rate sensitivity is also measured through analysis of changes in the present value of the Company’s equity. Refer to “Present Value of Equity,” below.

To achieve the objectives of managing interest rate risk, the Company’s executive management meets periodically to discuss and monitor the market interest rate environment and provides reports to the board of directors. 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 board of directors.

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 mortgage loans and mortgage loans that mature or reprice within five years for portfolio, and selling most fixed-rate residential mortgage loans with maturities of 15 years or more in the secondary market;

· entering into interest rate swap arrangements to mitigate the interest rate exposure associated with specific commercial loan relationships at the time such loans are originated;

· emphasizing variable-rate and/or short- to medium-term, fixed-rate home equity and commercial and industrial loans;

· maintaining a significant level of mortgage-related and other investment securities available-for-sale that have weighted-average life of less than five years or interest rates that reprice in less than five years; and

· managing deposits and borrowings to provide stable funding.

Management believes these strategies 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.

52

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.

The following table presents the amounts of the Company’s interest-earning assets and interest-bearing liabilities outstanding at December 31, 2014, 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:

· 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. Actual cash flows may differ substantially from these assumptions.

· Mortgage-related securities—based upon known repricing dates (if applicable) and an independent outside source for determining estimated prepayment speeds. Actual cash flows may differ substantially from these assumptions.

· Deposit liabilities—based upon contractual maturities and the Company’s historical decay rates. Actual cash flows may differ from these assumptions.

· Borrowings—based upon final maturity.

	December 31, 2014
	Within			Three to			More than			More than
	Three			Twelve			1 Year to			3 Years -			Over 5
	Months			Months			3 Years			5 Years			Years			Total
	(Dollars in thousands)
Loans receivable:
Commercial loans:
Fixed	$	30,939		$	72,440		$	154,161		$	98,872		$	13,489		$	369,901
Adjustable		367,690			63,524			96,330			33,343			–			560,887
Retail loans:
Fixed		17,616			36,791			75,271			49,531			97,616			276,825
Adjustable		112,502			147,066			83,657			43,989			53,460			440,674
Interest-earning deposits		11,445			–			–			–			–			11,445
Mortgage-related securities:
Fixed		30,849			75,513			127,748			115,766			77,767			427,643
Adjustable		21,038			–			–			–			–			21,038
Other interest-earning assets		14,209			–			–			–			–			14,209
Total interest-earning assets		606,288			395,334			537,167			341,501			242,332			2,122,622
Deposit liabilities:
Non-interest-bearing demand accounts		–			–			–			–			187,905			187,905
Interest-bearing demand accounts		–			–			–			–			253,585			253,585
Savings accounts		–			–			–			–			220,557			220,557
Money market accounts		532,662			–			–			–			–			532,662
Certificates of deposit		128,574			263,107			107,044			25,323			–			524,048
Advance payments by borrowers for taxes and insurance		–			4,742			–			–			–			4,742
Borrowings		45,619			16,924			83,900			57,567			52,459			256,469
Total non-interest- and interest- bearing liabilities		706,855			284,773			190,944			82,890			714,506			1,979,968
Interest rate sensitivity gap	$	(100,567	)	$	110,561		$	346,223		$	258,611		$	(472,174	)	$	142,654
Cumulative interest rate sensitivity gap	$	(100,567	)	$	9,994		$	356,217		$	614,828		$	142,654
Cumulative interest rate sensitivity gap as a percent of total assets		-4.32	%		0.43	%		15.30	%		26.41	%		6.13	%
Cumulative interest-earning assets as a percentage of non-interest- and interest-bearing liabilities		85.77	%		101.01	%		130.12	%		148.59	%		107.20	%

Based on the above gap analysis, at December 31, 2014, the Company’s interest-bearing liabilities maturing or repricing within

one year approximates its interest-earning assets maturing or repricing within the same period. Based on this information, over the course of the next year increases or decreases in market interest rates could have a neutral impact on the Company’s net interest income. However, it should be noted that the Company’s future net interest income is affected by more than just future market interest rates. Net interest income is also affected by absolute and relative levels of earning assets and interest-bearing liabilities, the level of non-performing loans and other investments, and by other factors outlined in “Item 1. Business—Cautionary Statement,” “Item 1A. Risk Factors,” and “Item 7. Management Discussion of Financial Condition and Results of Operations.”

53

In addition to not anticipating all of the factors that could impact future net interest income, gap analysis has certain shortcomings. For example, although certain assets and liabilities may mature or reprice in similar periods, the interest rates on such react by different degrees to changes in market interest rates, especially in instances where changes in rates are limited by contractual caps or floors or instances where rates are influenced by competitive forces. 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. For example, it is the Company’s past experience that rate changes on most of its deposit liabilities generally lag changes in market interest 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. Because of these shortcomings, management of the Company believes that gap analysis is a better indicator of the relative change in the Company’s interest rate risk exposure from period to period than it is an indicator of the direction or amount of future change in net interest income.

Present Value of Equity In addition to the gap analysis table, management also uses simulation models to monitor interest rate risk. The models report the present value of equity (“PVE”) in different interest rate environments, assuming an instantaneous and permanent interest rate shock to all interest rate sensitive assets and liabilities. The PVE 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, adjustable rate, caps, and 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 PVE whereas decreases in market value of assets will decrease the PVE. Conversely, increases in the market value of liabilities will decrease the PVE whereas decreases in the market value of liabilities will increase the PVE.

The following table presents the estimated PVE over a range of interest rate change scenarios at December 31, 2014. The present value ratio shown in the table is the PVE 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)
+400	$	304,608	$	(108,066	)		(26.2	)%		13.99	%		(20.1	)%
+300		329,876		(82,798	)		(20.1	)		14.86			(15.2	)
+200		357,500		(55,174	)		(13.4	)		15.79			(9.8	)
+100		384,510		(28,164	)		(6.8	)		16.66			(4.9	)
0		412,674		–			–			17.52			–
-100		418,584		4,910			1.2			17.31			(1.2	)

Based on the above analysis, the Company’s PVE could be adversely affected by an increase in interest rates. The decline in the PVE as a result of an increase in rates is attributable to the combined effects of a decline in the present value of the Company’s earning assets (which is further impacted by an extension in duration in rising rate environments due to slower prepayments on loan and mortgage-related securities), partially offset by a decline in the present value of deposit liabilities and FHLB of Chicago advances. Alternatively, it should be noted that the Company’s PVE could be favorably impacted by a decrease in interest rates. However, it should be noted that the Company’s PVE is impacted by more than changes in market interest rates. Future PVE is also affected by management’s decisions relating to reinvestment of future cash flows, decisions relating to funding sources, and by other factors outlined in “Item 1. Business—Cautionary Statement,” “Item 1A. Risk Factors,” and “Item 7. Management Discussion of Financial Condition and Results of Operations.”

54

As is the case with gap analysis, PVE analysis also has certain shortcomings. PVE modeling requires management to make assumptions about future changes in market interest rates that are unlikely to occur, such as immediate, sustained, and parallel (or equal) changes in all market rates across all maturity terms. PVE modeling also requires that management make assumptions which may not reflect the manner in which actual yields and costs respond to changes in market interest rates. For example, it is the Company’s past experience that rate changes on most of its deposit liabilities generally lag changes in market interest rates. In addition, management makes assumptions regarding the changes in prepayment speeds of mortgage loans and securities. 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 model assumes that the Company will take no action in response to the changes in interest rates, when in practice rate changes on most deposit liabilities lag behind market changes and/or may be limited by competition. 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 PVE 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 PVE. Because of these shortcomings, management of the Company believes that PVE analysis is a better indicator of the relative change in the Company’s interest rate risk exposure from period to period than it is an indicator of the direction or amount of future change in net interest income.

55

Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of
Bank Mutual Corporation
Milwaukee, Wisconsin

We have audited the accompanying consolidated statements of financial condition of Bank Mutual Corporation and subsidiaries (the "Company") as of December 31, 2014 and 2013, and the related consolidated statements of income, total comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2014. 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, such consolidated financial statements present fairly, in all material respects, the financial position of Bank Mutual Corporation and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, 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, 2014, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 6, 2015, expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ Deloitte & Touche LLP

Milwaukee, Wisconsin
March 6, 2015

56

Bank Mutual Corporation and Subsidiaries

Consolidated Statements of Financial Condition

	December 31
	2014			2013
	(Dollars in thousands)
Assets
Cash and due from banks	$	34,727		$	23,747
Interest-earning deposits in banks		11,450			18,709
Cash and cash equivalents		46,177			42,456
Mortgage-related securities available-for-sale, at fair value		321,883			446,596
Mortgage-related securities held-to-maturity, at amortized cost (fair value of $134,117 in 2014 and $153,223 in 2013)		132,525			155,505
Loans held-for-sale		3,837			1,798
Loans receivable (net of allowance for loan losses of $22,289 in 2014 and $23,565 in 2013)		1,631,303			1,508,996
Mortgage servicing rights, net		7,867			8,737
Other assets		184,854			183,261
Total assets	$	2,328,446		$	2,347,349
Liabilities and equity
Liabilities:
Deposit liabilities	$	1,718,756		$	1,762,682
Borrowings		256,469			244,900
Advance payments by borrowers for taxes and insurance		4,742			3,431
Other liabilities		63,988			52,414
Total liabilities		2,043,955			2,063,427
Equity:
Preferred stock–$0.01 par value:
Authorized–20,000,000 shares in 2014 and 2013 Issued and outstanding–none in 2014 and 2013		–			–
Common stock–$0.01 par value:
Authorized–200,000,000 shares in 2014 and 2013 Issued–78,783,849 shares in 2014 and 2013
Outstanding–46,568,284 shares in 2014 and 46,438,284 in 2013		788			788
Additional paid-in capital		488,467			489,238
Retained earnings		159,065			151,384
Accumulated other comprehensive loss		(11,136	)		(2,319	)
Treasury stock–32,215,565 shares in 2014 and 32,345,565 in 2013		(356,467	)		(358,054	)
Total shareholders' equity		280,717			281,037
Non-controlling interest in real estate partnership		3,774			2,885
Total equity including non-controlling interest		284,491			283,922
Total liabilities and equity	$	2,328,446		$	2,347,349

Refer to Notes to Consolidated Financial Statements

57

Bank Mutual Corporation and Subsidiaries

Consolidated Statements of Income

	Year Ended December 31
	2014		2013		2012
	(Dollars in thousands, except per share data)
Interest income:
Loans	$	66,261	$	64,638	$	65,478
Mortgage-related securities		12,850		14,666		17,309
Investment securities		139		54		73
Interest-earning deposits		15		98		162
Total interest income		79,265		79,456		83,022
Interest expense:
Deposit liabilities		4,684		8,325		14,655
Borrowings		4,731		4,785		6,984
Advance payments by borrowers for taxes and insurance		1		2		2
Total interest expense		9,416		13,112		21,641
Net interest income		69,849		66,344		61,381
Provision for loan losses		233		4,506		4,545
Net interest income after provision for loan losses		69,616		61,838		56,836
Non-interest income:
Deposit-related fees and charges		11,985		12,196		12,037
Brokerage and insurance commissions		2,574		3,116		3,009
Mortgage banking revenue, net		2,990		6,876		10,600
Income from bank-owned life insurance (“BOLI”)		2,790		2,387		2,118
Gain on sales of investments		102		–		543
Other-than-temporary impairment (“OTTI”) losses:
Total OTTI losses		–		–		(889	)
Non-credit portion of OTTI losses		–		–		489
Net OTTI losses		–		–		(400	)
Other non-interest income		1,908		1,541		1,352
Total non-interest income		22,349		26,116		29,259
Non-interest expense:
Compensation, payroll taxes, and other employee benefits		41,299		43,854		42,304
Occupancy and equipment		12,787		11,881		11,363
Federal insurance premiums		1,489		1,863		3,308
Advertising and marketing		1,801		1,826		2,139
Losses and expenses on foreclosed real estate, net		986		2,292		6,725
Other non-interest expense		10,099		9,788		10,218
Total non-interest expense		68,461		71,504		76,057
Income before income taxes		23,504		16,450		10,038
Income tax expense		8,850		5,702		3,336
Net income before non-controlling interest		14,654		10,748		6,702
Net loss attributable to non-controlling interests		11		48		52
Net income	$	14,665	$	10,796	$	6,754
Per share data:
Earnings per share–basic	$	0.32	$	0.23	$	0.15
Earnings per share–diluted		0.31		0.23		0.15
Cash dividends per share paid		0.15		0.10		0.05

Refer to Notes to Consolidated Financial Statements

58

Bank Mutual Corporation and Subsidiaries

Consolidated Statements of Total Comprehensive Income

	Year Ended December 31
	2014			2013			2012
	(Dollars in thousands)
Net income before non-controlling interest	$	14,654		$	10,748		$	6,702
Other comprehensive income (loss), net of income taxes:
Unrealized holding gains (losses):
Non-credit portion of OTTI on securities available-for sale, net of deferred income taxes of $(196)		–			–			(293	)
Change in net unrealized gain on securities available-for-sale, net of deferred  income taxes of $(512) in 2014, $(1,424)  in 2013, and $1,593 in 2012		(764	)		(2,125	)		2,378
Reclassification adjustment for gain on securities included in income, net of  income taxes of $(41) in 2014 and $(218) in 2012		(61	)		–			(325	)
		(825	)		(2,125	)		1,760
Defined benefit pension plans:
Unrecognized gain (loss) and net prior service costs, net of deferred income taxes of $(5,328) in 2014, $2,058 in 2013, and $(732) in 2012		(7,992	)		3,086			(1,098	)
Curtailment gain on plan amendment, net of deferred income taxes of $958		–			1,437			–
		(7,992	)		4,523			(1,098	)
Total other comprehensive income (loss), net of income taxes		(8,817	)		2,398			662
Total comprehensive income before non-controlling interest		5,837			13,146			7,364
Comprehensive loss attributable to non-controlling interest		11			48			52
Total comprehensive income	$	5,848		$	13,194		$	7,416

Refer to Notes to Consolidated Financial Statements

59

Bank Mutual Corporation and Subsidiaries

Consolidated Statements of Equity

	Common Stock		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Non- Controlling Interest in Real Estate Partnership			Total
	(Dollars in thousands; except per share data)
Balance at December 31, 2011	$	788	$	490,159		$	140,793		$	(5,379	)	$	(360,590	)	$	2,925		$	268,696
Net income		–		–			6,754			–			–			–			6,754
Net loss attributable to non-controlling interest		–		–			–			–			–			(52	)		(52	)
Other comprehensive income		–		–			–			662			–			–			662
Equity contribution by non-controlling interest		–		–			–			–			–			60			60
Issuance of management recognition plan shares		–		(1,181	)		–			–			1,181			–			–
Share based payments		–		982			–			–			–			–			982
Cash dividends ($0.05 per share)		–		–			(2,316	)		–			–			–			(2,316	)
Balance at December 31, 2012	$	788	$	489,960		$	145,231		$	(4,717	)	$	(359,409	)	$	2,933		$	274,786
Net income		–		–			10,796			–			–			–			10,796
Net loss attributable to non-controlling interest		–		–			–			–			–			(48	)		(48	)
Other comprehensive income		–		–			–			2,398			–			–			2,398
Issuance of management recognition plan shares		–		(1,134	)		–			–			1,134			–			–
Exercise of stock options		–		(134	)		–			–			221			–			87
Share based payments		–		546			–			–			–			–			546
Cash dividends ($0.10 per share)		–		–			(4,643	)		–			–			–			(4,643	)
Balance at December 31, 2013	$	788	$	489,238		$	151,384		$	(2,319	)	$	(358,054	)	$	2,885		$	283,922
Net income		–		–		$	14,665			–			–			–		$	14,665
Net loss attributable to non-controlling interest		–		–			–			–			–			(11	)		(11	)
Other comprehensive loss		–		–			–			(8,817	)		–			–			(8,817	)
Equity contribution by non-controlling interest		–		–			–			–			–			900			900
Issuance of management recognition plan shares		–		(1,538	)		–			–			1,538			–			–
Exercise of stock options		–		(29	)		–			–			49			–			20
Share based payments		–		796			–			–			–			–			796
Cash dividends ($0.15 per share)		–		–			(6,984	)		–			–			–			(6,984	)
Balance at December 31, 2014	$	788	$	488,467		$	159,065		$	(11,136	)	$	(356,467	)	$	3,774		$	284,491

Refer to Notes to Consolidated Financial Statements

60

Bank Mutual Corporation and Subsidiaries

Consolidated Statements of Cash Flows

	Year Ended December 31
	2014			2013			2012
	(Dollars in thousands)
Operating activities:
Net income	$	14,665		$	10,796		$	6,754
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		233			4,506			4,545
Loss on foreclosed real estate, net		763			1,882			5,525
Provision for depreciation		2,917			2,668			2,569
Net OTTI losses		–			–			400
Amortization of mortgage servicing rights		1,772			2,809			3,904
Increase (decrease) in valuation on MSRs		(1	)		(2,395	)		1,528
Net premium amortization on securities		2,216			2,159			4,608
Loans originated for sale		(79,714	)		(243,669	)		(446,358	)
Proceeds from loan sales		78,739			254,685			463,165
Gain on loan sales activities, net		(1,965	)		(4,405	)		(13,206	)
Gain on sales of investments		(102	)		–			(543	)
Deferred income tax expense		7,550			5,207			3,286
Other, net		(3,094	)		4,410			7,850
Net cash provided by operating activities		23,979			38,653			44,027
Investing activities:
Proceeds from sale of investment securities available-for-sale		17,794			–			20,938
Purchases of mortgage-related securities available-for-sale		–			(88,094	)		(51,374	)
Principal payments on mortgage-related securities available-for-sale		104,430			186,674			260,953
Purchases of mortgage-related securities held-to-maturity		–			–			(158,915	)
Principal payments on mortgage-related securities held-to-maturity		21,977			1,354			902
Redemption of FHLB stock		–			4,178			30,251
Purchases of FHLB stock		(1,964	)		(582	)		–
Net increase in loans receivable		(124,794	)		(116,700	)		(100,209	)
Proceeds from sale of foreclosed properties		3,558			10,786			18,801
Net purchases of premises and equipment		(4,133	)		(3,696	)		(2,689	)
Net cash provided (used) by investing activities		16,868			(6,080	)		18,658

(continued)

61

Bank Mutual Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued)

	Year Ended December 31
	2014			2013			2012
	(Dollars in thousands)
Financing activities:
Net decrease in deposit liabilities	$	(43,926	)	$	(105,217	)	$	(153,764	)
Net increase in short-term borrowings		2,800			40,000			–
Proceeds from long-term borrowings		30,000			–			158,935
Repayments of long-term borrowings		(21,231	)		(5,886	)		(101,240	)
Net increase (decrease) in advance payments by borrowers for  taxes and insurance		1,311			(1,525	)		1,764
Cash dividends		(6,984	)		(4,643	)		(2,316	)
Other, net		904			95			60
Net cash used in financing activities		(37,126	)		(77,176	)		(96,561	)
Increase (decrease) in cash and cash equivalents		3,721			(44,603	)		(33,876	)
Cash and cash equivalents at beginning of year		42,456			87,059			120,935
Cash and cash equivalents at end of year	$	46,177		$	42,456		$	87,059
Supplemental information:
Cash received (paid) in period for:
Interest on deposits and borrowings	$	(9,431	)	$	(13,142	)	$	(21,915	)
Income taxes		1,055			(274	)		(173	)
Non-cash transactions:
Loans transferred to foreclosed properties and repossessed assets		2,254			5,443			13,054

Refer to Notes to Consolidated Financial Statements

62

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

1. Summary of Significant Accounting Policies

Business Bank Mutual Corporation (the “Company”), a Wisconsin corporation, is a federal unitary savings and loan holding company which holds all of the outstanding shares of Bank Mutual (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, including businesses and government entities, and using such deposits to originate secured and unsecured loans to commercial and retail borrowers.

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 active wholly-owned subsidiaries: BancMutual Financial & Investment Services, Inc., and MC Development Ltd. MC Development Ltd. owns a 50% interest in Arrowood Development LLC, which is a variable interest entity and is consolidated into the financial statements. All intercompany accounts and transactions have been eliminated in consolidation.

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 interest-bearing deposits in banks and federal funds sold 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 of Chicago. The average amount of required reserve balances for the years ended December 31, 2014 and 2013, was $14,525 and $12,921, respectively.

Federal Home Loan Bank Stock Stock of the Federal Home Loan Bank of Chicago (“FHLB of Chicago”) is owned due to membership requirements and is carried at cost, which is its redemption value, and is included in other assets. FHLB stock is periodically reviewed for impairment based on management’s assessment of the ultimate recoverability of the investment rather than temporary declines in its estimated fair value.

Securities Available-for-Sale and Held-to-Maturity 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 loss in shareholders’ equity. Held-to-maturity securities are stated at amortized cost.

The amortized cost of securities classified as available-for-sale or held-to-maturity 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 securities. Such accretion or amortization is included in interest income from investments. Interest and dividends are 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 and held-to-maturity 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 Company’s intent and/or likely need to sell the security before its anticipated recovery in fair value. Further, if the Company does not expect to recover the entire amortized cost of the security (i.e., a credit loss is expected), the Company will be unable to assert that it will recover its cost basis even if it does not intend to sell the security. If, based upon an analysis of each of these factors, it is determined that the impairment is other-than-temporary, the carrying value of the security is written down through earnings by the amount of the expected credit loss.

63

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

1. Summary of Significant Accounting Policies (continued)

Loans Receivable and Loans Held-for-Sale Loans receivable are recorded at cost, net of undisbursed loan proceeds, allowance for loan losses, unamortized deferred fees and costs, and unamortized purchase premiums or discounts, if any. Loan origination and commitment fees and certain direct loan origination costs are deferred and amortized as an adjustment of loan yield. Purchase premiums and discounts are also amortized as an adjustment of yield.

Loans held-for-sale, which generally consists of recently originated fixed-rate residential mortgage loans, are recorded at market value determined on an individual loan basis. Fees received from the borrower are deferred and recorded as an adjustment of the carrying value.

Accrued Interest on Loans Interest on loans receivable is accrued and credited to income as earned. The Company measures the past due status of a loan by the number of days that have elapsed since the borrower has failed to make a contractual loan payment. Accrual of interest is generally discontinued when either (i) reasonable doubt exists as to the full, timely collection of interest or principal or (ii) when a loan becomes past due by more than 90 days. At that time, the loan is considered impaired and any accrued but uncollected interest is reversed. Additional interest income is recorded only to the extent that payments are received, collection of the principal is reasonably assured, and/or the net recorded investment in the loan is deemed to be collectible. Loans are generally restored to accrual status when the obligation is brought to a current status by the borrower.

Allowance for Loan Losses and Impaired Loans The Company classifies its loan portfolio into six segments for purposes of determining its allowance for loan losses: commercial and industrial, commercial real estate, multi-family real estate, construction and development, one- to four-family real estate, and home equity and other consumer. This segmentation is based on the nature of the loan collateral and the purpose of the loan, which in the judgment of management are the primary risk characteristics that determine the allowance for loan loss. Loans in the commercial and industrial segment are typically secured by equipment, inventory, receivables, other business assets, and in some instances, business and personal real estate, or may be unsecured. Loans in the commercial real estate, multi-family real estate, and one- to four-family real estate segments are secured principally by real estate. The commercial real estate segment consists of non-residential loans secured by office, retail/wholesale, industrial/warehouse, and other properties. The construction and development segment consists of loans secured by commercial real estate, multi-family, and developed and undeveloped land. Loans in the home equity and other consumer segment may be secured by real estate, personal property, or may be unsecured.

The allowance for loan losses for each segment is maintained at a level believed adequate by management to absorb probable losses inherent in each segment and is based on factors such as the size and current risk characteristics of the segments, an assessment of individual problem loans and pools of homogenous loans within the segments, and actual loss, delinquency, and/or risk rating experience within the segments. The Company also considers current economic conditions and/or events in specific industries and geographical areas, including unemployment levels, trends in real estate values, peer comparisons, and other pertinent factors, to include regulatory guidance. Finally, as appropriate, the Company also considers individual borrower circumstances and the condition and fair value of the loan collateral, if any.

The allowance for loan losses for each segment is determined using a combined approach. Individual loans in the segments that have been identified as impaired are analyzed individually to determine an appropriate allowance for loan loss. In addition, the allowance for loan losses for each segment is augmented using a homogenous pool approach for loans in each segment that are current and/or have not been individually identified as impaired loans. The homogenous approach utilizes loss rates that are developed by management using the qualitative factors and other considerations outlined in the previous paragraph.

64

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

1. Summary of Significant Accounting Policies (continued)

Loans are considered impaired when they are identified as such by the Company’s internal risk rating and loss evaluation process or when contractually past due 90 days or more with respect to interest or principal. Factors that indicate impairment include, but are not limited to, deterioration in a borrower’s financial condition, performance, or outlook, decline in the condition, performance, or fair value of the collateral for the loan (if any), payment or other default on the loan, and adverse economic or market developments in the borrower’s region or business segment. Accrual of interest is typically discontinued on impaired loans, although from time-to-time the Company may continue to accrue interest and/or recognize interest income on impaired loans when payments are being received and, in the judgment of management, collection of the principal is reasonably assured and/or the net recorded investment in the loan is deemed to be collectible.

The Company has various policies and procedures in place to monitor its exposure to credit risk including, but not limited to, a formal risk rating process, periodic loan delinquency reporting, periodic loan file reviews, financial updates from and visits to borrowers, and established past-due loan collection procedures. The Company formally evaluates its allowance for loan losses on a quarterly basis or more often as deemed necessary. A provision for loan loss is charged to operations based on this periodic evaluation. Actual loan losses are charged off against the allowance for loan losses, while recoveries of amounts previously charged off are credited to the allowance.

Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on loans, the fair value of underlying collateral (if any), estimated losses on pools of homogeneous loans based on historical loss experience, changes in risk characteristics of the loan portfolio, and consideration of current economic trends, all of which may be susceptible to significant change.

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.

Derivative Financial Instruments 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, 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.

65

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

1. Summary of Significant Accounting Policies (continued)

The Company enters into interest rate swap arrangements to manage the interest rate risk exposure associated with specific commercial loan relationships at the time such loans are originated. These interest rate swaps, as well as the embedded derivatives associated with certain of the Company’s commercial loan relationships, are derivative instruments under GAAP. The Company has not designated any of these derivative instruments as accounting hedges as specified in GAAP. As such, the fair market value of interest rate swaps and embedded derivatives are included in the Company’s assets or liabilities, as the case may be, and periodic changes in fair market value of such derivative instruments are recorded through periodic earnings in other non-interest income.

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 provided such costs do not result in a carrying value in excess of the property’s fair value less estimated costs to sell, in which case such costs are expensed. 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 30 to 45 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.

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 consolidated federal and combined state income tax returns. 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.

In 2013 the IRS issued final tangible property regulations to be effective for the Company’s 2014 federal income tax return. The Company’s adoption of these rules is not expected to have a significant impact on the Company’s financial condition or results of operations.

Earnings (Loss) Per Share Basic and diluted earnings (loss) per share (“EPS”) are computed by dividing net income by the weighted-average number of common shares outstanding for the period. Vested shares of restricted stock which have been awarded under provisions of the Company's 2004 and 2014 Stock Incentive Plans are also considered outstanding for basic EPS. Non-vested restricted stock 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 a qualifying defined benefit plan and a supplemental defined benefit plan. As appropriate, the net periodic pension cost of these plans 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 plans, amortization of prior service cost, and amortization of recognized actuarial gains and losses over the estimated future service period of existing plan participants. Effective January 1, 2014, the Company froze the benefits of participants in the qualified defined benefit pension plan that had less than 20 years of service. This change also resulted in the future benefits under the Company’s supplemental defined benefit pension plan being effectively frozen.

66

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

1. Summary of Significant Accounting Policies (continued)

The Company also has a defined contribution plan. The costs associated with the defined contribution plan consist of a predetermined percentage of individual participant compensation, as well as the cost of discretionary contributions determined by the Company’s board of directors.

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 secured and unsecured loans to commercial and retail borrowers, and marketing annuities and other insurance products.

Recent Accounting Changes In 2011 the Financial Accounting Standards Board (“FASB”) issued new accounting guidelines related to the disclosure of both gross information and net information about instruments eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting agreement. The guidance was effective for interim and fiscal periods beginning on or after January 1, 2013, which for the Company was the first quarter of 2013. The Company's adoption of these new accounting guidelines did not have a material impact on its results of operations or financial condition. However, the guidelines do affect how matters may be disclosed in the financial statements.

In 2012 the FASB issued new accounting guidance related to (i) testing indefinite-lived intangible assets for impairment and (ii) subsequent measurement of an indemnification asset recognized in a government-assisted acquisition of a financial institution. Item (i) was effective for years beginning after September 15, 2012, which was the first quarter of 2013 for the Company. Item (ii) was effective for fiscal years beginning on or after December 15, 2012, which was the first quarter of 2013 for the Company. The Company’s adoption of these new guidelines did not have a material impact in its results of operations or financial condition.

In 2013 the FASB issued new accounting guidance relating to (i) the reporting of reclassifications out of accumulated other comprehensive income or loss; and (ii) the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. Item (i) was effective for fiscal years beginning after December 15, 2012, which was the first quarter of 2013 for the Company. The adoption of this item did not have an effect on the Company’s results of operations or financial condition. Item (ii) was effective for fiscal years beginning after December 15, 2013, which was the first quarter of 2014 for the Company. Adoption of this item did not have a material impact on the Company’s results of operations or financial condition.

In 2013 the FASB issued new accounting guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carry forward, a similar tax loss, or a tax credit carry forward exists. The guidance was effective for fiscal years and interim periods beginning after December 15, 2013, which was the first quarter of 2014 for the Company. Adoption of this item did not have a material impact on the Company’s results of operations or financial condition.

In the first quarter of 2014 the FASB issued new accounting guidance related to troubled debt restructurings by creditors to clarify when an in-substance repossession or foreclosure occurs as satisfaction of a consumer mortgage loan. Although the new guidance is effective for fiscal years beginning after December 15, 2014, which would be the first quarter of 2015 for the Company, early adoption of the new guidance is permitted. Accordingly, the Company adopted the new guidance in the first quarter of 2014 using a prospective transition method. Adoption of this new guidance did not have a material impact on the Company’s results of operations or financial condition. However, it did affect how certain matters are disclosed in the financial statements.

67

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

1. Summary of Significant Accounting Policies (continued)

In the second quarter of 2014 the FASB issued new accounting guidance related to the recognition of revenue from contracts with customers. The guidance is effective for fiscal years and interim periods beginning after December 15, 2016, which will be the first quarter of 2017 for the Company. The Company’s adoption of this item is not expected to have a material impact on its results of operations or financial condition.

In the third quarter of 2014 the FASB issued new accounting guidance related to the classification and measurement of certain government-guaranteed mortgages upon foreclosure. The guidance is effective for fiscal years and interim periods beginning after December 15, 2014, which will be the first quarter of 2015 for the Company. The Company’s adoption of this item is not expected to have a material impact on its results of operations or financial condition.

Reclassifications Certain components of non-interest income in 2013 and 2012 were reclassified to conform to the 2014 presentation format. For the years ended December 31, 2013 and 2012, $6,769 and $6,903 that had been previously reported as “service charges on deposits” in such periods, respectively, were renamed as “deposit-related fees and charges.” These amounts were combined with $5,427 and $5,134 of other fee income from deposit customers that had been previously included in “other non-interest income” in those periods, respectively. Also, for the same years, respectively, net loan servicing revenue of $2,471 and $(2,606) was reclassified from “loan-related fees and servicing revenue, net” and was combined with $4,405 and $13,206 in “gain on loan sales activities, net” and the aggregate amount reported as “mortgage banking revenue, net.” Finally, $844 and $695 in 2013 and 2012, respectively, that was previously included in “loan-related fees and servicing revenue, net,” was reclassified to “other non-interest income.”

68

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

2. Mortgage-Related Securities Available-for-Sale and Held-to-Maturity

The amortized cost and fair value of mortgage-related securities available-for-sale and held-to-maturity are as follows:

	December 31, 2014
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Securities available-for-sale:
Federal Home Loan Mortgage Corporation	$	165,632	$	3,590	$	(54	)	$	169,168
Federal National Mortgage Association		121,501		1,862		(154	)		123,209
Government National Mortgage Association		25		4		–			29
Private-label CMOs		28,998		707		(228	)		29,477
Total available-for-sale	$	316,156	$	6,163	$	(436	)	$	321,883
Securities held-to-maturity:
Federal National Mortgage Association	$	132,525	$	1,592		–		$	134,117
Total held-to-maturity	$	132,525	$	1,592		–		$	134,117

	December 31, 2013
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Securities available-for-sale:
Federal Home Loan Mortgage Corporation	$	223,690	$	5,235	$	(52	)	$	228,873
Federal National Mortgage Association		177,683		1,796		(458	)		179,021
Government National Mortgage Association		29		4		–			33
Private-label CMOs		38,089		855		(275	)		38,669
Total available-for-sale	$	439,491	$	7,890	$	(785	)	$	446,596
Securities held-to-maturity:
Federal National Mortgage Association	$	155,505	$	1	$	(2,283	)	$	153,223
Total held-to-maturity	$	155,505	$	1	$	(2,283	)	$	153,223

69

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

2. Mortgage-Related Securities Available-for-Sale and Held-to-Maturity (continued)

The following tables identify mortgage-related securities by amount of time the securities have had a gross unrealized loss as of the dates indicated:

	December 31, 2014
	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
Securities available-for-sale:
Federal Home Loan Mortgage Corporation	$	9		2	$	5,831	$	45		1	$	5,180	$	54	$	11,011
Federal National Mortgage Association		–		–		–		154		3		13,556		154		13,556
Private-label CMOs		12		1		1,363		216		9		11,821		228		13,184
Total available-for-sale	$	21		3	$	7,194	$	415		13	$	30,557	$	436	$	37,751

	December 31, 2013
	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
Securities available-for-sale:
Federal Home Loan Mortgage Corporation	$	52		1	$	7,375		–		–		–	$	52	$	7,375
Federal National Mortgage Association		458		6		45,822		–		–		–		458		45,822
Private-label CMOs		39		3		5,990	$	236		7	$	10,244		275		16,234
Total available-for-sale	$	549		10	$	59,187	$	236		7	$	10,244	$	785	$	69,431
Securities held-to-maturity:
Federal National Mortgage Association	$	2,283		16	$	125,537		–		–		–	$	2,283	$	125,537
Total held-to-maturity	$	2,283		16	$	125,537		–		–		–	$	2,283	$	125,537

None of the Company’s mortgage-related securities held-to-maturity at December 31, 2014, had an unrealized loss.

.

70

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

2. Mortgage-Related Securities Available-for-Sale and Held-to-Maturity (continued)

The Company determined that the unrealized losses on its mortgage-related securities were temporary as of December 31, 2014 and 2013. The Company does not intend to sell these securities and it is unlikely that it will be required to sell these securities before the recovery of their amortized cost. The Company believes it is probable that it will receive all future contractual cash flows related to these securities. This determination was based on management’s judgment regarding the nature of the loan collateral that supports the securities, a review of the current ratings issued on the securities by various credit rating agencies, recent trends in the fair market values of the securities and, in the case of private-label CMOs, a review of the actual delinquency and/or default performance of the loan collateral that supports the securities.

As of December 31, 2014 and 2013, the Company had private-label CMOs with a fair value of $23,254 and $28,844 respectively, and unrealized gains of $480 and $501, respectively that were rated less than investment grade. These private-label CMOs were analyzed using modeling techniques that considered the priority of cash flows in the CMO structure and various default and loss rate scenarios that management considered appropriate given the nature of the loan collateral. In 2012 the Company recognized $400 in net OTTI losses related to its investment on a number of private-label CMOs. No such losses were recognized in 2014 and 2013. The determination of the net OTTI losses in 2012 was based on modeling techniques that considered the priority of cash flows in the CMO structure and various default and loss rate scenarios that management considered appropriate given the nature of the loan collateral. The following assumptions were used in determining the amount of the credit loss in 2012: (i) prepayment speeds with a range of 5.5% to 16.5% and a weighted-average rate of 9.9%, (ii) default rates with a range of 4.0% to 5.5% and a weighted-average rate of 4.4%, (iii) loss severity rates with a range of 40.0% to 52.0% and a weighted-average rate of 42.1%, and (iv) current credit enhancements with a range of 0.5% to 4.6% and a weighted-average rate of 3.0%.

The following table contains a summary of OTTI related to credit losses that have been recognized in earnings as of the dates indicated, as well as the end of period values for securities that have experienced such losses:

	Year Ended December 31
	2014		2013		2012
Beginning balance of unrealized OTTI related to credit losses	$	789	$	789	$	389
Additional unrealized OTTI related to credit losses for which OTTI was not previously recognized		–		–		146
Additional unrealized OTTI related to credit losses for which OTTI was previously recognized		–		–		254
Net OTTI losses recognized in earnings		–		–		400
Ending balance of unrealized OTTI related to credit losses	$	789	$	789	$	789
Adjusted cost at end of period	$	5,504	$	7,152	$	9,541
Estimated fair value at end of period	$	6,065	$	7,649	$	9,908

Results of operations included gross realized gains on the sale of securities available-for-sale of $102 and $543 in 2014 and 2012, respectively. There were no gross realized losses on the sale of such securities in those same years. In addition, there were no gross realized gains or losses on the sale of securities available-for-sale in 2013.

Mortgage-related securities with a fair value of approximately $79,753 and $74,988 at December 31, 2014 and 2013, respectively, were pledged to secure deposits, FHLB advances, and for other purposes as permitted or required by law.

71

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

3. Loans Receivable

Loans receivable is summarized as follows:	December 31
	2014			2013
Commercial loans:
Commercial and industrial	$	226,537		$	166,788
Commercial real estate		263,512			276,547
Multi-family real estate		322,413			265,841
Construction and development loans:
Commercial real estate		42,405			27,815
Multi-family real estate		211,239			164,685
Land and land development		5,069			6,962
Total construction and development		258,713			199,462
Total commercial loans		1,071,175			908,638
Retail loans:
One- to four-family first mortgages:
Permanent		480,102			449,230
Construction		23,905			40,968
Total one- to four-family first mortgages		504,007			490,198
Home equity loans:
Fixed term home equity		139,046			148,688
Home equity lines of credit		80,692			79,470
Total home equity loans		219,738			228,158
Other consumer loans:
Student		9,692			11,177
Other		12,681			12,942
Total other consumer loans		22,373			24,119
Total retail loans		746,118			742,475
Gross loans receivable		1,817,293			1,651,113
Undisbursed loan proceeds		(162,471	)		(117,439	)
Allowance for loan losses		(22,289	)		(23,565	)
Deferred fees and costs, net		(1,230	)		(1,113	)
Total loans receivable, net	$	1,631,303		$	1,508,996

The Company’s commercial and retail borrowers are located primarily in Wisconsin, Illinois, Michigan, Minnesota, and Iowa, as is the real estate and non-real estate collateral that secures the Company’s loans.

At December 31, 2014 and 2013, certain one- to four-family mortgage loans and home equity loans, as well as certain multi-family mortgage loans, with aggregate carrying values of approximately $342,000 and $327,000, respectively, were pledged to secure FHLB advances.

The unpaid principal balance of loans serviced for third-party investors was $1,087,107 and $1,148,109 at December 31, 2014 and 2013, respectively. These loans are not reflected in the consolidated financial statements.

72

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

3. Loans Receivable (continued)

The following tables summarize the allowance for loan losses by loan portfolio segment during the periods indicated. The tables also summarize the allowance for loan loss and loans receivable as of the dates indicated by the nature of the impairment evaluation, either individually or collectively (the loans receivable amounts in the table are net of undisbursed loan proceeds).

	December 31, 2014
Allowance for loan losses:	Commercial and Industrial			Commercial Real Estate			Multi- Family Real Estate			Construction and Development			One- to Four- Family			Home Equity and Other Consumer			Total
Beginning balance	$	2,603		$	6,377		$	5,931		$	4,160		$	3,220		$	1,274		$	23,565
Provision		(259	)		895			373			(1,467	)		311			380			233
Charge-offs		(59	)		(561	)		(241	)		(34	)		(871	)		(534	)		(2,300	)
Recoveries		64			169			15			142			344			57			791
Ending balance	$	2,349		$	6,880		$	6,078		$	2,801		$	3,004		$	1,177		$	22,289
Loss allowance individually evaluated for impairment		–		$	262		$	642			–			–			–		$	904
Loss allowance collectively evaluated for impairment	$	2,349		$	6,618		$	5,436		$	2,801		$	3,004		$	1,177		$	21,385
Loan receivable balances at December 31, 2014:
Loans individually evaluated for impairment	$	12,343		$	14,822		$	10,654		$	2,166		$	4,839		$	601		$	45,425
Loans collectively evaluated for impairment		214,194			248,690			311,759			110,453			482,791			241,510			1,609,397
Total loans receivable	$	226,537		$	263,512		$	322,413		$	112,619		$	487,630		$	242,111		$	1,654,822

	December 31, 2013
Allowance for loan losses:	Commercial and Industrial			Commercial Real Estate			Multi- Family Real Estate			Construction and Development			One- to Four- Family			Home Equity and Other Consumer			Total
Beginning balance	$	1,686		$	7,354		$	5,195		$	2,617		$	3,267		$	1,458		$	21,577
Provision		1,111			(1,129	)		1,170			1,582			666			1,106			4,506
Charge-offs		(199	)		(514	)		(536	)		(148	)		(1,205	)		(1,389	)		(3,991	)
Recoveries		5			666			102			109			492			99			1,473
Ending balance	$	2,603		$	6,377		$	5,931		$	4,160		$	3,220		$	1,274		$	23,565
Loss allowance individually evaluated for impairment		–		$	412		$	588			–			–			–		$	1,000
Loss allowance collectively evaluated for impairment	$	2,603		$	5,965		$	5,343		$	4,160		$	3,220		$	1,274		$	22,565
Loan receivable balances at December 31, 2013:
Loans individually evaluated  for impairment	$	436		$	16,340		$	8,021		$	18,109		$	5,377		$	780		$	49,063
Loans collectively evaluated for impairment		166,352			260,204			257,820			93,117			455,621			251,497			1,484,611
Total loans receivable	$	166,788		$	276,544		$	265,841		$	111,226		$	460,998		$	252,277		$	1,533,674

73

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

3. Loans Receivable (continued)

	December 31, 2012
Allowance for loan losses:	Commercial and Industrial			Commercial Real Estate			Multi- Family Real Estate			Construction and Development			One- to Four- Family			Home Equity and Other Consumer			Total
Beginning balance	$	2,098		$	9,467		$	7,442		$	4,506		$	3,201		$	1,214		$	27,928
Provision		(302	)		1,825			(1,958	)		803			3,162			1,015			4,545
Charge-offs		(136	)		(4,894	)		(857	)		(2,693	)		(3,182	)		(812	)		(12,574	)
Recoveries		26			956			568			1			86			41			1,678
Ending balance	$	1,686		$	7,354		$	5,195		$	2,617		$	3,267		$	1,458		$	21,577
Loss allowance individually evaluated for impairment	$	62		$	123		$	914		$	295		$	191		$	456		$	2,041
Loss allowance collectively evaluated for impairment	$	1,624		$	7,231		$	4,281		$	2,322		$	3,076		$	1,002		$	19,536
Loan receivable balances at December 31, 2012:
Loans individually evaluated  for impairment	$	1,741		$	24,130		$	6,967		$	14,825		$	8,344		$	1,631		$	57,638
Loans collectively evaluated for impairment		130,695			239,645			257,046			26,852			467,794			245,282			1,367,314
Total loans receivable	$	132,436		$	263,775		$	264,013		$	41,677		$	476,138		$	246,913		$	1,424,952

The Company adjusts certain factors used to determine the allowance for loan losses on loans that are collectively evaluated for impairment. Management considered these adjustments necessary and prudent in light of general uncertainties related to trends in real estate values, economic conditions, and unemployment. The Company estimates that these changes, as well as overall changes in the balance of loans to which the various factors were applied, resulted in a decrease of $1,180 in 2014, an increase of $3,029 in 2013, and a decrease of $87 in 2012, in the total allowance for loan losses.

74

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

3. Loans Receivable (continued)

The following tables present information regarding impaired loans that have a related allowance for loan loss and those that do not as of the dates indicated (the loans receivable amounts in the tables are net of undisbursed loan proceeds):

	December 31, 2014
Impaired loans with an allowance recorded:	Loans Receivable Balance, Net		Unpaid Principal Balance		Related Allowance for Loss		Average Loan Receivable Balance, Net		Interest Income Recognized
Commercial and industrial:
Term loans Term loans		–		–		–	$	6		–
Lines of credit		–		–		–		–		–
Total commercial and industrial		–		–		–		6		–
Commercial real estate:
Office	$	1,922	$	1,938	$	262		384	$	125
Retail/wholesale/mixed		–		–		–		375		–
Industrial/warehouse		–		–		–		473		–
Other		–		–		–		–		–
Total commercial real estate		1,922		1,938		262		1,232		125
Multi-family real estate		1,402		1,402		642		1,423		42
Construction and development:
Commercial real estate		–		–		–		–		–
Multi-family		–		–		–		–		–
Land and land development		–		–		–		–		–
Total construction and development		–		–		–				–
One- to four-family		–		–		–		–		–
Home equity and other consumer:
Home equity		–		–		–		–		–
Student		–		–		–		–		–
Other		–		–		–		–		–
Total home equity and other consumer		–		–		–		–		–
Total with an allowance recorded	$	3,324	$	3,340	$	904	$	2,661	$	167
Impaired loans with no allowance recorded:
Commercial and industrial:
Term loans	$	201	$	345		–	$	207	$	14
Lines of credit		–		–		–		14		–
Total commercial and industrial		201		345		–		221		14
Commercial real estate:
Office		609		774		–		690		45
Retail/wholesale/mixed		1,537		1,943		–		1,425		100
Industrial/warehouse		212		265		–		172		16
Other		29		159		–		53		14
Total commercial real estate		2,387		3,141		–		2,340		175
Multi-family real estate		–		–		–		136		–
Construction and development:
Commercial real estate		597		597		–		597		–
Multi-family real estate		–		–		–		–		–
Land and land development		206		240		–		86		15
Total construction and development		803		837		–		683		15
One- to four-family		4,148		4,750		–		4,005		99
Home equity and other consumer:
Home equity		493		694		–		530		13
Student		–		–		–		–		–
Other		108		110		–		81		–
Total home equity and other consumer		601		804		–		611		13
Total with no allowance recorded	$	8,140	$	9,877		–	$	7,996	$	316

75

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

3. Loans Receivable (continued)

	December 31, 2013
	Loans Receivable Balance, Net		Unpaid Principal Balance		Related Allowance for Loss		Average Loan Receivable Balance, Net		Interest Income Recognized
Impaired loans with an allowance recorded:
Commercial and industrial:
Term loans		–		–		–	$	20		–
Lines of credit		–		–		–		–		–
Total commercial and industrial		–		–		–		20		–
Commercial real estate:
Office		–		–		–		26		–
Retail/wholesale/mixed	$	716	$	716	$	188		667	$	26
Industrial/warehouse		1,196		1,268		224		996		88
Other		–		–		–		–		–
Total commercial real estate		1,912		1,984		412		1,689		114
Multi-family real estate		1,443		1,443		588		1,940		72
Construction and development:
Commercial real estate		–		–		–		–		–
Multi-family real estate		–		–		–		–		–
Land and land development		–		–		–		386		–
Total construction and development		–		–		–		386		–
One- to four-family		–		–		–		–		–
Home equity and other consumer:
Home equity		–		–		–		–		–
Student		–		–		–		–		–
Other		–		–		–		–		–
Total home equity and other consumer		–		–		–		–		–
Total with an allowance recorded	$	3,355	$	3,427	$	1,000	$	4,035	$	186
Impaired loans with no allowance recorded:
Commercial and industrial:
Term loans	$	284	$	917		–	$	413	$	38
Lines of credit		–		115		–		23		–
Total commercial and industrial		284		1,032		–		436		38
Commercial real estate:
Office		810		1,693		–		837		41
Retail/wholesale/mixed		1,392		5,191		–		2,556		148
Industrial/warehouse		205		312		–		421		11
Other		82		201		–		541		17
Total commercial real estate		2,489		7,397		–		4,355		217
Multi-family real estate		340		2,070		–		2,802		–
Construction and development:
Commercial real estate		597		597		–		241		32
Multi-family real estate		–		107		–		–		–
Land and land development		131		1,325		–		285		24
Total construction and development		728		2,029		–		526		56
One- to four-family		4,556		5,717		–		6,079		138
Home equity and other consumer:
Home equity		676		1,004		–		946		22
Student		–		–		–				–
Other		104		116		–		59		1
Total home equity and other consumer		780		1,120		–		1,005		23
Total with no allowance recorded	$	9,177	$	19,365		–	$	15,203	$	472

76

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

3. Loans Receivable (continued)

The following tables present information relating to the Company’s internal risk ratings of its loans receivable as of the dates indicated (all amounts in the tables are net of undisbursed loan proceeds):

	December 31, 2014
	Pass		Watch		Special Mention		Substandard		Total
Commercial and industrial:
Term loans	$	60,393	$	1,943	$	716	$	939	$	63,991
Lines of credit		132,921		14,385		3,836		11,404		162,546
Total commercial and industrial		193,314		16,328		4,552		12,343		226,537
Commercial real estate:
Office		55,306		9,033		15,351		4,950		84,640
Retail/wholesale/mixed use		99,775		8,938		21,950		6,714		137,377
Industrial/warehouse		31,819		1,413		17		3,129		36,378
Other		5,088		–		–		29		5,117
Total commercial real estate		191,988		19,384		37,318		14,822		263,512
Multi-family real estate		301,162		10,597		–		10,654		322,413
Construction and development:
Commercial real estate		17,143		–		–		597		17,740
Multi-family real estate		89,811		–		–		–		89,811
Land and land development		3,412		87		–		1,569		5,068
Total construction/development		110,366		87		–		2,166		112,619
One- to four-family		480,521		678		1,592		4,839		487,630
Home equity and other consumer:
Home equity		219,245		–		–		493		219,738
Student		9,692		–		–		–		9,692
Other		12,573		–		–		108		12,681
Total home equity and other consumer		241,510		–		–		601		242,111
Total	$	1,518,861	$	47,074	$	43,462	$	45,425	$	1,654,822

77

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

3. Loans Receivable (continued)

	December 31, 2013
	Pass		Watch		Special Mention		Substandard		Total
Commercial and industrial:
Term loans	$	64,181	$	6,877	$	553	$	389	$	72,000
Lines of credit		66,838		19,721		8,182		47		94,788
Total commercial and industrial		131,019		26,598		8,735		436		166,788
Commercial real estate:
Office		53,425		9,206		15,240		5,268		83,139
Retail/wholesale/mixed use		89,367		9,213		15,772		9,590		123,942
Industrial/warehouse		45,931		670		9,237		1,400		57,238
Other		12,143		–		–		82		12,225
Total commercial real estate		200,866		19,089		40,249		16,340		276,544
Multi-family real estate		239,985		14,242		3,593		8,021		265,841
Construction and development:
Commercial real estate		21,279		–		–		597		21,876
Multi-family real estate		66,767		–		–		15,666		82,433
Land and land development		4,814		257		–		1,846		6,917
Total construction/development		92,860		257		–		18,109		111,226
One- to four-family		454,662		834		125		5,377		460,998
Home equity and other consumer:
Home equity		227,482		–		–		676		228,158
Student		11,177		–		–		–		11,177
Other		12,838		–		–		104		12,942
Total home equity and other consumer		251,497		–		–		780		252,277
Total	$	1,370,889	$	61,020	$	52,702	$	49,063	$	1,533,674

Loans rated “pass” or “watch” are generally current on contractual loan and principal payments and comply with other contractual loan terms. Pass loans generally have no noticeable credit deficiencies or potential weaknesses. Loans rated watch, however, will typically exhibit early signs of credit deficiencies or potential weaknesses that deserve management’s close attention. Loans rated “special mention” do not currently expose the Company to a sufficient degree of risk to warrant a lower rating, but possess clear trends in credit deficiencies or potential weaknesses that deserve management’s close attention. The allowance for loan losses on loans rated pass, watch, or special mention is typically evaluated collectively for impairment using a homogenous pool approach. This approach utilizes quantitative factors developed by management from its assessment of historical loss experience, qualitative factors, and other considerations.

Loans rated “substandard” involve a distinct possibility that the Company could sustain some loss if deficiencies associated with the loan are not corrected. Loans rated “doubtful” indicate that full collection is highly questionable or improbable. The Company did not have any loans that were rated doubtful at December 31, 2014 and 2013. Loans rated substandard or doubtful that are also considered in management’s judgment to be impaired are generally analyzed individually to determine an appropriate allowance for loan loss. A loan rated “loss” is considered uncollectible, even if a partial recovery could be expected in the future. The Company generally charges off loans that are rated as a loss. As such, the Company did not have any loans that were rated loss at December 31, 2014 and 2013.

78

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

3. Loans Receivable (continued)

The following tables contain information relating to the past due and non-accrual status of the Company’s loans receivable as of the dates indicated (all amounts in the table are net of undisbursed loan proceeds):

	December 31, 2014
	Past Due Status												Total
	30-59 Days		60-89 Days		> 90 Days		Total Past Due		Total Current		Total Loans		Non- Accrual
Commercial and industrial:
Term loans		–	$	63	$	83	$	146	$	63,845	$	63,991	$	167
Lines of credit	$	36		–		–		36		162,510		162,546		34
Total commercial and industrial		36		63		83		182		226,355		226,537		201
Commercial real estate:
Office		–		1,922		239		2,161		82,479		84,640		2,531
Retail/wholesale/mixed		654		715		244		1,613		135,764		137,377		1,537
Industrial/warehouse		–		–		–		–		36,378		36,378		212
Other		–		–		–		–		5,117		5,117		29
Total commercial real estate		654		2,637		483		3,774		259,738		263,512		4,309
Multi-family real estate		558		–		–		558		321,855		322,413		1,402
Construction and development:
Commercial real estate		–		–		597		597		17,143		17,740		597
Multi-family real estate		–		–		–		–		89,811		89,811		–
Land and land development		–		16		–		16		5,052		5,068		206
Total construction		–		16		597		613		112,006		112,619		803
One- to four-family		7,853		2,687		3,988		14,528		473,102		487,630		4,148
Home equity and other consumer:
Home equity		919		257		493		1,669		218,069		219,738		493
Student		167		145		540		852		8,840		9,692		–
Other		100		40		108		248		12,433		12,681		108
Total home equity and other consumer		1,186		442		1,141		2,769		239,342		242,111		601
Total	$	10,287	$	5,845	$	6,292	$	22,424	$	1,632,398	$	1,654,822	$	11,464

79

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

3. Loans Receivable (continued)

	December 31, 2013
	Past Due Status												Total
	30-59 Days		60-89 Days		> 90 Days		Total Past Due		Total Current		Total Loans		Non- Accrual
Commercial and industrial:
Term loans		–		–	$	140	$	140	$	71,860	$	72,000	$	284
Lines of credit	$	98		–		–		98		94,690		94,788		–
Total commercial and industrial		98		–		140		238		166,550		166,788		284
Commercial real estate:
Office		429		–		381		810		82,329		83,139		810
Retail/wholesale/mixed		1,665		–		233		1,898		122,044		123,942		2,108
Industrial/warehouse		1,196		–		160		1,356		55,882		57,238		1,401
Other		–		–		–		–		12,225		12,225		82
Total commercial real estate		3,290		–		774		4,064		272,480		276,544		4,401
Multi-family real estate		–	$	616		340		956		264,885		265,841		1,783
Construction and development:
Commercial real estate		–		–		597		597		21,279		21,876		597
Multi-family real estate		–		–		–		–		82,433		82,433		–
Land and land development		–		–		–		–		6,917		6,917		131
Total construction		–		–		597		597		110,629		111,226		728
One- to four-family		6,334		1,564		4,556		12,454		448,544		460,998		4,556
Home equity and other consumer:
Home equity		566		444		676		1,686		226,472		228,158		676
Student		238		172		443		853		10,324		11,177		–
Other		49		39		104		192		12,750		12,942		104
Total home equity and other consumer		853		655		1,223		2,731		249,546		252,277		780
Total	$	10,575	$	2,835	$	7,630	$	21,040	$	1,512,634	$	1,533,674	$	12,532

As of December 31, 2014 and 2013, $540 and $443 in student loans, respectively, were 90-days past due, but remained on accrual status. No other loans 90-days past due were in accrual status as of December 31, 2014 and 2013.

The Company classifies a loan modification as a troubled debt restructuring (“TDR”) when it has granted a borrower experiencing financial difficulties a concession that it would otherwise not consider. Loan modifications that result in insignificant delays in the receipt of payments (generally six months or less) are not considered TDRs under the Company’s TDR policy. TDRs are relatively insignificant and/or infrequent in the Company and generally consist of loans placed in interest-only status for a short period of time or payment forbearance for greater than six months. As of December 31, 2014 and 2013, TDRs were $4,872 and $4,298, respectively, and consisted primarily of one- to four-family mortgage loans. TDRs in accrual status as of those same dates were $3,315 and $3,310, respectively. Additions to TDRs during the twelve month periods ended as of those dates were immaterial. In addition, TDRs that experienced a payment default within one year of their restructuring were also immaterial during these twelve month periods. TDRs are evaluated for impairment and appropriate credit losses are recorded in accordance with the Company’s accounting policies and GAAP.

80

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

4. Mortgage Servicing Rights

The activity in mortgage servicing rights during the years ended December 31 is presented in the following table.

	2014			2013			2012
Mortgage servicing rights at beginning of year	$	8,738		$	9,217		$	8,269
Additions		901			2,330			4,852
Amortization		(1,772	)		(2,809	)		(3,904	)
Mortgage servicing rights at end of year		7,867			8,738			9,217
Valuation allowance at end of year		–			(1	)		(2,396	)
Mortgage servicing rights, net, at end of year	$	7,867		$	8,737		$	6,821

The following table shows the estimated future amortization expense for mortgage servicing rights for the years ended December 31:

2015	$	1,228
2016		1,053
2017		898
2018		766
2019		652
Thereafter		3,270
Total	$	7,867

The projection of amortization for mortgage servicing rights is based on existing asset balances and the interest rate environment as of December 31, 2014. Future amortization expense may be significantly different depending upon changes in the mortgage servicing portfolio, mortgage interest rates, loan prepayments, and market conditions.

5. Other Assets

Other assets are summarized as follow:

	December 31
	2014		2013
Accrued interest:
Loans receivable	$	4,748	$	4,582
Mortgage-related securities		1,027		1,328
Total accrued interest		5,775		5,910
Foreclosed
Commercial real estate		2,566		4,236
Land and land development		1,693		2,171
One-to four-family first mortgages		409		329
Total foreclosed properties and repossessed assets		4,668		6,736
Bank-owned life insurance		59,830		59,451
Premises and equipment, net		52,594		51,565
Deferred tax asset, net		25,595		27,387
Federal Home Loan Bank stock, at cost		14,209		12,245
Other assets		22,183		19,967
Total other assets	$	184,854	$	183,261

Residential one-to four-family mortgage loans that were in the process of foreclosure were $3,243 and $3,060 at December 31, 2014 and 2013, respectively.

81

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

5. Other Assets (continued)

Premises and equipment are summarized as follows:

	December 31
	2014			2013
Land and land improvements	$	17,782		$	17,914
Office buildings		57,864			56,151
Furniture and equipment		18,830			18,588
Leasehold improvements		1,191			940
Total cost		95,667			93,593
Accumulated depreciation and amortization		(43,073	)		(42,028	)
Total premises and equipment, net	$	52,594		$	51,565

The Company leases various branch offices, office facilities and equipment under non-cancelable operating leases which expire on various dates through 2032. 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, 2014:

	Amount
2015	$	1,009
2016		909
2017		598
2018		569
2019		578
Thereafter		2,820
Total	$	6,483

Rent expense was $927, $955, and $955, in 2014, 2013, and 2012, respectively.

6. Deposits Liabilities

Deposit liabilities are summarized as follows:

	December 31
	2014		2013
Checking accounts:
Non-interest-bearing	$	187,852	$	161,639
Interest-bearing		253,595		245,923
Total checking accounts		441,447		407,562
Money market accounts		532,705		501,020
Savings accounts		220,557		220,236
Certificate of deposits:
Due within one year		383,814		523,690
After one but within two years		66,586		83,192
After two but within three years		48,328		8,502
After three but within four years		10,401		8,152
After four but within five years		14,918		10,328
Total certificates of deposit		524,047		633,864
Total deposit liabilities	$	1,718,756	$	1,762,682

82

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

6. Deposits Liabilities (continued)

The aggregate amount of certificate accounts with balances of one hundred thousand dollars or more was $142,141 and $184,121 at December 31, 2014 and 2013, respectively.

Interest expense on deposits was as follows:

	Year Ended December 31
	2014		2013		2012
Interest-bearing checking accounts	$	30	$	32	$	51
Money market accounts		735		694		716
Savings accounts		55		62		63
Certificate of deposits		3,864		7,537		13,825
Total interest expense on deposit liabilities	$	4,684	$	8,325	$	14,655

7. Borrowings

Borrowings consist of the following:

	December 31, 2014					December 31, 2013
			Weighted-					Weighted-
			Average					Average
	Balance		Rate			Balance		Rate
FHLB overnight advances	$	42,800		0.13	%	$	40,000		0.13	%
FHLB term advances maturing in:
2015		18,450		0.79			23,450		0.80
2016		48,450		0.82			23,450		1.04
2017		32,765		1.50			37,795		1.48
2018		37,293		2.16			42,470		2.11
2019		19,307		3.00			19,477		3.02
2020		27,248		3.64			27,624		3.66
2021 and thereafter		30,156		3.67			30,634		3.68
Total borrowings	$	256,469		1.78	%	$	244,900		1.91	%

All of the Company’s FHLB advances are subject to prepayment penalties if voluntarily repaid prior to their stated maturity.

The Company is required to pledge certain unencumbered mortgage loans and mortgage-related securities as collateral against its outstanding advances from the FHLB of Chicago. Advances are also collateralized by the shares of capital stock of the FHLB of Chicago that are owned by the Company. The Company’s borrowings at the FHLB of Chicago are limited to the lesser of: (i) 35% of total assets; (ii) twenty (20) times the FHLB of Chicago capital stock owned by the Company; or (iii) 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.

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, 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.

83

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

8. Shareholders’ Equity (continued)

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 to risk-weighted assets, and of Tier I capital to average assets (as these terms are defined in regulations). Management believes, as of December 31, 2014, 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.

The Bank’s actual and required regulatory capital amounts and ratios as of December 31, 2014 and 2013, are presented in the following table:

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Regulatory Capital Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2014:
Total capital (to risk-weighted assets)	$	285,406		18.19	%	$	125,489		8.00	%	$	156,861		10.00	%
Tier 1 capital (to risk-weighted assets)		265,765		16.94			62,744		4.00			94,117		6.00
Tier 1 capital (to adjusted total assets)		265,765		11.44			92,957		4.00			116,197		5.00
As of December 31, 2013:
Total capital (to risk-weighted assets)	$	272,074		17.82	%	$	122,159		8.00	%	$	152,698		10.00	%
Tier 1 capital (to risk-weighted assets)		252,931		16.56			61,079		4.00			91,619		6.00
Tier 1 capital (to adjusted total assets)		252,931		10.89			92,943		4.00			116,179		5.00

84

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

8. Shareholders’ Equity (continued)

The following table presents reconciliations of the Bank’s equity under generally accepted accounting principles to capital as determined by regulators:

	December 31, 2014						December 31, 2013
	Risk- Based Capital			Tier 1 (Core) Capital			Risk- Based Capital			Tier 1 (Core) Capital
Total equity including non-controlling interest according to the Bank’s records	$	265,948		$	265,948		$	272,407		$	272,407
Net unrealized gain on securities available for sale, net of taxes		(3,430	)		(3,430	)		(4,255	)		(4,255	)
Net unrealized loss and net prior service costs for defined pension plans, net of taxes		14,566			14,566			6,574			6,574
Deposit-based intangible, net of taxes		(70	)		(70	)		(256	)		(256	)
Investment in “non-includable” subsidiaries		(3,249	)		(3,249	)		(3,039	)		(3,039	)
Disallowed deferred tax assets		(8,000	)		(8,000	)		(18,500	)		(18,500	)
Allowance for loan losses, as limited		19,641			–			19,143			–
Regulatory capital	$	285,406		$	265,765		$	272,074		$	252,931

The following table summarizes the components of accumulated other comprehensive loss, net of related income tax effects, as of the dates shown:

	December 31
	2014			2013
Net unrealized gain on securities available-for-sale	$	3,430		$	4,255
Qualified and supplemental defined benefit plans		(14,458	)		(6,518	)
Other post-retirement benefit plans		(108	)		(56	)
Accumulated other comprehensive loss	$	(11,136	)	$	(2,319	)

85

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and 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
	2014		2013		2012
Basic earnings per share:
Net income	$	14,665	$	10,796	$	6,754
Weighted-average shares outstanding		46,123,884		46,204,917		46,184,264
Vested restricted shares during the period		40,146		25,710		7,104
Basic shares outstanding		46,164,030		46,230,627		46,191,368
Basic earnings per share	$	0.32	$	0.23	$	0.15
Diluted earnings per share:
Net income	$	14,665	$	10,796	$	6,754
Weighted-average shares outstanding used in basic earnings per share		46,164,030		46,230,627		46,191,368
Net dilutive effect of:
Stock option shares		251,949		162,239		8,654
Non-vested restricted shares		29,319		30,725		9,557
Diluted shares outstanding		46,445,298		46,423,591		46,209,579
Diluted earnings per share	$	0.31	$	0.23	$	0.15

The Company had stock options for 438,000, 1,778,000, and 2,268,500 shares outstanding at December 31, 2014, 2013, and 2012, 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 $7.81, $10.53, and $9.37, 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 $648 in 2014, $206 in 2013, and $198 in 2012.

The Company also has a qualified defined benefit pension plan covering employees meeting certain minimum age and service requirements and a supplemental defined benefit pension plan for certain eligible employees. The supplemental pension plan is funded through a "rabbi trust" arrangement. The benefits under these plans 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.

Effective January 1, 2013, the Company closed the qualified defined benefit pension plan to employees that were not eligible to participate in the plan as of that date, as well as any employees hired after that date. In addition, effective for service performed after March 1, 2013, the Company reduced certain benefits paid under the qualified and supplemental plans related to any employee service performed after that date. Finally, effective January 1, 2014, the Company froze the benefits of participants in the qualified defined benefit pension plan that had less than 20 years of service. This change also resulted in the future benefits under the Company’s supplemental defined benefit pension plan being effectively frozen. The effect of freezing the qualified plan was a curtailment gain, which reduced the projected benefit obligation and the unrecognized loss by $2,395 in 2013. This amount was recognized through accumulated other comprehensive loss in 2013.

86

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

10. Employee Benefit Plans (continued)

The changes in plan assets and benefit obligations at December 31, 2014 and 2013, are presented in the following table.

	Qualified						Supplemental
	Pension Plan						Pension Plan
	2014			2013			2014			2013
Change in plan assets:
Fair value of plan assets at beginning of year	$	49,256		$	51,412			–			–
Actual return on plan assets		2,684			(725	)		–			–
Employer contributions		–			–		$	1,097		$	579
Benefits paid		(1,779	)		(1,431	)		(1,097	)		(579	)
Fair value of plan assets at end of year		50,161			49,256			–			–
Change in benefit obligation:
Benefit obligation at beginning of year		57,854			62,838			10,183			10,624
Service cost		897			3,081			–			160
Interest cost		2,668			2,300			453			388
Actuarial loss (gain)		12,119			(6,539	)		1,575			(410	)
Curtailment gain on plan amendment		–			(2,395	)		–			–
Benefits paid		(1,779	)		(1,431	)		(1,097	)		(579	)
Benefit obligation at end of year		71,759			57,854			11,114			10,183
Funded status at the end of the year	$	(21,598	)	$	(8,598	)	$	(11,114	)	$	(10,183	)

The underfunded status of the qualified and supplemental pension plans at December 31, 2014, are recognized in the Consolidated Statement of Financial Condition as accrued pension liability, which is included as a component of other liabilities.

The following tables summarize the changes in pension plan assets and benefit obligations recognized in accumulated other comprehensive loss, net of related income tax effect, for the periods indicated:

	Qualified						Supplemental
	Pension Plan						Pension Plan
	2014			2013			2014			2013
Balance in accumulated other comprehensive loss at the beginning of year	$	(5,857	)	$	(9,844	)	$	(661	)		(1,154	)
Change in unrecognized loss		(6,999	)		2,550			(941	)		467
Curtailment gain on plan amendment		–			1,437			–			–
Change in prior service cost		–			–			–			26
Total recognized in other comprehensive loss		(6,999	)		3,987			(941	)		493
Balance in accumulated other comprehensive loss at the end of year	$	(12,856	)	$	(5,857	)	$	(1,602	)	$	(661	)

The $1,602 in accumulated other comprehensive loss as of December 31, 2014, for the supplemental pension plan consisted of $1,602 in unrecognized loss. The $661 in accumulated other comprehensive loss as of December 31, 2013, for the supplemental pension plan consisted of $635 in unrecognized loss and $26 in prior service costs. All period-end balances in the table for the qualified pension plan consisted of unrecognized loss.

87

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

10. Employee Benefit Plans (continued)

The estimated net of tax costs that will be amortized from accumulated other comprehensive loss into net periodic cost in 2015 is $2,623 for the qualified plan. The accumulated benefit obligations for the qualified defined benefit pension plan were $70,163 at December 31, 2014, and $54,703 at December 31, 2013.

The assumptions used to determine the benefit obligations as of December 31 is as follows:

	2014			2013
Discount rate		3.74	%		4.70	%
Rate of increase in compensation levels		3.00			3.00
Expected long-term rate of return on plan assets (qualified plan)		6.00			6.00

The assumptions used to determine the net cost for the years ended December 31 is as follows:

	2014			2013			2012
Discount rate		4.70	%		3.70	%		4.21	%
Rate of increase in compensation levels		3.00			3.00			3.00
Expected long-term rate of return on plan assets (qualified plan)		6.00			6.50			6.50

The expected long-term rate of return was estimated using a combination of the historical and expected rate of return for immediate participation guarantee contracts, which is the primary asset of the qualified plan.

Using an actuarial measurement date of December 31, 2014, 2013, and 2012, components of net periodic benefit cost follow:

	2014			2013			2012
Qualified pension plan:
Interest cost	$	2,668		$	2,300		$	2,254
Service cost		897			3,081			2,898
Expected return on plan assets		(2,891	)		(3,297	)		(3,022	)
Amortization of net loss		661			1,732			1,759
Net periodic cost	$	1,335		$	3,816		$	3,889
Supplemental pension plan:
Interest cost	$	453		$	388		$	377
Service cost		–			160			116
Amortization of prior service cost		–			44			13
Amortization of net loss from earlier periods		6			368			–
Net periodic cost	$	459		$	960		$	506

At December 31, 2014, the projected benefit payments for each of the plans are as follows:

	Qualified Pension Plan		Supplemental Pension Plan		Total
2015	$	2,341	$	970	$	3,311
2016		2,615		910		3,525
2017		2,827		850		3,677
2018		3,064		811		3,875
2019		3,277		788		4,065
2020 – 2024		19,491		3,736		23,227
Total	$	33,615	$	8,065	$	41,680

88

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

10. Employee Benefit Plans (continued)

The following tables summarize the fair value of the Company’s qualified pension plan assets as of the dates indicated:

	December 31, 2014
			Fair Value Hierarchy
	Amount		Level 1		Level 2		Level 3
Asset category:
Money market fund	$	385		–	$	385		–
Equity security		1,135	$	1,135		–		–
Immediate participation guarantee contract		48,641		–		–	$	48,641
Total	$	50,161	$	1,135	$	385	$	48,641

	December 31, 2013
			Fair Value Hierarchy
	Amount		Level 1		Level 2		Level 3
Asset category:
Money market fund	$	354		–	$	354		–
Equity security		1,173	$	1,173		–		–
Immediate participation guarantee contract		47,729		–		–	$	47,729
Total	$	49,256	$	1,173	$	354	$	47,729

The investment objective is to minimize risk. The assets of the qualified pension plan are concentrated in a group annuity contract issued by a life insurance company. Pension plan contributions are maintained in the general account of the insurance company, which invests primarily in corporate and government notes and bonds with ten to fifteen years to maturity. The group annuity contract is valued at fair value by discounting the related cash flows based on current yields of similar instruments with comparable durations and considering the credit worthiness of the issuer.

The equity securities are shares of stock issued by the life insurance company when it demutualized. This investment is valued at the closing price reported in the active market in which the security is traded. The money market fund, which invests in short-term U.S. government securities, is based on a $1.00 net asset value (“NAV”) specified by the fund manager. The fund is not traded in an active market. The fund manager bases its estimate of the NAV on quoted prices for similar assets in active markets.

The following table presents a summary of the changes in the fair value of the pension plan’s Level 3 asset during the periods indicated. As noted above, the Company’s Level 3 asset consists entirely of a group annuity contract issued by an insurance company.

	2014			2013
Fair value at the beginning of the period	$	47,729		$	50,279
Actual return on plan assets		2,691			(1,119	)
Employer contribution		–			–
Benefits paid		(1,779	)		(1,431	)
Fair value at the end of the period	$	48,641		$	47,729

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.

89

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

10. Employee Benefit Plans (continued)

The liabilities related to these plans were $4,258 and $3,553 at December 31, 2014 and 2013 respectively. The net expense related to these plans for the years ended December 31, 2014, 2013, and 2012 was $839, $199, and $189, respectively.

11. Stock-Based Benefit Plans

In 2004 the Company’s shareholders approved the 2004 Stock Incentive Plan (the “2004 Plan”). Options granted under the 2004 Plan vested over five years and had expiration terms of ten years. The 2004 Plan also provided for restricted stock awards that also vested over five years. The 2004 Plan terminated on February 1, 2014, in accordance with the terms of the plan. Options awarded under the 2004 Plan will remain outstanding until exercised, forfeited, or expired.

In May 2014 the Company’s shareholders approved the 2014 Incentive Compensation Plan (the “2014 Plan”), which provides for the award of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, and cash awards. Stock-related awards under the 2014 Plan vest over a period of three or more years and, if applicable, have a maximum term of ten years. The number of shares of common stock of the Company that may be issued under the 2014 Plan is limited to 3,000,000 shares. As of December 31, 2014, 2,939,500 shares remain eligible for award under the 2014 Plan.

The Company has no stock compensation plans that have not been approved by shareholders.

Restricted stock grants are amortized to compensation expense as the Company’s employees and directors become vested in the shares. The amount amortized to expense was $376 , $237 , and $186 in 2014, 2013, and 2012, respectively. Outstanding non-vested restricted stock grants had a fair value of $1,382 and an unamortized cost of $1,142 at December 31, 2014. The cost of these shares is expected to be recognized over a weighted-average period of 1.7 years.

The Company recorded stock option compensation expenses of $465, $301, and $232, for 2014, 2013, and 2012, respectively. As of December 31, 2014, there was $982 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 1.58 years.

The following schedule reflects activity in the Company’s vested and non-vested stock options and related weighted-average exercise prices for the periods indicated.

	Year Ended December 31
	2014					2013					2012
	Stock Options			Weighted- Average Exercise		Stock Options			Weighted- Average Exercise		Stock Options			Weighted- Average Exercise
Outstanding at beginning of year		2,955,000		$	8.0742		2,671,000		$	8.4711		2,382,500		$	9.4637
Granted		276,000			6.9653		352,000			4.9439		412,500			3.3999
Exercised		(4,000	)		5.0500		(18,200	)		4.7764		–			–
Forfeited		(60,000	)		11.9737		(49,800	)		8.4373		(124,000	)		10.6730
Expired		(1,536,000	)		10.6730		–			–		–			–
Outstanding at end of year		1,631,000		$	5.3032		2,955,000		$	8.0742		2,671,000		$	8.4711

90

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

11. Stock-Based Benefit Plans (continued)

The following table provides additional information regarding the Company’s outstanding options as of December 31, 2014.

	Remaining		Non-Vested Options				Vested Options
	Contractual Life		Stock Options		Intrinsic Value		Stock Options		Intrinsic Value
Exercise price:
$11.160		3.3		–		–		32,000		–
$12.025		3.6		–		–		50,000		–
$7.226		5.3		10,000		–		40,000		–
$4.740		6.0		14,000	$	30		56,000	$	119
$5.050		6.0		130,000		235		219,000		396
$4.300		6.2		10,000		26		15,000		38
$3.720		6.6		7,000		22		10,500		33
$3.390		7.0		223,500		776		176,000		611
$3.800		7.3		6,000		18		4,000		12
$4.820		8.1		224,000		457		78,000		159
$5.360		8.3		16,000		24		4,000		6
$5.700		8.4		16,000		19		4,000		5
$6.340		8.6		8,000		4		2,000		1
$7.170		9.1		213,500		–		15,000		–
$6.010		9.3		7,500		6		–		–
$5.580		9.4		20,000		20		–		–
$6.100		9.6		20,000		15		–		–
Total				925,500	$	1,652		705,500	$	1,380
Weighted-average remaining contractual life				7.8 years				6.3 years
Weighted-average exercise price			$	5.1505			$	5.4917

The total intrinsic value of options exercised was $5 and $25 during 2014 and 2013, respectively. There were no options exercised in 2012. The weighted-average grant date fair value of non-vested options at December 31, 2014, was $1.45 per share. In 2014 60,000 non-vested options were forfeited.

The Company uses the Black-Scholes option-pricing model to estimate the fair value of granted options. This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. However, the Company's stock options have characteristics significantly different from traded options and changes in the subjective input assumptions can materially affect the fair value estimate. Option valuation models such as Black-Scholes require the input of highly subjective assumptions including the expected stock price volatility, which is computed using ten 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 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 following weighted-average assumptions were used to value 276,000 options granted during 2014: risk free interest rate of 2.37%, dividend yield of 1.82%, expected stock volatility of 32%, and expected term to exercise of 7.5 years. The following weighted-average assumptions were used to value 352,000 options granted during 2013: risk free interest rate of 1.28%, dividend yield of 1.67%, expected stock volatility of 30%, and expected term to exercise of 7.5 years. The following weighted-average assumptions were used to value 412,500 options granted during 2012: risk free interest rate of 1.50%, dividend yield of 1.18%, expected stock volatility of 25%, and expected term to exercise of 7.5 years.

91

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

12. Income Taxes

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 state income tax examinations for years prior to 2011 and 2010, respectively. If any interest and/or penalties would be imposed by an appropriate taxing authority, the Company would report the interest component as a reduction of income before income taxes and would report penalties through income tax expense. The Company had no material uncertain tax positions and had not recorded a liability for unrecognized tax benefits as of or during the three years ended December 31, 2014.

The Company’s provision for income taxes consists of the following for the periods indicated:

	Year Ended December 31
	2014		2013		2012
Current income tax expense:
Federal	$	476	$	487	$	47
State		824		8		3
Current income tax expense		1,300		495		50
Deferred income tax expense:
Federal		5,888		4,077		2,629
State		1,662		1,130		657
Deferred income tax expense		7,550		5,207		3,286
Income tax expense	$	8,850	$	5,702	$	3,336

Income tax expense differs from the provision computed at the federal statutory corporate rate as follows:

	Year Ended December 31
	2014			2013			2012
Income before income taxes	$	23,504		$	16,450		$	10,038
Tax expense at federal statutory rate	$	8,230		$	5,774		$	3,531
Increase (decrease) in taxes resulting from:
State income taxes, net of federal tax benefit		1,095			741			429
Bank-owned life insurance		(977	)		(835	)		(741	)
State income tax settlement, net of federal benefit		518			–			–
Other		(16	)		22			117
Income tax expense	$	8,850		$	5,702		$	3,336

92

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

12. Income Taxes (continued)

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
	2014		2013
Deferred tax assets:
Federal net operating losses and AMT credits	$	5,550	$	12,077
Pension		13,309		7,654
Loan loss reserves		8,947		9,460
State net operating losses		3,986		5,114
Non-deductible losses on foreclosed real estate		1,775		1,638
Deferred compensation		1,807		1,825
Other-than-temporary impairment of investment securities		297		253
Restricted stock amortization		287		255
Other		778		1,379
Total deferred tax assets		36,736		39,655
Deferred tax liabilities:
Unrealized gain on investment securities		2,297		2,850
Purchase accounting adjustments		2,699		2,833
Mortgage servicing rights		3,157		3,507
FHLB stock dividends		1,200		1,200
Property and equipment depreciation		1,330		1,483
Other		458		395
Total deferred tax liabilities		11,141		12,268
Net deferred tax asset	$	25,595	$	27,387

As of December 31, 2014, the Company had $10,170 and $76,962 in net operating loss carryovers for federal and state income tax purposes, respectively, and $1,990 in AMT credit carryovers available to offset against future income. The net operating loss carryovers expire in various years through 2031 if unused. The AMT credit carryovers have no expiration date.

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.

93

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

13. Financial Instruments with Off-Balance-Sheet Risk (continued)

Off-balance sheet financial instruments or obligations that represent exposure to credit risk under commitments to extend credit are summarized in the following table as of the dates indicated:

	December 31
	2014		2013
Unused commercial lines of credit	$	104,406	$	104,734
Commercial loans		4,609		1,535
Standby letters of credit		3,774		3,350
Real estate loan commitments:
Fixed rate		33,040		29,158
Adjustable rate		216,714		141,604
Unused consumer lines of credit		165,600		168,645

The Company sells substantially all of its long-term, fixed-rate, one- to four-family loan originations in the secondary market. The Company uses derivative financial instruments to manage interest rate risk associated with these activities. Specifically, the Company enters into interest rate lock commitments (“IRLCs”) with borrowers, which are considered to be derivative financial instruments. The Company manages its exposure to interest rate risk in IRLCs (as well as interest rate risk in its loans held-for-sale) by entering into forward commitments to sell loans to the Fannie Mae. Commitments to sell loans expose the Company to interest rate risk if market rates of interest decrease during the commitment period. Such forward commitments are considered to be derivative financial instruments. These derivatives are not designated as accounting hedges as specified in GAAP. As such, changes in the fair value of the derivative instruments are recognized currently through earnings. As of December 31, 2014 and 2013, net unrealized gains of $84 and $93, respectively, were recognized in net gain on loan sales activities on the derivative instruments specified in the previous paragraph. These amounts were exclusive of net unrealized gains of $117 and $16 on loans held-for-sale as of those dates, respectively, which were also included in net gain on loan sales activities.

The Company enters into interest rate swap arrangements to manage the interest rate risk exposure associated with specific commercial loan relationships at the time such loans are originated. These interest rate swaps, as well as the embedded derivatives associated with certain of its commercial loan relationships, are derivative financial instruments under GAAP. None of these derivative financial instruments are designated by the Company as accounting hedges as specified in GAAP. As such, the fair market value of the interest rate swaps and embedded derivatives will be carried on the Company’s balance sheet as derivative assets or liabilities, as the case may be, and periodic changes in fair market value of such financial instruments will be recorded through periodic earnings in other non-interest income. During the years ended December 31, 2014 and 2013, net unrealized gains of $1,559 and $32, respectively, and net unrecognized losses of $1,559 and $32, respectively, related to interest rate swaps and embedded derivatives were recorded in other non-interest income.

The following table summarizes the Company’s derivative financial instruments as of the dates indicated.

	December 31, 2014					December 31, 2013
	Notional Amount		Fair Value			Notional Amount		Fair Value
Interest rate lock commitments	$	7,219	$	142		$	4,361	$	60
Forward commitments to sell loans		7,415		(58	)		4,085		33
Embedded derivatives on commercial loans		23,985		649			4,983		32
Receive-fixed interest rate swaps		20,144		910			–		–
Pay-fixed interest rate swaps		44,129		(1,559	)		4,983		(32	)
Net unrealized gains			$	84				$	93

94

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

13. Financial Instruments with Off-Balance-Sheet Risk (continued)

The unrealized gains shown in the preceding table were included as a component of other assets as of the dates indicated. The unrealized losses were included in other liabilities as of the dates indicated.

14. Fair Value Measurements

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 (exit price). 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 measurements based on the observability of those inputs. Accounting guidance 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). There were no transfers of assets or liabilities between categories of the fair value hierarchy during the years ended December 31, 2014 and 2013.

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. The Company considers the fair value of cash and cash equivalents to be Level 1 in the fair value hierarchy.

Mortgage-Related Securities Available-for-Sale and Held-to-Maturity Fair values for these securities are based on price estimates obtained from a third-party independent pricing service. This service utilizes pricing models that vary by asset class and incorporate available trade, bid, ask and other market information of comparable instruments. For structured securities, such as CMOs, the pricing models include cash flow estimates that consider the impact of loan performance data, including, but not limited to, expectations relating to loan prepayments, default rates, and loss severities. Management has reviewed the pricing methodology used by its pricing service to verify that prices are determined in accordance with the fair value guidance specified in GAAP. The Company considers the fair value of mortgage-related securities to be Level 2 in the fair value hierarchy.

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. The Company considers the fair value of loans held-for-sale to be Level 2 in the fair value hierarchy.

Loans Receivable Loans receivable are segregated by type such as commercial and industrial loans, commercial real estate mortgage loans, multi-family real estate mortgage loans, one- to four-family mortgage loans, and home equity and other consumer 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. The Company considers the fair value of loans receivable to be Level 3 in the fair value hierarchy.

95

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

14. Fair Value Measurements (continued)

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. The Company considers the fair value of mortgage servicing rights to be Level 3 in the fair value hierarchy.

The following table summarizes the significant inputs utilized by the Company to estimate the fair value of its MSRs as of December 31, 2014:

	Weighted- Average			Range
Loan size	$	119			$2-$412
Contractual interest rate		3.78	%		2.00%-7.15%
Constant prepayment rate (“CPR”)		10.61	%		5.69%-22.67%
Remaining maturity in months		229			5-480
Servicing fee		0.25	%		–
Annual servicing cost per loan (not in thousands)	$	60			–
Annual ancillary income per loan (not in thousands)	$	30			–
Discount rate		9.55	%		9.50%-11.25%

MSR pools with an amortized cost basis greater than fair value are carried at fair value in the Company’s financial statements. There were no pools determined to be impaired at December 31, 2014, and as such there was no valuation allowance at December 31, 2014. In 2014 the Company recorded a gain of $1, which was equal to the change in the valuation allowance for that period. Pools determined to be impaired at December 31, 2013, had an amortized cost basis of $10 and a fair value of $9 as of that date. Accordingly, the Company recorded a valuation allowance of $1 as of December 31, 2013, as well as a corresponding gain of $2,395 during the twelve month period then ended, which was equal to the change in the valuation allowance during that period.

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. The Company considers the fair value of FHLB of Chicago stock to be Level 2 in the fair value hierarchy.

Accrued Interest Receivable and Payable The carrying values of accrued interest receivable and payable approximate their fair value. The Company considers the accrued interest receivable and payable to be Level 2 in the fair value hierarchy.

Deposit Liabilities and Advance Payments by Borrowers for Taxes and Insurance Fair value for demand deposits equal book value. The Company considers the fair value of demand deposits to be Level 2 in the fair value hierarchy. Fair values for certificate of 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 Company considers the fair value of certificates of deposit to be Level 3 in the fair value hierarchy. The advance payments by borrowers for taxes and insurance are equal to their carrying amounts at the reporting date. The Company considers the fair value of advance payments by borrowers to be Level 2 in the fair value hierarchy.

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. The Company considers the fair value of borrowings to be Level 2 in the fair value hierarchy.

96

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

14. Fair Value Measurements (continued)

Off-Balance Sheet Financial Instruments Off-balance sheet financial instruments consist of commitments to extend credit, IRLCs, forward commitments to sell loans, interest rate swaps, and embedded derivatives related to certain commercial loan relationships. Commitments to extend credit that are not IRLCs generally carry variable rates of interest. As such, the fair value of these instruments is not material. The Company considers the fair value of these instruments to be Level 2 in the fair value hierarchy. The carrying value of IRLCs, forward commitments to sell loans, interest rate swaps and embedded derivatives is equal to their fair value. For IRLCs and forward commitments, the fair value is the difference between the current market prices for securities collateralized by similar loans and the notional amounts of the IRLCs and forward commitments. The fair value of the Company’s interest rate swaps and embedded derivatives is determined using discounted cash flow analysis on the expected cash flows of each derivative and also includes a nonperformance or credit risk component. The Company considers the fair value of IRLCs, forward commitments to sell loans, interest rate swaps, and embedded derivatives to be Level 2 in the fair value hierarchy.

The carrying values and fair values of the Company’s financial instruments are presented in the following table as of the dates indicated.

	December 31, 2014						December 31, 2013
	Carrying Value			Fair Value			Carrying Value			Fair Value
Cash and cash equivalents	$	46,177		$	46,177		$	42,456		$	42,456
Mortgage related securities available-for-sale		321,883			321,883			446,596			446,596
Mortgage related securities held-to-maturity		132,525			134,117			155,505			153,223
Loans held-for-sale		3,837			3,837			1,798			1,798
Loans receivable, net		1,631,303			1,653,170			1,508,996			1,508,092
Mortgage servicing rights, net		7,867			9,550			8,737			10,479
Federal Home Loan Bank stock		14,209			14,209			12,245			12,245
Accrued interest receivable		5,774			5,774			5,910			5,910
Deposit liabilities		1,718,756			1,620,375			1,762,682			1,647,540
Borrowings		256,469			264,659			244,900			251,826
Advance payments by borrowers		4,742			4,742			3,431			3,431
Accrued interest payable		492			492			450			450
Unrealized gain (loss) on off-balance-sheet items:
Interest rate lock commitments on loans		142			142			60			60
Forward commitments to sell loans		(58	)		(58	)		33			33
Embedded derivatives on commercial loans		649			649			32			32
Receive-fixed interest rate swaps		910			910			–			–
Pay-fixed interest rate swaps		(1,559	)		(1,559	)		(32	)		(32	)

97

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

14. Fair Value Measurements (continued)

The following table segregates by fair value hierarchy (i.e., Level 1, 2, or 3) all of the Company’s assets and liabilities that are measured at fair value on a recurring basis as of the dates indicated.

	December 31, 2014
	Level 1		Level 2		Level 3		Total
Loans held-for-sale		–	$	3,837		–	$	3,837
Mortgage-related securities available-for-sale		–		321,883		–		321,883
Total		–	$	325,720		–	$	325,720

	December 31, 2013
	Level 1		Level 2		Level 3		Total
Loans held-for-sale		–	$	1,798		–	$	1,798
Mortgage-related securities available-for-sale		–		446,596		–		446,596
Total		–	$	448,394		–	$	448,394

Impaired Loans For non-accrual loans greater than an established threshold and individually evaluated for impairment and all renegotiated loans, impairment is measured based on: (i) the fair value of the loan or the fair value of the collateral less estimated selling costs (collectively the “collateral value method”) or (ii) 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 on a periodic basis to support the fair value of collateral underlying the loans. Appraisals are performed by independent certified and/or licensed appraisers that have been reviewed by the Company and incorporate information such as recent sales prices for comparable properties, costs of construction, and net operating income of the property or business. Selling costs are generally estimated at 10%. Appraised values may be further discounted based on management judgment regarding changes in market conditions and other factors since the time of the appraisal. A significant unobservable input in using net operating income to estimate fair value is the capitalization rate. At December 31, 2014, the range of capitalization rates utilized to determine the fair value of the underlying collateral on certain loans was 6% to 12%. 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 $904 was recorded for loans with a recorded investment of $45,425 at December 31, 2014. These amounts were $1,000 and $49,063 at December 31, 2013, respectively. Provision for loan losses related to these loans was $316 and $380 in 2014 and 2013, respectively.

Foreclosed Properties 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. In determining fair value, the Company generally obtains appraisals to support the fair value of foreclosed properties, as described in the previous paragraph. In certain instances, the Company may also use the selling list price, less estimated costs to sell, as the fair value of foreclosed properties. In such instances, the list price is generally less than the appraised value. The Company considers these fair values to be Level 3 in the fair value hierarchy. As of December 31, 2014, $4,311 in foreclosed properties were valued at collateral value compared to $6,612 at December 31, 2013. Losses of $856 and $1,672 related to these foreclosed properties valued at collateral value were recorded during the twelve months ended December 31, 2014 and 2013, respectively.

98

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

15. Condensed Parent Company Only Financial Statements

STATEMENT OF FINANCIAL CONDITION

	December 31
	2014			2013
Assets
Cash and cash equivalents	$	17,553		$	10,926
Investment in subsidiary		262,175			269,522
Other assets		989			589
Total assets	$	280,717		$	281,037
Liabilities and shareholders’ equity
Total liabilities		–			–
Shareholders’ equity:
Common stock–$0.01 par value:
Authorized–200,000,000 shares in 2014 and 2013 Issued–78,783,849 shares in 2014 and 2013 Outstanding–46,568,284 shares in 2014 and 46,438,284 shares in 2013	$	788		$	788
Additional paid-in capital		488,467			489,238
Retained earnings		159,065			151,384
Accumulated other comprehensive loss		(11,136	)		(2,319	)
Treasury stock–32,215,565 shares in 2014 and 32,345,565 shares in 2013		(356,467	)		(358,054	)
Total shareholders’ equity		280,717			281,037
Total liabilities and shareholders’ equity	$	280,717		$	281,037

STATEMENT OF INCOME

	Year Ended December 31
	2014			2013			2012
Total income	$	20		$	9		$	3
Total expenses		974			836			796
Loss before income taxes		(954	)		(827	)		(793	)
Income tax benefit		(377	)		(323	)		(306	)
Loss before equity in earnings of subsidiary		(577	)		(504	)		(487	)
Equity in earnings of subsidiary		15,242			11,300			7,241
Net income	$	14,665		$	10,796		$	6,754

99

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

(Dollars in thousands, except share and per share amounts)

15. Condensed Parent Company Only Financial Statements (continued)

STATEMENT OF TOTAL COMPREHENSIVE INCOME

	Year Ended December 31
	2014			2013			2012
Net income	$	14,665		$	10,796		$	6,754
Other comprehensive income (loss), net of income taxes:
Unrealized holding gains (losses):
Non-credit portion of OTTI on securities available-for sale, net of deferred income taxes of $(196)		–			–			(293	)
Change in net unrealized gain on securities available-for-sale, net of deferred income taxes of $(512) in 2014, $(1,424) in 2013, and $1,593 in 2012		(764	)		(2,125	)		2,378
Reclassification adjustment for gain on securities included in income, net of income taxes of $(41) in 2014 and $(218) in 2012		(61	)		–			(325	)
		(825	)		(2,125	)		1,760
Defined benefit pension plans:
Pension asset, net of deferred income taxes of $(5,328) in 2014, $2,058 in 2013, and $(732) in 2012		(7,992	)		3,086			(1,098	)
Curtailment gain on plan amendment, net of deferred income taxes of $958		–			1,437			–
		(7,992	)		4,523			(1,098	)
Total other comprehensive income, net of income taxes		(8,817	)		2,398			662
Total comprehensive income	$	5,848		$	13,194		$	7,416

STATEMENT OF CASH FLOWS

	Year Ended December 31
	2014			2013			2012
Operating activities:
Net income	$	14,665		$	10,796		$	6,754
Adjustment to reconcile net income to net cash provided by operating activities:
Equity in earnings of subsidiary		(15,242	)		(11,300	)		(7,241	)
Stock-based compensation		163			85			88
Other operating activities		(434	)		1,467			(353	)
Net cash provided (used) by operating activities		(848	)		1,048			(752	)
Investing activities:
Dividends from Bank subsidiary		14,063			10,920			4,130
Other investing activities		–			230			(409	)
Net cash provided by investing activities		14,063			11,150			3,721
Financing activities:
Cash dividends		(6,984	)		(4,643	)		(2,316	)
Proceeds from exercise of stock options		20			87			–
Other financing activities		376			–			564
Net cash used in financing activities		(6,588	)		(4,556	)		(1,752	)
Increase (decrease) in cash and cash equivalents		6,627			7,642			1,217
Cash and cash equivalents at beginning of year		10,926			3,284			2,067
Cash and cash equivalents at end of year	$	17,553		$	10,926		$	3,284

100

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

The management of the Company, including its Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of 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 that evaluation, the Chief Executive Officer and Chief Financial Officer concluded as of December 31, 2014, that the disclosure controls and procedures were effective.

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 GAAP. 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 GAAP, 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, 2014, based on the criteria established in “Internal Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based upon its assessment and those criteria, management believes that as of December 31, 2014, 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 audited the effectiveness of the Company’s internal control over financial reporting. That report can be found on the following page as part of this Item 9A.

101

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, 2014, based on criteria established in Internal Control — Integrated Framework (2013) 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 assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on 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, 2014, based on the criteria established in Internal Control — Integrated Framework (2013) 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, 2014 of the Company and our report dated March 6, 2015 expressed an unqualified opinion on those financial statements.

/s/ Deloitte & Touche LLP

Milwaukee, Wisconsin
March 6, 2015

102

Item 9B. Other Information

Not applicable.

103

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, 2015 (the “2015 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,” “Compensation Committee Report on Executive Compensation,” “Executive Compensation,” and “Risk Management and Compensation” in the 2015 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 2015 Annual Meeting Proxy Statement.

The following chart gives aggregate information regarding grants under all equity compensation plans of the Company through December 31, 2014.

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants, and rights		Weighted-average exercise price of outstanding options, warrants, and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in 1st column)
2004 Stock Incentive Plan approved by shareholders		1,583,500	$	5.2776		None
2014 Incentive Compensation Plan approved by shareholders		47,500	$	5.9805		2,939,500
Equity compensation plans not approved by security holders		None		None		None
Total		1,631,000	$	5.3032		2,939,500

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” and “Certain Transactions and Relationships with the Company” in the 2015 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 2015 Annual Meeting Proxy Statement.

104

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 “Item 8. Financial Statements and Supplementary Data”:

· Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm, on the consolidated financial statements.

· Consolidated Statements of Financial Condition—As of December 31, 2014 and 2013.

· Consolidated Statements of Income—Years Ended December 31, 2014, 2013, and 2012.

· Consolidated Statements of Total Comprehensive Income—Years Ended December 31, 2014, 2013, and 2012

· Consolidated Statements of Equity—Years Ended December 31, 2014, 2013, and 2012.

· Consolidated Statements of Cash Flows—Years Ended December 31, 2014, 2013, and 2012.

· 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. Refer to the 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.

105

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 6, 2015
	By:	/s/ David A. Baumgarten
		David A. Baumgarten
		President and Chief Executive Officer

POWER OF ATTORNEY

Each person whose signature appears below hereby authorizes David A. Baumgarten, Michael W. Dosland, Richard L. Schroeder 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/ David A. Baumgarten	/s/ Thomas H. Buestrin
David A. Baumgarten, President, Chief Executive Officer, and Director (Principal Executive Officer)	Thomas H. Buestrin, Director
/s/ Michael W. Dosland	/s/ Mark C. Herr
Michael W. Dosland, Senior Vice President and Chief Financial Officer (Principal Financial Officer)	Mark C. Herr, Director
/s/ Richard L. Schroeder	/s/ Lisa A. Mauer
Richard L. Schroeder, Vice President and	Lisa A. Mauer, Director
Controller (Principal Accounting Officer)
/s/ Michael T. Crowley, Jr.	/s/ William J. Mielke
Michael T. Crowley, Jr., Chairman and Director	William J. Mielke, Director
/s/ David C. Boerke	/s/ Robert B. Olson
David C. Boerke, Director	Robert B. Olson, Director
/s/ Richard A. Brown
Richard A. Brown, Director

* Each of the above signatures is affixed as of March 6, 2015.

106

BANK MUTUAL CORPORATION

(“Bank Mutual Corporation” or the “Company”)

Commission File No. 000-32107

EXHIBIT INDEX

TO

2014 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, 2014:

Exhibit	Description	Incorporated Herein by Reference To	Filed 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*	Bank Mutual Corporation Outside Directors’ Retirement Plan	Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (“2009 10-K”)
10.3*	Mutual Savings Bank Executive Excess Benefit Plan **	Exhibit 10.3 to Bank Mutual Corporation’s Registration Statement on Form S-1, Registration No. 333-39362 (“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 (in effect only as to post-retirement matters)	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 Agreement (with Messrs. Anderegg, Dosland, Larson, Mayne, and certain other executive officers; continuing through 2015)	Exhibit 10.6(c) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (“2010 10-K”)

107

Exhibit	Description	Incorporated Herein by Reference To	Filed Herewith
10.7*	Employment Agreement of Mr. Baumgarten  with Bank Mutual dated as of April 5, 2010 (continuing through 2016)	Exhibit 10.1 to the Company’s Report on Form 8-K dated April 5, 2010
10.8(a)*	Non-Qualified Deferred Retirement Plan for Directors of First Northern Savings Bank	Exhibit 10.10(a) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000
10.8(b)*	Amendment No. 1 thereto	Exhibit 10.3.2 to First Northern Capital Corp.’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998
10.9(a)*	Bank Mutual Corporation 2004 Stock Incentive Plan (superseded)	Appendix A to Proxy Statement for 2004 Annual Meeting of Shareholders
10.9(b)(i)*	Form of Option Agreement thereunder—Bank Mutual Corporation Director Stock Option Agreement (superseded)	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”)
10.9(b)(ii)*	2011 updated Form of Bank Mutual Corporation Director Stock Option Agreement	Exhibit 10.11(b)(ii) to the 2010 10-K
10.9(c)(i)*	Form of Option Agreement thereunder—Bank Mutual Corporation Incentive Stock Option Agreement  (superseded)	Exhibit 10.1(c ) to the 6/30/04 10-Q
10.9(c)(ii)*	2010 updated Form of Bank Mutual Corporation Incentive Stock Option Agreement	Exhibit 10.11(c )(ii) to the 2010 10-K
10.9(c)(iii)*	2012 alternate Form of Bank Mutual Corporation Incentive Stock Option Agreement	Exhibit 10.10(c)(iii) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 10-K”)
10.9(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
10.9(e)(i)*	Form of Restricted Stock Agreement thereunder—Bank Mutual Corporation Officers Management Recognition Award	Exhibit 10.1(e) to the 6/30/04 10-Q
10.9(e)(ii)*	2011 updated Form of Bank Mutual Corporation Officers Management Recognition Award	Exhibit 10.11(e)(ii) to the 2010 10-K

108

Exhibit	Description	Incorporated Herein by Reference To	Filed Herewith
10.9(e)(iii)*	2012 alternate Form of Bank Mutual Corporation Officers Management Recognition Award	Exhibit 10.10(e)(iii) to the 2011 10-K
10.10(a)*	Bank Mutual Corporation 2014 Incentive Compensation Plan (the “2014 Plan”)	Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 (“3/31/14  10-Q”)
	Forms of Award Agreements under 2014 Plan:
10.10(b)*	Form of Incentive Stock Option Agreement (standard)	Exhibit 10.2(a) to 3/31/14 10-Q
10.10(c)*	Form of Incentive Stock Option Agreement (for Mr. Baumgarten)	Exhibit 10.2(b) to 3/31/14 10-Q
10.10(d)*	Form of Director Stock Option Agreement	Exhibit 10.2(c) to 3/31/14 10-Q
10.10(e)*	Form of Restricted Stock award (standard)	Exhibit 10.2(d) to 3/31/14 10-Q
10.10(f)*	Form of Restricted Stock Award (for Mr. Baumgarten)	Exhibit 10.2(e) to 3/31/14 10-Q
10.10(g)*	Form of Restricted Stock Award (for directors)	Exhibit 10.2(f) to 3/31/14 10-Q
10.11*	Bank Mutual Corporation Management Incentive Plan	Exhibit 10.11(b) to the 2011 10-K
21.1	List of Subsidiaries		X
23.1	Consent of Deloitte & Touche LLP		X
24.1	Powers of Attorney	Signature Page of this Report
31.1	Sarbanes-Oxley Act Section 302 Certification signed by the Chairman 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 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 Senior Vice President and Chief Financial Officer of Bank Mutual Corporation		X

109

Exhibit	Description	Incorporated Herein by Reference To	Filed Herewith
101	The following materials are provided from Bank Mutual Corporation’s Annual Report on Form  10-K for the year ended December 31, 2014, formatted in Extensible Business Reporting Language (“XBRL”):  (i) the Unaudited Condensed Consolidated Statements of Financial Condition, (ii) Unaudited Condensed Consolidated Statements of Income, (iii) Unaudited Condensed Consolidated Statements of Equity, (iv) Unaudited Condensed Consolidated Statements of Cash Flow, and   (v) Notes to Unaudited Condensed Consolidated Financial Statements tagged as blocks of text.
101.INS	XBRL Instance Document		X
101.SCH	XBRL Taxonomy Extension Schema Document		X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document		X
101.LAB	XBRL Extension Labels Linkbase Document		X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document		X
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document		X

  * Designates management or compensatory agreements, plans or arrangements required to be filed as exhibits pursuant to Item 15(b) of Form 10-K.

** Mutual Savings Bank is now known as “Bank Mutual.”

110