BANK MUTUAL CORP (Form: 10-Q, Received: 05/06/2014 13:08:56)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2014

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

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		(IRS Employer Identification No.)
incorporation or organization)

4949 West Brown Deer Road

Milwaukee, Wisconsin 53223

(414) 354-1500

(Address, including Zip Code, and telephone number,

including area code, of registrant’s principal executive offices)

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, and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

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	¨	Small reporting company	¨

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

Yes ¨ No x

The number of shares outstanding of the issuer’s common stock, $0.01 par value per share, was 46,551,284 shares, at May 6, 2014.

BANK MUTUAL CORPORATION

FORM 10-Q QUARTERLY REPORT

Table of Contents

Item		Page

PART I

Item l.	Financial Statements

	Unaudited Condensed Consolidated Statements of Financial Condition as of March 31, 2014, and December 31, 2013	3

	Unaudited Condensed Consolidated Statements of Income for the three months ended March 31, 2014 and 2013	4

	Unaudited Condensed Consolidated Statements of Total Comprehensive Income for the three months ended March 31, 2014 and 2013	5

	Unaudited Condensed Consolidated Statements of Equity for the three months ended March 31, 2014 and 2013	6

	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013	7

	Notes to Unaudited Condensed Consolidated Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	45

Item 4.	Controls and Procedures	48

PART II

Item 1A.	Risk Factors	49

Item 6.	Exhibits	49

SIGNATURES		50

PART I

Item 1. Financial Statements

Bank Mutual Corporation and Subsidiaries

Unaudited Condensed Consolidated Statements of Financial Condition

	March 31			December 31
	2014			2013
	(Dollars in thousands)
Assets
Cash and due from banks	$	27,675		$	23,747
Interest-earning deposits		17,401			18,709
Cash and cash equivalents		45,076			42,456
Mortgage-related securities available-for-sale, at fair value		421,118			446,596
Mortgage-related securities held-to-maturity, at amortized cost (fair value of $154,505 in 2014 and $153,223 in 2013)		154,966			155,505
Loans held-for-sale		4,276			1,798
Loans receivable (net of allowance for loan losses of $23,577 in 2014 and $23,565 in 2013)		1,502,271			1,508,996
Mortgage servicing rights, net		8,434			8,737
Other assets		182,866			183,261

Total assets	$	2,319,007		$	2,347,349

Liabilities and equity

Liabilities:
Deposit liabilities	$	1,742,470		$	1,762,682
Borrowings		229,596			244,900
Advance payments by borrowers for taxes and insurance		13,000			3,431
Other liabilities		46,843			52,414
Total liabilities		2,031,909			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–46,551,284 shares in 2014 and 46,438,284 in 2013		788			788
Additional paid-in capital		488,096			489,238
Retained earnings		152,831			151,384
Accumulated other comprehensive loss		(1,715	)		(2,319	)
Treasury stock–32,232,565 shares in 2014 and 32,345,565 in 2013		(356,675	)		(358,054	)
Total shareholders’ equity		283,325			281,037
Non-controlling interest in real estate partnership		3,773			2,885
Total equity including non-controlling interest		287,098			283,922

Total liabilities and equity	$	2,319,007		$	2,347,349

Refer to Notes to Unaudited Condensed Consolidated Financial Statements

Bank Mutual Corporation and Subsidiaries

Unaudited Condensed Consolidated Statements of Income

	Three Months Ended March 31
	2014		2013
	(Dollars in thousands, except per share data)
Interest income:
Loans	$	16,292	$	16,208
Mortgage-related securities		3,356		3,927
Investment securities		22		13
Interest-earning deposits		3		27
Total interest income		19,673		20,175
Interest expense:
Deposit liabilities		1,363		2,765
Borrowings		1,163		1,225
Total interest expense		2,526		3,990
Net interest income		17,147		16,185
Provision for loan losses		13		891
Net interest income after provision for loan losses		17,134		15,294
Non-interest income:
Deposit-related fees and charges		2,858		2,919
Brokerage and insurance commissions		688		691
Mortgage banking revenue, net		630		2,682
Income from bank-owned life insurance (“BOLI”)		467		724
Other non-interest income		252		416
Total non-interest income		4,895		7,432
Non-interest expense:
Compensation, payroll taxes, and other employee benefits		9,859		11,053
Occupancy and equipment		3,350		3,079
Federal insurance premiums		374		807
Advertising and marketing		464		527
Losses and expenses on foreclosed real estate, net		361		1,132
Other non-interest expense		2,351		2,398
Total non-interest expense		16,759		18,996
Income before income taxes		5,270		3,730
Income tax expense		2,438		1,199
Net income before non-controlling interest		2,832		2,531
Net loss attributable to non-controlling interest		12		14

Net income	$	2,844	$	2,545

Per share data:
Earnings per share–basic	$	0.06	$	0.05
Earnings per share–diluted	$	0.06	$	0.05
Cash dividends per share paid	$	0.03	$	0.02

Refer to Notes to Unaudited Condensed Consolidated Financial Statements

Bank Mutual Corporations and Subsidiaries

Unaudited Condensed Consolidated Statements of Total Comprehensive Income

	Three Months Ended March 31
	2014		2013
	(Dollars in thousands)
Net income before non-controlling interest	$	2,832	$	2,531
Other comprehensive income, net of tax:
Unrealized holding gains during the period:
Change in net unrealized gain on securities available-for-sale, net of deferred income taxes of $337in 2014 and $55 in 2013		503		82
		503		82
Defined benefit pension plans:
Amortization of net prior service costs and unrecognized loss included in net periodic benefit cost, net of deferred income taxes of $68 in 2014 and $212 in 2013		101		319
		101		319
Total other comprehensive income, net of tax		604		401
Total comprehensive income before non-controlling interest		3,436		2,932
Comprehensive loss attributable to non-controlling interest		12		14

Total comprehensive income	$	3,448	$	2,946

Refer to Notes to Unaudited Condensed Consolidated Financial Statements

Bank Mutual Corporations and Subsidiaries

Unaudited Condensed Consolidated Statements of Equity

									Accumulated						Non-Controlling
			Additional						Other						Interest in
	Common		Paid-In			Retained			Comprehensive			Treasury			Real Estate
	Stock		Capital			Earnings			Income (Loss)			Stock			Partnership			Total
	(Dollars in thousands, except per share data)

Balance at January 1, 2014	$	788	$	489,238		$	151,384		$	(2,319	)	$	(358,054	)	$	2,885		$	283,922
Net income		–		–			2,844			–			–			–			2,844
Net loss attributable to non-controlling interest		–		–			–			–			–			(12	)		(12	)
Other comprehensive income		–		–			–			604			–			–			604
Equity contribution by non-controlling interest		–		–			–			–			–			900			900
Issuance of management recognition plan shares		–		(1,379	)		–			–			1,379			–			–
Share based payments		–		237			–			–			–			–			237
Cash dividends ($0.03 per share)		–		–			(1,397	)		–			–			–			(1,397	)

Balance at March 31, 2014	$	788	$	488,096		$	152,831		$	(1,715	)	$	(356,675	)	$	3,773		$	287,098

Balance at January 1, 2013	$	788	$	489,960		$	145,231		$	(4,717	)	$	(359,409	)	$	2,933		$	274,786
Net income		–		–			2,545			–			–			–			2,545
Net loss attributable to non-controlling interest		–		–			–			–			–			(14	)		(14	)
Other comprehensive income		–		–			–			401			–			–			401
Issuance of management recognition plan shares		–		(1,134	)		–			–			1,134			–			–
Share based payments		–		156			–			–			–			–			156
Cash dividends ($0.02 per share)		–		–			(929	)		–			–			–			(929	)

Balance at March 31, 2013	$	788	$	488,982		$	146,847		$	(4,316	)	$	(358,275	)	$	2,919		$	276,945

Refer to Notes to Unaudited Condensed Consolidated Financial Statements

Bank Mutual Corporation and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

	Three Months Ended March 31
	2014			2013
Operating activities:	(Dollars in thousands)
Net income	$	2,844		$	2,545
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses		13			891
Loss on foreclosed real estate, net		234			883
Provision for depreciation		698			655
Amortization of mortgage servicing rights		422			1,008
Decrease in MSR valuation allowance		(1	)		(1,114	)
Net premium amortization on securities		478			581
Loans originated for sale		(13,043	)		(110,350	)
Proceeds from loan sales		10,784			104,793
Gain on loan sales activities, net		(336	)		(1,861	)
Other, net		(4,426	)		(8,694	)
Net cash used by operating activities		(2,333	)		(10,663	)
Investing activities:
Principal repayments on mortgage-related securities available-for-sale		25,994			62,343
Principal repayments on mortgage-related securities held-to-maturity		385			344
Proceeds from redemption of FHLB of Chicago stock		–			4,178
Purchases of FHLB of Chicago stock		(995	)		–
Net decrease (increase) in loans receivable		5,793			(404	)
Proceeds from sale of foreclosed properties		687			2,726
Net purchases of premises and equipment		(516	)		(1,101	)
Net cash provided by investing activities		31,348			68,086
Financing activities:
Net decrease in deposit liabilities		(20,212	)		(21,418	)
Net decrease in short-term borrowings		(15,000	)		–
Repayments of long-term borrowings		(304	)		(2,813	)
Net increase in advance payments by borrowers for taxes and insurance		9,569			9,375
Cash dividends		(1,397	)		(929	)
Other, net		949			–
Net cash used by financing activities		(26,395	)		(15,785	)
Increase in cash and cash equivalents		2,620			41,638
Cash and cash equivalents at beginning of period		42,456			87,059
Cash and cash equivalents at end of period	$	45,076		$	128,697

Supplemental information:
Cash paid in period for:
Interest on deposit liabilities and borrowings	$	2,524		$	3,690
Income taxes		905			–
Non-cash transactions:
Loans transferred to foreclosed properties and repossessed assets		919			3,132

Refer to Notes to Unaudited Condensed Consolidated Financial Statements

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2014

(Dollars in Thousands, Except Share and Per Share Amounts)

1. Basis of Presentation

The Unaudited Condensed Consolidated Financial Statements include the accounts of Bank Mutual Corporation (the “Company”), its wholly-owned subsidiary Bank Mutual (the “Bank”), and the Bank’s subsidiaries.

The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information, Rule 10-01 of Regulation S-X, and the instructions to Form 10-Q. The financial statements do not include all of the information and footnotes required by GAAP for complete financial information. However, in the opinion of management, all adjustments (consisting of normal recurring entries) necessary for a fair presentation of operations, cash flows, and financial position have been included in the accompanying financial statements. This report should be read in conjunction with the Company’s 2013 Annual Report on Form 10-K. Operating results for the three months ended March 31, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

Certain components of non-interest income in 2013 were reclassified to conform to the 2014 presentation format. For the three months ended March 31, 2013, $1,593 that had been previously reported as “service charges on deposits” was renamed “deposit-related fees and charges.” This amount was combined with $1,326 of transactions and other fee income from deposit customers that had been previously included in “other non-interest income.” Also, for the same three-month period, net loan servicing revenue of $821 was reclassified from “loan-related fees and servicing revenue, net,” and was combined with $1,861 in “gain on loan sales activities, net,” and the aggregate amount reported as “mortgage banking revenue, net.” Finally, the remaining $128 that was included in “loan related fees and servicing revenue, net,” was reclassified to “other non-interest income.”

During the first quarter of 2013 the Financial Accounting Standards Board (“FASB”) issued new accounting guidance relating to 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. This new guidance 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, financial condition, or liquidity.

During the third quarter of 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 is 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, financial condition, or liquidity.

During 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 for the company 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. Adoption of this new guidance did not have a material impact on the Company’s financial condition, results of operations, or liquidity. However, it did affect how certain matters are disclosed in the financial statements.

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

March 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:

	March 31, 2014
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Securities available-for-sale:
Federal Home Loan Mortgage Corporation	$	209,918	$	5,140		–		$	215,058
Federal National Mortgage Association		167,945		2,022	$	(124	)		169,843
Government National Mortgage Association		28		5		–			33
Private-label CMOs		35,282		1,014		(112	)		36,184
Total available-for-sale	$	413,173	$	8,181	$	(236	)	$	421,118
Securities held-to-maturity:
Federal National Mortgage Association	$	154,966	$	441	$	(902	)	$	154,505
Total held-to-maturity	$	154,966	$	441	$	(902	)	$	154,505

	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

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

March 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 summarize mortgage-related available-for-sale securities by amount of time the securities have had a gross unrealized loss as of the dates indicated:

	March 31, 2014
	Less Than 12 Months						Greater Than 12 Months
	in an Unrealized Loss Position						in an Unrealized Loss Position						Gross		Total
:	Unrealized Loss Amount		Number of Securities		Estimated Fair Value		Unrealized Loss Amount		Number of Securities		Estimated Fair Value		Unrealized Loss Amount		Estimated Fair Value
Securities available-for-sale:
Federal Home Loan Mortgage Corporation		–		–		–		–		–		–		–		–
Federal National Mortgage Association	$	124		4	$	24,973		–		–		–	$	124	$	24,973
Private-label CMOs		–		–		–	$	112		5	$	7,708		112		7,708
Total available-for-sale	$	124		4	$	24,973	$	112		5	$	7,708	$	236	$	32,681

Securities held-to-maturity:
Federal National Mortgage Association	$	902		9	$	61,905		–		–		–	$	902	$	61,905
Total held-to-maturity	$	902		9	$	61,905		–		–		–	$	902	$	61,905

	December 31, 2013
	Less Than 12 Months						Greater Than 12 Months
	in an Unrealized Loss Position						in an Unrealized Loss Position						Gross		Total
:	Unrealized Loss Amount		Number of Securities		Estimated Fair Value		Unrealized Loss Amount		Number of Securities		Estimated Fair Value		Unrealized Loss Amount		Estimated Fair 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

The Company determined that the unrealized losses on its private-label collateralized mortgage obligations (“CMOs”) were temporary as of March 31, 2014, and December 31, 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 March 31, 2014, and December 31, 2013, the Company had private-label CMOs, with a fair value of $28,425 and $28,844 respectively, and unrealized gains of $805 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.

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

March 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 table contains a summary of other-than-temporary impairment (“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:

	Three Months Ended March 31
	2014		2013
Beginning balance of unrealized OTTI related to credit losses	$	789	$	789
Additional unrealized OTTI related to credit losses for which OTTI was not previously recognized		–		–
Additional unrealized OTTI related to credit losses for which OTTI was previously recognized		–		–
Net OTTI losses recognized in earnings		–		–
Ending balance of unrealized OTTI related to credit losses	$	789	$	789
Adjusted cost at end of period	$	6,773	$	8,947
Estimated fair value at end of period	$	7,402	$	9,452

Results of operations included no gross realized gains or losses on the sale of securities during either of the three-month periods ended March 31, 2014 or 2013.

Mortgage-related securities available-for-sale with a fair value of approximately $87,147 and $74,988 at March 31, 2014, and December 31, 2013, respectively, were pledged to secure deposits, borrowings, and for other purposes as permitted or required by law.

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2014

(Dollars in Thousands, Except Share and Per Share Amounts)

3. Loans Receivable

The following table summarizes the components of loans receivable as of the dates indicated:

	March 31			December 31
	2014			2013
Commercial loans:
Commercial and industrial	$	182,121		$	166,788
Commercial real estate		272,236			276,547
Multi-family real estate		256,838			265,841
Construction and development loans:
Commercial real estate		22,967			27,815
Multi-family real estate		141,548			164,685
Land and land development		5,992			6,962
Total construction and development		170,507			199,462
Total commercial loans		881,702			908,638
Retail loans:
One- to four-family first mortgages:
Permanent		453,339			449,230
Construction		40,486			40,968
Total one- to four-family first mortgages		493,825			490,198
Home equity loans:
Fixed term home equity		147,091			148,688
Home equity lines of credit		78,189			79,470
Total home equity loans		225,280			228,158
Other consumer loans:
Student		10,734			11,177
Other		12,523			12,942
Total other consumer loans		23,257			24,119
Total retail loans		742,362			742,475
Gross loans receivable		1,624,064			1,651,113
Undisbursed loan proceeds		(97,282	)		(117,439	)
Allowance for loan losses		(23,577	)		(23,565	)
Deferred fees and costs, net		(934	)		(1,113	)
Total loans receivable, net	$	1,502,271		$	1,508,996

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

At March 31, 2014, and December 31, 2013, certain one- to four-family mortgage loans, multi-family mortgage loans, and home equity loans with aggregate carrying values of approximately $306,000 and $327,000 were pledged to secure advances from the Federal Home Loan Bank (“FHLB”) of Chicago.

The unpaid principal balance of loans serviced for others was $1,130,071 and $1,148,109 at March 31, 2014, and December 31, 2013, respectively. These loans are not reflected in the consolidated financial statements.

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2014

(Dollars in Thousands, Except Share and Per Share Amounts)

3. Loans Receivable (continued)

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

	At or for the Three Months Ended March 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		685		617			228		(1,731	)		57			157			13
Charge-offs		–		(30	)		–		–			(210	)		(143	)		(383	)
Recoveries		–		100			–		142			129			11			382
Ending balance	$	3,288	$	7,064		$	6,159	$	2,571		$	3,196		$	1,299		$	23,577
Loss allowance individually evaluated for impairment	$	16	$	660		$	676		–			–			–		$	1,352
Loss allowance collectively evaluated for impairment	$	3,272	$	6,404		$	5,483	$	2,571		$	3,196		$	1,299		$	22,225

Loan receivable balances at the end of the period:
Loans individually evaluated for impairment	$	5,385	$	27,613		$	9,430	$	2,308		$	4,142		$	634		$	49,512
Loans collectively evaluated for impairment		176,736		244,623			247,408		96,908			463,692			247,903			1,477,270
Total loans receivable	$	182,121	$	272,236		$	256,838	$	99,216		$	467,834		$	248,537		$	1,526,782

	At or for the Three Months Ended March 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		104		714			(594	)		71			488			108			891
Charge-offs		–		(111	)		–			(6	)		(553	)		(620	)		(1,290	)
Recoveries		–		187			–			–			75			5			267
Ending balance	$	1,790	$	8,144		$	4,601		$	2,682		$	3,277		$	951		$	21,445
Loss allowance individually evaluated for impairment		–	$	596		$	612		$	250			–			–		$	1,458
Loss allowance collectively evaluated for impairment	$	1,790	$	7,548		$	3,989		$	2,432		$	3,277		$	951		$	19,987

Loan receivable balances at the end of the period:
Loans individually evaluated for impairment	$	1,414	$	19,900		$	9,129		$	15,392		$	7,450		$	1,021		$	54,306
Loans collectively evaluated for impairment		136,786		221,844			256,040			59,335			450,997			241,845			1,366,847
Total loans receivable	$	138,200	$	241,744		$	265,169		$	74,727		$	458,447		$	242,866		$	1,421,153

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 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 these factors were applied, resulted in a decrease in the total allowance for loan losses of $340 during the three months ended March 31, 2014, and an increase of $451 during the three months ended March 31, 2013.

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

March 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 table are net of undisbursed loan proceeds).

	March 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	$	16	$	17	$	16	$	18		–
Lines of credit		–		–		–		–		–
Total commercial and industrial		16		17		16		18		–
Commercial real estate:
Office		–		–		–		13		–
Retail/wholesale/mixed		914		937		190		790	$	13
Industrial/warehouse		1,167		1,265		470		1,081		25
Other		–		–		–		–		–
Total commercial real estate		2,081		2,202		660		1,884		38
Multi-family real estate		1,436		1,436		676		1,688		14
Construction and development:
Commercial real estate		–		–		–		–		–
Multi-family real estate		–		–		–		–		–
Land and land development		–		–		–		193		–
Total construction and development		–		–		–		193		–
One- to four-family		–		–		–		–		–
Home equity and other consumer:
Home equity		–		–		–		–		–
Student		–		–		–		–		–
Other		–		–		–		–		–
Total home equity and other consumer		–		–		–		–		–
Total with an allowance recorded	$	3,533	$	3,655	$	1,352	$	3,783	$	52

Impaired loans with no allowance recorded:
Commercial and industrial:
Term loans	$	215	$	851		–	$	314	$	3
Lines of credit		–		115		–		12		–
Total commercial and industrial		215		966		–		326		3
Commercial real estate:
Office		687		1,441		–		762		10
Retail/wholesale/mixed		1,098		4,904		–		1,827		18
Industrial/warehouse		181		298		–		301		–
Other		81		201		–		311		1
Total commercial real estate		2,047		6,844		–		3,201		29
Multi-family real estate		340		2,070		–		1,571		–
Construction and development:
Commercial real estate		597		597		–		419		–
Multi-family real estate		–		107		–		–		–
Land and land development		42		1,083		–		164		–
Total construction and development		639		1,787		–		583
One- to four-family		3,338		4,411		–		4,708		9
Home equity and other consumer:
Home equity		549		833		–		747		1
Student		–		–		–		–		–
Other		85		88		–		72		–
Total home equity and other consumer		634		921		–		819		1
Total with no allowance recorded	$	7,213	$	16,999		–	$	11,208	$	42

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2014

(Dollars in Thousands, Except Share and Per Share Amounts)

3. Loans Receivable (continued)

	December 31, 2013
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		–		–		–	$	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

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

March 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):

	March 31, 2014
	Pass		Watch		Special Mention		Substandard		Total
Commercial and industrial:
Term loans	$	81,965	$	2,511	$	437	$	382	$	85,295
Lines of credit		82,384		6,694		2,745		5,003		96,826
Total commercial and industrial		164,349		9,205		3,182		5,385		182,121
Commercial real estate:
Office		53,164		9,137		15,177		5,118		82,596
Retail/wholesale/mixed use		91,847		6,632		16,962		11,826		127,267
Industrial/warehouse		39,103		799		89		10,588		50,579
Other		11,713		–		–		81		11,794
Total commercial real estate		195,827		16,568		32,228		27,613		272,236
Multi-family real estate		234,968		10,820		1,620		9,430		256,838
Construction and development:
Commercial real estate		19,391		–		–		597		19,988
Multi-family real estate		73,280		–		–		–		73,280
Land and land development		3,986		251		–		1,711		5,948
Total construction/development		96,657		251				2,308		99,216
One- to four-family		462,867		701		124		4,142		467,834
Home equity and other consumer:
Home equity		224,731		–		–		549		225,280
Student		10,734		–		–		–		10,734
Other		12,438		–		–		85		12,523
Total home equity and other consumer		247,903		–		–		634		248,537
Total	$	1,402,571	$	37,545	$	37,154	$	49,512	$	1,526,782

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

March 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 March 31, 2014, or December 31, 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 March 31, 2014, or December 31, 2013.

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

March 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):

	March 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		–		–	$	172	$	172	$	85,123	$	85,295	$	231
Lines of credit	$	17		–		–		17		96,809		96,826		–
Total commercial and industrial		17		–		172		189		181,932		182,121		231
Commercial real estate:
Office		400		–		287		687		81,909		82,596		687
Retail/wholesale/mixed		2,857	$	76		177		3,110		124,157		127,267		2,012
Industrial/warehouse		–		–		180		180		50,399		50,579		1,348
Other		81		–		–		81		11,713		11,794		81
Total commercial real estate		3,338		76		644		4,058		268,178		272,236		4,128
Multi-family real estate		598		–		340		938		255,900		256,838		1,776
Construction and development:
Commercial real estate		–		–		597		597		19,391		19,988		597
Multi-family real estate		–		–		–		–		73,280		73,280		–
Land and land development		93		–		42		135		5,813		5,948		42
Total construction		93		–		639		732		98,484		99,216		639
One- to four-family		6,613		1,488		3,301		11,402		456,432		467,834		3,338
Home equity and other consumer:
Home equity		475		170		549		1,194		224,086		225,280		549
Student		171		62		499		732		10,002		10,734		–
Other		57		26		85		168		12,355		12,523		85
Total home equity and other consumer		703		258		1,133		2,094		246,443		248,537		634
Total	$	11,362	$	1,822	$	6,229	$	19,413	$	1,507,369	$	1,526,782	$	10,746

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

March 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 March 31, 2014, and December 31, 2013, $499 and $443 in student loans, respectively, were 90-days past due, but remained on accrual status because such loans were originated under programs guaranteed by the federal government. No other loans 90-days past due were in accrual status as of either date.

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 March 31, 2014, and December 31, 2013, TDRs were $4,225 and $4,298, respectively, and consisted primarily of one- to four-family mortgage loans. TDRs in accrual status as of those same dates were $3,309 and $3,310, respectively. Additions to TDRs during the three month periods ended March 31, 2014 and 2013, were immaterial. In addition, TDRs that experienced a payment default within one year of their restructuring during these same three and twelve month periods were also immaterial. TDRs are evaluated for impairment and appropriate credit losses are recorded in accordance with the Company’s accounting policies and GAAP.

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2014

(Dollars in Thousands, Except Share and Per Share Amounts)

4. Mortgage Servicing Rights

The following table presents the activity in the Company’s mortgage servicing rights (“MSRs”) for the periods indicated:

	Three Months Ended March 31
	2014			2013
MSRs at beginning of the period	$	8,737		$	9,217
Additions		120			936
Amortization		(422	)		(1,008	)
MSRs at end of period		8,435			9,145
Valuation allowance at end of period		(1	)		(1,282	)
MSRs at end of the period, net	$	8,434		$	7,863

The following table shows the estimated future amortization expense for MSRs for the periods indicated:

	Amount
Estimate for nine months ending December 31: 2014	$	940
Estimate for years ending December 31: 2015		1,097
2016		966
2017		836
2018		723
2019		696
Thereafter		3,176
Total	$	8,434

The projections of amortization expense shown above for MSRs are based on existing asset balances and the existing interest rate environment as of March 31, 2014. Future amortization expense may be significantly different depending upon changes in the mortgage servicing portfolio, mortgage interest rates, and market conditions.

5. Other Assets

The following table summarizes the components of other assets as of the dates indicated:

	March 31		December 31
	2014		2013
Accrued interest:
Loans receivable	$	4,593	$	4,582
Mortgage-related securities		1,262		1,328
Total accrued interest		5,855		5,910
Foreclosed properties and repossessed assets:
Commercial real estate		4,107		4,236
Land and land development		1,981		2,171
One-to four-family		647		329
Total foreclosed properties and repossessed assets		6,735		6,736
Bank-owned life insurance		59,891		59,451
Premises and equipment, net		51,355		51,565
Deferred tax asset, net		25,203		27,387
Federal Home Loan Bank stock, at cost		13,240		12,245
Other assets		20,587		19,967
Total other assets	$	182,866	$	183,261

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2014

(Dollars in Thousands, Except Share and Per Share Amounts)

5. Other Assets (continued)

Residential one-to four-family mortgage loans that were in the process of foreclosure were $2,661 and $3,060 at March 31, 2014 and December 31, 2013, respectively.

6. Deposit Liabilities

The following table summarizes the components of deposit liabilities as of the dates indicated:

	March 31		December 31
	2014		2013
Checking accounts:
Non-interest-bearing	$	167,117	$	161,639
Interest-bearing		241,359		245,923
Total checking accounts		408,476		407,562
Money market accounts		510,425		501,020
Savings accounts		224,521		220,236
Certificates of deposit:
Due within one year		488,424		523,690
After one but within two years		81,502		83,192
After two but within three years		6,817		8,502
After three but within four years		10,412		8,152
After four but within five years		11,893		10,328
Total certificates of deposits		599,048		633,864
Total deposit liabilities	$	1,742,470	$	1,762,682

7. Borrowings

The following table summarizes borrowings as of the dates indicated:

	March 31, 2014					December 31, 2013
			Weighted-					Weighted-
			Average					Average
	Balance		Rate			Balance		Rate
FHLB overnight advances	$	25,000		0.13	%	$	40,000		0.13	%
FHLB term advances maturing in:
2014		–		–			–		–
2015		23,450		0.80			23,450		0.80
2016		23,450		1.04			23,450		1.04
2017		37,787		1.48			37,795		1.48
2018		42,426		2.11			42,470		2.11
2019 and thereafter		77,483		3.50			77,735		3.51
Total borrowings	$	229,596		2.02	%	$	244,900		1.91	%

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

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2014

(Dollars in Thousands, Except Share and Per Share Amounts)

7. Borrowings (continued)

The Company is required to maintain certain unencumbered mortgage loans and certain mortgage-related securities as collateral against its outstanding advances from the FHLB of Chicago. Total advances from the FHLB of Chicago are limited to the lesser of: (i) 35% of the Bank’s total assets; (ii) twenty times the capital stock of the FHLB of Chicago that is owned by the Bank; 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 actions and possible additional discretionary actions by regulators, that, if undertaken, could have a direct material effect on the Bank’s and the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by federal regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total capital and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to adjusted assets (as all of these terms are defined in the applicable regulations). Management believes, as of March 31, 2014, that the Bank met or exceeded all capital adequacy requirements to which it is subject. The Company is not aware of any conditions or events which would change the Bank’s status from “well capitalized.”

The following table presents the Bank’s actual and required regulatory capital amounts and ratios as of the dates indicated:

	Actual					Required For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2014:
Total capital	$	275,745		18.24	%	$	120,959		8.00	%	$	151,199		10.00	%
(to risk-weighted assets)
Tier 1 capital		256,787		16.98			60,479		4.00			90,719		6.00
(to risk-weighted assets)
Tier 1 capital		256,787		11.18			91,902		4.00			114,878		5.00
(to adjusted total assets)

As of December 31, 2013:
Total capital	$	272,074		17.82	%	$	122,159		8.00	%	$	152,698		10.00	%
(to risk-weighted assets)
Tier 1 capital		252,931		16.56			61,079		4.00			91,619		6.00
(to risk-weighted assets)
Tier 1 capital		252,931		10.89			92,943		4.00			116,179		5.00
(to adjusted total assets)

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2014

(Dollars in Thousands, Except Share and Per Share Amounts)

9. Earnings Per Share

The following table summarizes the computation of basic and diluted earnings per share for the periods indicated:

	Three Months Ended March 31
	2014		2013
Basic earnings per share:
Net income	$	2,844	$	2,545
Weighted average shares outstanding		46,249,884		46,255,311
Vested MRP shares for period		31,561		17,417
Basic shares outstanding		46,281,445		46,272,728
Basic earnings per share	$	0.06	$	0.05

Diluted Earnings Per Share:
Net income	$	2,844	$	2,545
Weighted average shares outstanding used in basic earnings per share		46,281,445		46,272,728
Net dilutive effect of:
Stock option shares		275,829		93,375
Non-vested MRP shares		33,221		22,898
Diluted shares outstanding		46,590,495		46,389,001
Diluted earnings per share	$	0.06	$	0.05

The Company had stock options for 1,976,500 shares outstanding as of March 31, 2014, and for 2,489,000 shares as of March 31, 2013, that were not included in the computation of diluted earnings per share because they were anti-dilutive. These shares had weighted average exercise prices of $10.19 and $8.94 per share as of those 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 $276 and $45 during the three months ended March 31, 2014 and 2013, respectively.

The Company also has a defined benefit pension plan covering employees meeting certain minimum age and service requirements and a non-qualified supplemental pension plan for certain qualifying employees. The supplemental pension plan is funded through a "rabbi trust" arrangement. The benefits are generally based on years of service and the employee’s average annual compensation for five consecutive calendar years in the last ten calendar years that produces the highest average. The Company’s funding policy for the qualified plan is to contribute annually the amount necessary to satisfy the requirements of the Employee Retirement Income Security Act of 1974.

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2014

(Dollars in Thousands, Except Share and Per Share Amounts)

10. Employee Benefit Plans (continued)

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 following table summarizes the qualified plan’s net periodic benefit cost for the periods indicated:

	Three Months Ended
	March 31
	2014			2013
Service cost	$	224		$	770
Interest cost		667			575
Expected return on plan assets		(722	)		(824	)
Amortization of net loss from earlier periods		165			433
Net periodic benefit cost	$	334		$	954

The net periodic benefit cost for the Company’s supplemental plan was $115 and $232 for the three months ended March 31, 2014 and 2013, respectively. The amount in 2014 consisted of interest cost of $113, and amortization of net loss from earlier periods of $2. The amount in 2013 consisted of service cost of $40, interest cost of $97, and amortization of net loss from earlier periods of $95. The amount of the 2014 contribution, if any, will be determined based on a number of factors, including the results of an actuarial valuation report as of January 1, 2014. As of March 31, 2014, the amount of the 2014 contribution, if any, was unknown. No contribution is necessary for the supplemental pension plan.

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 management recognition plan (“MRP”) awards that also vested over five years. No awards may be made under the 2004 Plan after February 1, 2014.

MRP grants are amortized to compensation expense as the Company’s employees and directors become vested in the granted shares. The amount amortized to expense was $90 and $69 for the three month periods ended March 31, 2014 and 2013, respectively. Outstanding non-vested MRP grants had a fair value of $1,535 and an unamortized cost of $1.351 at March 31, 2014. The cost of these shares is expected to be recognized over a weighted-average period of 2.08 years.

During the three months ended March 31, 2014 and 2013, the Company recorded stock option compensation expense of $98 and $77, respectively. As of March 31, 2014, there was $1,264 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 1.89 years.

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2014

(Dollars in Thousands, Except Share and Per Share Amounts)

11. Stock-Based Benefit Plans (continued)

The following table summarizes the activity in the Company’s stock options during the periods indicated:

	Three Months Ended March 31
	2014					2013
				Weighted					Weighted
				Average					Average
	Stock			Exercise		Stock			Exercise
	Options			Price		Options			Price
Outstanding at beginning of period		2,955,000		$	8.0742		2,671,000		$	8.4711
Granted		228,500			7.1700		302,000			4.8200
Exercised		–			–		–			–
Forfeited		(10,000	)		10.6730		(29,000	)		8.9279
Outstanding at end of period		3,173,500		$	8.0010		2,944,000		$	8.0921

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

	Remaining		Non-Vested Options				Vested Options
	Contractual Life		Stock Options		Intrinsic Value		Stock Options		Intrinsic Value
Exercise price:
$10.673		0.1		–		–		1,536,000		–
$12.234		2.3		–		–		50,000		–
$11.160		4.1		–		–		32,000		–
$12.025		4.4		–		–		50,000		–
$7.226		6.1		20,000		–		30,000		–
$4.740		6.7		28,000	$	45		42,000	$	67
$5.050		6.8		142,000		183		211,000		272
$4.300		7.0		10,000		20		15,000		31
$3.720		7.3		10,500		28		7,000		18
$3.390		7.8		241,500		712		158,000		466
$3.800		8.0		8,000		20		2,000		5
$4.820		8.8		241,600		367		60,400		92
$5.360		9.1		20,000		20		–		–
$5.700		9.2		20,000		13		–		–
$6.340		9.4		10,000		–		–		–
$7.170		9.8		228,500		–		–		–
Total				980,100	$	1,408		2,193,400	$	951
Weighted-average remaining contractual life				8.4 years				2.0 years
Weighted-average exercise price			$	5.1146			$	9.2869

There were no options exercised during the three months ended March 31, 2014 and 2013. The weighted average grant date fair value of non-vested options at March 31, 2014, was $1.43 per share. During the three months ended March 31, 2014, options for 228,500 shares were granted, options for 206,900 shares became vested, and non-vested options for 10,000 shares 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

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2014

(Dollars in Thousands, Except Share and Per Share Amounts)

11. Stock-Based Benefit Plans (continued)

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 228,500 options granted during the three month period ended March 31, 2014: risk free rate of 2.40%, dividend yield of 1.66%, expected stock volatility of 32%, and expected term to exercise of 7.5 years. These options had a weighted-average value of $2.34 per option using these assumptions. The following weighted-average assumptions were used to value 302,000 options granted during the three month period ended March 31, 2013: risk free rate of 1.25%, dividend yield of 1.68%, expected stock volatility of 30%, and expected term to exercise of 7.5 years. These options had a weighted-average value of $1.31 per option using these assumptions.

12. Financial Instruments with Off-Balance Sheet Risk

Off-balance sheet financial instruments or obligations whose contract amounts represent credit and/or interest rate are summarized in the following table as of the dates indicated:

	March 31		December 31
	2014		2013
Unused commercial lines of credit	$	104,715	$	104,734
Commercial loans		5,044		1,535
Standby letters of credit		2,874		3,350
Real estate loan commitments:
Fixed rate		47,659		29,158
Adjustable rate		185,738		141,604
Unused consumer lines of credit		170,531		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 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 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 Federal National Mortgage Association (“Fannie Mae”) or the FHLB of Chicago. 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 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 March 31, 2014, and December 31, 2013, net unrealized gains of $84 and $93, respectively, were recognized in net gain on loan sales activities on these derivative instruments. These amounts were exclusive of net unrealized gains of $86 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 three months ended March 31, 2014 and 2013, net unrealized gains of $74 and zero, respectively, and net losses of $74 and zero, respectively, related to interest rate swaps and embedded derivatives were recorded in other non-interest income.

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2014

(Dollars in Thousands, Except Share and Per Share Amounts)

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

The following table summarizes the Company’s derivative assets and liabilities as of the dates indicated:

	March 31, 2014					December 31, 2013
	Notional Amount		Fair Value			Notional Amount		Fair Value
Interest rate lock commitments	$	5,462	$	92		$	4,361	$	60
Forward commitments to sell loans		6,804		(8	)		4,085		33
Embedded derivatives on commercial loans		4,957		74			4,983		32
Pay-fixed interest rate swaps		4,957		(74	)		4,983		(32	)
Net unrealized gains			$	84				$	93

The unrealized gains shown in the above 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.

13. 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 three months ended March 31, 2014.

The methods and assumptions used by the Company in estimating the fair value of its financial instruments, whether or not such fair values are recognized in the consolidated financial statements, are summarized below:

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.

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2014

(Dollars in Thousands, Except Share and Per Share Amounts)

13. Fair Value Measurements (continued)

Loans Receivable Loans receivable are segregated by type such as one- to four-family, multi-family, and commercial real estate mortgage loans, consumer loans, and commercial business loans. The fair value of each type is calculated by discounting scheduled cash flows through the expected maturity of the loans using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan type. The estimated maturity is based on the Company’s historical experience with prepayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. The Company considers the fair value of loans receivable to be Level 3 in the fair value hierarchy.

Mortgage Servicing Rights The Company estimates the fair market value of MSRs for those loans that are sold with servicing rights retained. For valuation purposes, the related loans are stratified into pools by product type and, within product type, by interest rates. The fair value of the MSR pools 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 MSRs 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 March 31, 2014:

	Weighted- Average			Range
Loan size	$	124		$	2-$413
Contractual interest rate		3.79	%		2.00%-7.15	%
Constant prepayment rate (“CPR”)		8.49	%		5.18%-31.51	%
Remaining maturity in months		238			7-480
Servicing fee		0.25	%		–
Annual servicing cost per loan (not in thousands)	$	60			–
Annual ancillary income per loan (not in thousands)	$	35			–
Discount rate		9.80	%		9.75%-11.50	%

MSR pools with an amortized cost basis greater than fair value are carried at fair value in the Company’s financial statements. Pools determined to be impaired at March 31, 2014, had an amortized cost basis of $9 and a fair value of $8 as of that date. Accordingly, the Company recorded a valuation allowance of $1 as of March 31, 2014, as well as a corresponding gain of $1 during the three month period then ended, which was equal to the change in the valuation allowance during 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. The Company recorded a gain of $1,114 during the three month period ended March 31, 2013.

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 fair value of 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 certificates 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

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2014

(Dollars in Thousands, Except Share and Per Share Amounts)

13. Fair Value Measurements (continued)

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 payment 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.

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 indicated dates.

	March 31 2014						December 31 2013
	Carrying Value			Fair Value			Carrying Value			Fair Value
Cash and cash equivalents	$	27,675		$	27,675		$	42,456		$	42,456
Mortgage related securities available-for-sale		421,118			421,118			446,596			446,596
Mortgage related securities held-to-maturity		154,966			154,505			155,505			153,223
Loans held-for-sale		4,276			4,276			1,798			1,798
Loans receivable, net		1,502,271			1,502,352			1,508,996			1,508,092
Mortgage servicing rights, net		8,434			10,417			8,737			10,479
Federal Home Loan Bank stock		13,240			13,240			12,245			12,245
Accrued interest receivable		5,855			5,855			5,910			5,910
Deposit liabilities		1,742,470			1,632,035			1,762,682			1,647,540
Borrowings		229,596			237,357			244,900			251,826
Advance payments by borrowers		13,000			13,000			3,431			3,431
Accrued interest payable		451			451			450			450
Unrealized gain (loss) on off-balance-sheet items:
Interest rate lock commitments on loans		92			92			60			60
Forward commitments to sell loans		(8	)		(8	)		33			33
Embedded derivatives on commercial loans		74			74			32			32
Pay-fixed interest rate swaps		(74	)		(74	)		(32	)		(32	)

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2014

(Dollars in Thousands, Except Share and Per Share Amounts)

13. 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 were accounted for at fair value on a recurring basis as of the dates indicated:

At March 31, 2014

Level 1

Level 2

Level 3

Total

Loans held-for-sale

–

4,276

–

4,276

Mortgage-related securities available-for-sale

–

421,118

–

421,118

At 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

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 March 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 $1,352 was recorded for loans with a recorded investment of $49,512 at March 31, 2014. These amounts were $1,000 and $49,066 at December 31, 2013, respectively. Provision for loan losses related to these loans was $353 during the three month period ended March 31, 2014, and $380 during the twelve month period ended December 31, 2013. Provision for loan losses related to impaired loans at March 31, 2013, was $542 for the three months ended March 31, 2013.

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 March 31, 2014, $6,137 in foreclosed properties was valued at collateral value compared to $6,612 at December 31, 2013. Losses of $248 and $1,672 related to these foreclosed properties were recorded during the three months ended March 31, 2014, and the twelve months ended December 31, 2013, respectively. Losses on foreclosed properties valued at collateral value at March 31, 2013 were $1,154 for the three months ended March 31, 2013.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 further 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, including substantial changes under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”); regulators’ strict expectations for financial institutions’ capital levels and restrictions imposed on institutions, as to payments of dividends 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 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; 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 the Company’s filings with the Securities and Exchange Commission, particularly under Part I, Item 1A, “Risk Factors,” of the Company’s 2013 Annual Report on Form 10-K.

Results of Operations

Overview The Company’s net income was $2.8 million or $0.06 per diluted share for the three months ended March 31, 2014, compared to $2.5 million or $0.05 per diluted share during the same period in 2013. Net income during these periods represented a return on assets (“ROA”) of 0.49% and 0.43%, respectively, and a return on equity (“ROE”) of 4.03% and 3.73%, respectively. The improvement in net income between these periods was due primarily to higher net interest income and lower compensation-related expenses, provision for loan losses, net losses and expenses on foreclosed real estate, and federal insurance premiums. These developments were partially offset by lower net mortgage banking revenue, lower income from bank-owned life insurance (“BOLI”), and a non-recurring charge in the first quarter of 2014 related to state income taxes. The following paragraphs describe these changes in greater detail, along with other matters affecting the Company’s results of operations during the three months ended March 31, 2014 and 2013.

Net Interest Income The Company’s net interest income increased by $962,000 or 5.9% during the three months ended March 31, 2014, compared to the same period in 2013. This increase was primarily attributable to a 30 basis point improvement in the Company’s net interest margin, which increased from 2.97% in the first quarter 2013 to 3.27% in the first quarter of 2014. This increase was primarily caused by an improved earning asset mix and an improved funding mix between the periods. Specifically, the Company’s average loans receivable increased by $60.0 million or 4.2% in the first quarter of 2014 compared to the same period in 2013 and its average mortgage-related securities, investment securities, and overnight investments declined by $140.6 million or 18.9% in the aggregate between these same periods. Loans receivable generally have a higher yield than securities and overnight investments.

With respect to the Company’s funding mix, its average checking and savings deposits increased by $34.1 million or 3.7% in the aggregate in the first quarter of 2014 compared to the same period in 2013 and its average certificates of deposit declined by $177.9 million or 22.4% between these periods. Checking and savings deposits generally have a lower interest cost (or no cost) than certificates of deposits. Also contributing to the improvement in funding mix in the first quarter of 2014 was $34.3 million in average overnight borrowings from the FHLB of Chicago compared to no such borrowings in the same quarter of 2013. These borrowings, which were drawn to fund loan growth and net deposit outflows in recent months, had an average interest cost of only 0.13% during the first quarter of 2014, which is also a lower cost than certificates of deposit.

Also contributing to the improvement in net interest margin in the first quarter of 2014 compared to the same period in 2013 was a 54 basis point decline in the average cost of the Company’s certificates of deposit. Management anticipates that the Company’s cost of certificates of deposit will decline only modestly during the remainder of 2014, although there can be no assurances.

The favorable impact of the aforementioned developments on net interest income was partially offset by a $80.6 million or 3.7% decrease in average earning assets during the three months ended March 31, 2014, compared to the same period in 2013. The Company’s earning assets have declined in recent periods as it has used available cash flow to fund a net decrease in its liabilities, particularly its certificates of deposit, as previously noted (refer to “Financial Condition—Deposit Liabilities,” below, for additional discussion).

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.

	Three Months Ended March 31
	2014								2013
				Interest		Average						Interest		Average
	Average			Earned/		Yield/			Average			Earned/		Yield/
	Balance			Paid		Rate			Balance			Paid		Rate
	(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable (1)	$	1,494,848		$	16,292		4.36	%	$	1,434,799		$	16,208		4.52	%
Mortgage-related securities		582,234			3,356		2.31			665,881			3,927		2.36
Investment securities (2)		13,050			22		0.67			13,705			13		0.38
Interest-earning deposits		9,689			3		0.12			66,020			27		0.16
Total interest-earning assets		2,099,821			19,673		3.75			2,180,405			20,175		3.70
Non-interest-earning assets		226,867								211,690
Total average assets	$	2,326,688							$	2,392,095

Liabilities and equity:
Interest-bearing liabilities:
Regular savings deposits	$	220,613			13		0.02		$	219,904			15		0.03
Money market accounts		492,744			179		0.15			467,029			177		0.15
Interest-bearing demand accounts		232,479			7		0.01			224,798			8		0.01
Certificates of deposit		617,409			1,164		0.75			795,290			2,565		1.29
Total deposit liabilities		1,563,245			1,363		0.35			1,707,021			2,765		0.65
Advance payments by borrowers for taxes and insurance		8,749			–		0.00			10,048			–		0.00
Borrowings		239,843			1,163		1.94			210,305			1,225		2.33
Total interest-bearing liabilities		1,811,837			2,526		0.56			1,927,374			3,990		0.83
Non-interest-bearing liabilities:
Non-interest-bearing deposits		160,672								138,780
Other non-interest-bearing liabilities		71,863								52,931
Total non-interest-bearing liabilities		232,535								191,711
Total liabilities		2,044,372								2,119,085
Total equity		282,316								273,010
Total average liabilities and equity	$	2,326,688							$	2,392,095
Net interest income and net interest rate spread				$	17,147		3.19	%				$	16,185		2.87	%
Net interest margin							3.27	%							2.97	%
Average interest-earning assets to average interest-bearing liabilities		1.16	x							1.13	x

(1)

For the purposes of these computations, non-accruing loans and loans held-for-sale are included in loans receivable.

(2)

The carrying value and earnings on stock in the FHLB of Chicago is included in investment securities.

The following table presents 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.

	Three Months Ended March 31, 2014 Compared to March 31, 2013
	Increase (Decrease)
	Volume			Rate			Net
	(Dollars in thousands)
Interest-earning assets:
Loans receivable	$	669		$	(585	)	$	84
Mortgage-related securities		(489	)		(82	)		(571	)
Investment securities		(1	)		10			9
Interest-earning deposits		(18	)		(6	)		(24	)
Total interest-earning assets		161			(663	)		(502	)
Interest-bearing liabilities:
Savings accounts		3			(5	)		(2	)
Money market accounts		10			(8	)		2
Interest-bearing demand accounts		–			(1	)		(1	)
Certificates of deposit		(490	)		(911	)		(1,401	)
Total deposit liabilities		(477	)		(925	)		(1,402	)
Advance payments by borrowers for taxes and insurance		–			–			–
Borrowings		159			(221	)		(62	)
Total interest-bearing liabilities		(318	)		(1,146	)		(1,464	)
Net change in net interest income	$	479		$	483		$	962

Provision for Loan Losses The Company’s provision for loan losses was $13,000 in the first quarter of 2014 compared to $891,000 in the same quarter last year. The decline in the provision for loan loss was due principally to an improvement in the general credit quality of the Company’s loan portfolio, as evidenced by a decrease in the overall level of the Company’s classified loans, as described later in this report. This improvement 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. General economic, employment, and real estate conditions continue to improve in the Company’s markets, although at a relatively slow pace. However, current conditions continue to be challenging for some borrowers. As such, there can be no assurances that classified loans and/or non-performing loans will continue to trend lower in future periods or that the Company’s provision for loan losses will not vary considerably from period to period. For additional discussion related to the Company’s non-performing loans, non-performing assets, classified assets, and allowance for loan losses, refer to “Financial Condition—Asset Quality,” below.

Non-Interest Income Total non-interest income decreased by $2.5 million or 34.1% during the three months ended March 31, 2014, compared to the same period in 2013. Significant reasons for the changes in the components of non-interest income are discussed in the following paragraphs.

Deposit-related fees and charges decreased by $61,000 or 2.1% during the three months ended March 31, 2014, compared to the same period in the prior year, 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 periods, 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. Basis of Presentation” in the Company’s Unaudited Condensed Consolidated Financial Statements included in “Item 1. Financial Statements”). Management attributes the decrease in deposit-related fees and charges during the first quarter of 2014 to changes in deposit customer spending behavior in recent periods which has resulted in lower revenue from overdraft charges and from check printing commissions. These developments were partially offset by increased revenue from treasury management and merchant card processing services that the Company offers to commercial depositors. Also contributing was increased revenue from a debit card reward program that the Company implemented in 2013.

Brokerage and insurance commissions were $688,000 during the first quarter of 2014, which was slightly lower than the same period in the previous year. 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. Commission revenue in the 2013 quarter benefited from higher commission revenue from sales of equity-related investments, which management attributed to stronger equity markets in early 2013 compared to 2014. Substantially offsetting this development in the 2014 quarter was higher commission revenue from sales of tax-deferred annuities. In low interest rate environments customers are motivated to purchase tax-deferred annuities due to higher returns compared to deposit-related products, such as certificates of deposit.

Mortgage banking revenue, net, was $630,000 during the three months ended March 31, 2014, compared to $2.7 million in the same period of the previous year. The following table presents the components of mortgage banking revenue, net, for the periods indicated:

	Three Months Ended March 31
	2014			2013
	(Dollars in thousands)
Gross loan servicing fees	$	715		$	715
Mortgage servicing rights amortization		(422	)		(1,008	)
Mortgage servicing rights valuation recovery		1			1,114
Loan servicing revenue, net		294			821
Gain on loan sales activities, net		336			1,861
Mortgage banking revenue, net	$	630		$	2,682

In prior periods the above components of mortgage banking revenue, net, had been presented as separate line items in the consolidated statement of income (for additional discussion refer to “Note 1. Basis of Presentation” in the Company’s Unaudited Condensed Consolidated Financial Statements included in “Item 1. Financial Statements”).

Loan servicing revenue, net, was $294,000 in the first quarter of 2014 compared to $821,000 in the same period in 2013. The change in the valuation allowance that the Company maintains against its mortgage servicing rights (“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 early 2013 and continuing into 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. Higher rates also resulted in substantially lower MSR amortization in the 2014 quarter compared to the same quarter in 2013 due to a lower level of actual loan prepayments. As of March 31, 2014, the Company’s MSRs had a net book value of $8.4 million. As of the same date the Company serviced $1.13 billion in loans for third-party investors compared to $1.15 billion one year ago.

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. In recent periods the amortization of MSRs has exceeded the fee revenue that has been collected from servicing the related mortgage loans. Amortization of MSRs has been elevated in recent periods because of the low interest rate environment, which has resulted in increased loan prepayment activity and faster amortization of the related MSRs. If market interest rates for residential mortgage loans increase and/or prepayment expectations decrease in future periods, the Company could record reduced levels of MSR amortization expense, as well as recover all or a portion of previously established allowance on MSRs. Alternatively, if market interest rates decrease and/or actual or expected loan prepayment expectations increase, amortization expense is likely to remain elevated because of continued high levels of loan prepayment activity. In addition, the Company could potentially record charges to earnings related to increases in the valuation allowance on its MSRs.

Gain on loan sales activities, net, was $336,000 in the first quarter of 2014 compared to $1.9 million in the same quarter last year. The Company typically sells most of the fixed-rate, one- to four-family mortgage loans that it originates. During the first three months of 2014 sales of these loans were $10.6 million or 89.8% lower than they were during the same period in 2013. Increases in market interest rates during 2013 and continuing into 2014 have resulted in lower originations and sales of fixed-rate, one- to four-family loans in recent periods. If market interest rates remain at their current level or trend higher, management anticipates that the Company’s gains on sales of loans will continue to be substantially lower in 2014 than they were in 2013.

Income from BOLI was $467,000 during the three months ended March 31, 2014, compared to $724,000 during the same period in 2013. Results in the first quarter of 2013 included a payout of excess death benefits under the terms of the insurance contracts. The first quarter of 2014 does not include any payouts related to excess death benefits.

Other non-interest income was $252,000 during the first quarter of 2014 compared to $416,000 during the same quarter in 2013. This decrease was due primarily to less revenue from the change in the fair value of investments held in trust for certain non-qualifying employee benefit plans, due to the effects of changes in market interest rates and equity markets.

Non-Interest Expense Total non-interest expense decreased by $2.2 million or 11.8% during the three months ended March 31, 2014, compared to the same period in 2013. Significant reasons for the changes in the components of non-interest expense are discussed in the following paragraphs.

Compensation-related expenses decreased by $1.2 million or 10.8% during the three months ended March 31, 2014, compared to the same period in 2013. This decrease was due primarily to lower costs related to the Company’s defined benefit pension plan, the benefits of which were frozen for most participants effective December 31, 2013. Also contributing to the decrease in this plan’s costs was an increase in the discount rate used to determine the present value of the pension obligation. Compensation-related expenses was also lower in the first quarter of 2014 because of a change in the manner in which employees earn vacation and other paid time off benefits beginning in 2014.

The favorable developments described in the preceding paragraph 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, as previously described. Also offsetting the favorable developments described in the preceding paragraph was the impact of normal annual merit increases granted to most employees in the first quarter of 2014.

Occupancy and equipment expenses increased by $271,000 or 8.8% during the three months ended March 31, 2014, compared to the same period in the prior year. Most of this increase was caused by increased snow removal costs and utility expenses associated with harsher winter conditions in the first quarter of 2014 as compared to the previous year.

Federal deposit insurance premiums were $374,000 during the first three months of 2014, which was $433,000 or 53.7% lower than the same period in 2013. This decrease was caused by improvements in the Company’s financial condition and operating results in recent periods. Under the Federal FDIC risk-based premium assessment system, these improvements resulted in a lower insurance assessment rate for the Company. Contributing to a lesser degree was a lower level of average total assets in the first quarter of 2014 compared to 2013. The FDIC uses average total assets as the assessment base for determining the insurance premium.

Advertising and marketing-related expenses declined by $63,000 or 12.0% during the first quarter of 2014 compared to the same quarter in the previous year. At this time management expects advertising and marketing-related expenses for the full year of 2014 to be about 5% higher than they were in 2013. However, this will depend on future management decisions and there can be no assurances.

Net losses and expenses on foreclosed real estate were $361,000 during the three months ended March 31, 2014, compared to $1.1 million during the same period of last year. The Company has experienced lower losses and expenses on foreclosed real estate in recent periods due to lower levels of foreclosed properties.

Income Tax Expense Income tax expense was $2.4 million and $1.2 million during the first three months of 2014 and 2013, respectively. The 2014 period included 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 (the “Department”). This payment settled a previously reported tax matter in which the Department disagreed with the Company’s position. The Company believes its position would have prevailed against any future legal proceedings or other actions that the Department might have brought against the Company, if any. However, the Company agreed to the payment to avoid future expected costs to defend its position in possible legal proceedings or other actions that the Department might have taken related to this matter. In exchange for the payment, the Department closed its examination related to this matter and declared all tax years prior to 2010 closed to future examination. Excluding this non-recurring charge, as well as the related federal tax benefit, the Company’s effective tax rates (“ETRs”) during the first quarters of 2014 and 2013 were 36.4% and 32.1%, respectively. The Company’s ETR will vary from period to period depending primarily on the impact of non-taxable revenue items, such as tax-exempt interest income and earnings from BOLI. The Company’s ETR will generally be higher in periods in which these non-taxable revenue items comprise a smaller portion of pre-tax income.

Financial Condition

Overview The Company’s total assets decreased by $28.3 million or 1.2% during the three months ended March 31, 2014. During this period the Company’s mortgage-related securities available-for-sale declined by $25.5 million and its total loans receivable declined by $6.7 million. Cash flow from these sources, as well as a $9.6 million seasonal increase in advance payments from borrowers for taxes and insurance, funded a $20.2 million decrease in the Company’s deposit liabilities and a $15.3 million decrease in overnight borrowings from the FHLB of Chicago, which are a component of borrowings. The Company’s total shareholders’ equity increased from $281.0 million at December 31, 2013, to $283.3 million at March 31, 2014. The following paragraphs describe these changes in greater detail, as well as other changes in the Company’s financial condition during the three months ended March 31, 2014.

Mortgage-Related Securities Available-for-Sale The Company’s portfolio of mortgage-related securities available-for-sale declined by $25.5 million or 5.7% during the three months ended March 31, 2014. This decrease was principally caused by periodic principal repayments on the securities. The Company did not purchase any available-for-sale securities during the three months ended March 31, 2014.

Changes in the fair value of the Company’s mortgage-related securities available-for-sale are recorded through accumulated other comprehensive loss (net of deferred income taxes), 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 $7.9 million at March 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. As of March 31, 2014, and December 31, 2013, the carrying value of the Company’s investment in private-label CMOs was $36.2 million and $38.7 million, respectively. The net unrealized gain on the securities as of such dates was $902,000 and $580,000, respectively. As of March 31, 2014, $27.6 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 $780,000. 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 loss of $502,000.

As of March 31, 2014, management has determined that none of the Company’s private-label CMOs were other-than-temporarily impaired. The Company does not intend to sell these securities and it is unlikely it would be required to sell them before the 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.

Mortgage-Related Securities Held-to-Maturity The Company maintains a portfolio of mortgage-related securities held-to-maturity that consists of securities issued and guaranteed by Fannie Mae and backed by multi-family residential loans. The Company has classified these securities has held-to-maturity because it has the ability and intent to hold these securities until they mature. The Company did not purchase any held-to-maturity securities during the three months ended March 31, 2014.

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. Loans held-for-sale were $4.3 million and $1.8 million at March 31, 2014, and December 31, 2013, respectively. For reasons noted previously in this report, management believes that sales of one- to four-family mortgage loans during the remainder of 2014 will continue to be substantially lower than they were in 2013.

Loans Receivable The Company’s loans receivable decreased by $6.7 million or 0.4% during the three months ended March 31, 2014. During the first quarter of 2014 the Company’s total construction and development loans outstanding declined by $28.9 million or 14.5% due to the expected transition of certain borrowers from construction to permanent financing outside of the Company. This development was partially offset by a $15.3 million or 9.2% increase in commercial and industrial loans outstanding during the same period due to a combination of new business and increased line utilization by existing borrowers. The Company’s total loans outstanding have declined in the first quarter of each year during the past two years, but have finished each year higher than the previous year end. Total loans outstanding increased by $106.8 million or 7.6% in 2013 and by $82.6 million or 6.3% in 2012. Management also believes an overall increase in total loans is achievable for the full year in 2014. However, growth in total loans is subject to economic, market, and competitive factors outside of the Company’s control and there can be no assurances that expected loan growth will occur in 2014 or that total loans will not decrease during the period.

The following table sets forth the Company’s commercial and retail loans that were originated for portfolio during the periods indicated:

	Three Months Ended March 31
	2014		2013
	(Dollars in thousands)
Commercial loans:
Commercial and industrial	$	18,838	$	11,851
Commercial real estate		6,913		4,137
Multi-family real estate		8,188		11,683
Construction and development		3,950		21,107
Total commercial loans		37,889		48,778
Retail loans:
One- to four-family first mortgages (1)		15,027		17,150
Home equity		7,887		12,391
Other consumer		336		975
Total retail loans		23,250		30,516
Total loan originations	$	61,139	$	79,294

(1)

Excludes $13.0 million and $110.4 million in loans originated for sale during the three months ended March 31, 2014 and 2013, respectively.

Mortgage Servicing Rights The carrying value of the Company’s MSRs was $8.4 million at March 31, 2014, and $8.7 million at December 31, 2013, net of valuation allowances of $700 and $1,400 as of such dates, respectively. As of March 31, 2014, the Company serviced $1.13 billion in loans for third-party investors compared to $1.15 billion at December 31, 2013. Refer to “Results of Operations—Non-Interest Income,” above, for additional discussion related to the Company’s MSRs.

Other Assets As of March 31, 2014, and December 31, 2013, the Company’s net deferred tax asset, which is included as component of other assets, was $25.2 million and $27.4 million, respectively. 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 these dates. 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 trends 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 Company’s foreclosed properties and repossessed assets, which are included as a component of other assets, were $6.7 million at both March 31, 2014, and December 31, 2013. 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.

Deposit Liabilities Deposit liabilities decreased by $20.2 million or 1.1% during the three months ended March 31, 2014. Certificates of deposit declined by $34.8 million or 5.5% during the period while core deposits, consisting of checking, savings and money market accounts, increased by $14.6 million or 1.3%. The Company continues to closely manage the rates it offers on certificates of deposit to control its overall liquidity position, which has resulted in a decline in certificates of deposit in recent periods. Core deposits have increased in recent periods 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 the increase in core deposits in recent periods, however, was customer reaction to the low interest rate environment. Management believes that this environment has encouraged some customers to switch to core deposits in an effort to retain flexibility in the event interest rates rise in the future. If interest rates increase in the future, customer preference may shift from core 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 could have an adverse impact on its net interest margin.

Borrowings Borrowings, which consist of advances from the FHLB of Chicago, decreased by $15.3 million or 6.2% during the three months ended March 31, 2014. This decrease was primarily caused by a decrease in overnight borrowings from the FHLB of Chicago. During the period, cash flows from the Company’s mortgage-related securities and loans receivable portfolio were used to reduce overnight borrowings. The Company’s term advances from the FHLB of Chicago are subject to significant prepayment penalties if repaid by the Company prior to their stated maturity. Management believes that additional funds are available to be borrowed from the FHLB of Chicago or other sources in the future to fund maturing term advances, loan originations, security purchases, and other corporate purposes, if needed or desirable. However, there can be no assurances of the future availability of borrowings or any particular level of future borrowings.

Advance Payments by Borrowers for Taxes and Insurance Advance payments by borrowers for taxes and insurance (i.e., escrow deposits) were $13.0 million at March 31, 2014, compared to $3.4 million at December 31, 2013. Escrow deposits typically increase during the course of the calendar year until real estate tax obligations are paid, generally in December of each year or January of the following year.

Shareholders' Equity The Company’s shareholders’ equity increased from $281.0 million at December 31, 2013, to $283.3 million at March 31, 2014. This increase was due primarily to net income during the period, partially offset by the payment of cash dividends of $0.03 per share to shareholders. The book value of the Company’s common stock was $6.09 per share at March 31, 2014, compared to $6.05 per share at December 31, 2013.

On May 5, 2014, the Company’s board of directors declared a $0.04 per share dividend payable on May 30, 2014, to shareholders of record on May 16, 2014. For additional discussion relating to the Company’s ability to pay dividends refer to “Liquidity and Capital Resources—Capital Resources,” below.

Asset Quality The following table summarizes non-performing loans and assets as of the dates indicated:

	At March 31			At December 31
	2014			2013
	(Dollars in thousands)
Non-accrual commercial loans:
Commercial and industrial	$	231		$	284
Commercial real estate		4,128			4,401
Multi-family real estate		1,776			1,783
Construction and development		639			728
Total commercial loans		6,774			7,196
Non-accrual retail loans:
One- to four-family first mortgages		3,338			4,556
Home equity		549			676
Other consumer		85			104
Total non-accrual retail loans		3,972			5,336
Total non-accrual loans		10,746			12,532
Accruing loans delinquent 90 days or more (1)		499			443
Total non-performing loans		11,245			12,975
Foreclosed real estate and repossessed assets		6,734			6,736
Total non-performing assets	$	17,979		$	19,711

Non-performing loans to total loans		0.75	%		0.86	%
Non-performing assets to total assets		0.78			0.84
Interest income that would have been recognized if non-accrual loans had been current (2)	$	315		$	1,265
Interest income on non-accrual loans included in interest income (2)	$	94		$	658

(1)

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

(2)

Amounts shown are for the three months ended March 31, 2014, and the twelve months ended December 31, 2013, respectively.

The Company’s non-performing loans were $11.2 million or 0.75% of loans receivable as of March 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 $18.0 million or 0.78% of total assets and $19.7 million or 0.84% of total assets as of these same dates, respectively. Non-performing assets are classified as “substandard” in accordance with the Company’s internal risk rating policy. In addition to non-performing assets, at March 31, 2014, management was closely monitoring $37.2 million in additional loans that were classified as “special mention” and $38.3 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 March 31, 2014, most of the 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” during the period. However, this development was largely 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. In a number of specific instances in which loans were downgraded to “substandard,” management believes the conditions that caused the downgrade are temporary, and that it is likely such loans will be upgraded in the future, rather than experience additional deterioration. However, there can be no assurances. Management does not believe any of these particular loans were impaired as of March 31, 2014.

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.

A summary of the Company’s allowance for loan losses is shown below for the periods indicated:

	Three Months Ended March 31
	2014			2013
	(Dollars in thousands)
Balance at beginning of period	$	22,565		$	21,577
Provision for loan losses		13			891
Charge-offs:
Commercial and industrial		–			–
Commercial real estate		(30	)		(111	)
Multi-family real estate		–			–
Construction and development		–			(6	)
One- to four-family first mortgages		(210	)		(553	)
Home equity		(20	)		(534	)
Other consumer		(123	)		(86	)
Total charge-offs		(383	)		(1,290	)
Recoveries:
Commercial and industrial		–			–
Commercial real estate		100			187
Multi-family real estate		–			–
Construction and development		142			–
One- to four-family first mortgages		129			75
Home equity		6			–
Other consumer		5			5
Total recoveries		382			267
Net charge-offs		(1	)		(1,023	)
Balance at end of period	$	23,577		$	21,445

	March 31			December 31
	2014			2013
Allowance for loan losses to total loans		1.57	%		1.56	%
Allowance for loan losses to non-performing loans		209.67	%		181.62	%
Net charge-offs to average loans (1)		0.00	%		0.18	%

(1)

The rate for the three months ended March 31, 2014, is annualized.

The Company’s allowance for loan losses was $23.6 million or 1.57% of total loans at March 31, 2014, compared to $23.6 million or 1.56% of total loans at December 31, 2013. As a percent of non-performing loans, the Company’s allowance for loan losses was 209.7% at March 31, 2014, compared to 181.6% at December 31, 2013. Management believes the allowance for loan losses at March 31, 2014, was adequate to cover probable and estimable losses in the Company’s loan portfolio as of that date. However, future increases to the allowance may be necessary and results of operations could be adversely affected if future conditions differ from the assumptions used by management to determine the allowance for loan losses as of the end of the period.

Management is responsible for the timely and periodic determination of the amount of the allowance required. Future provisions for loan losses will continue to be based upon management’s assessment of the overall loan portfolio and the underlying collateral, trends in non-performing loans, current economic conditions, and other relevant factors. To the best of management’s knowledge, all known and inherent losses have been provided for in the allowance for loan losses.

Refer to “Operating Results—Provision for Loan Losses,” above, for additional discussion.

Liquidity and Capital Resources

Liquidity The term "liquidity" refers to the Company’s ability to generate cash flow to fund loan originations, loan purchases, deposit withdrawals, and operating expenses. The Company’s primary sources of funds are deposit liabilities, scheduled payments, prepayments, and maturities of loans and mortgage-related securities, sales of one- to four-family loans in the secondary market, borrowings from the FHLB of Chicago, and cash flow provided by the Company’s operations. From time-to-time the Company may also sell securities classified as available-for-sale. Historically, these sources of funds have been adequate to maintain liquidity, with the Company borrowing correspondingly more in periods in which its operations generate less cash.

Scheduled payments and maturities of loans and mortgage-related securities are relatively predictable sources of funds. However, cash flows from customer deposits, calls of investment securities (if any), and prepayments of loans and mortgage-related securities are strongly influenced by interest rates, general and local economic conditions, and competition in the marketplace. These factors increase the variability of cash flows from these sources of funds.

The Company is committed to maintaining a strong liquidity position; therefore, management monitors the Company’s liquidity position on a daily basis. Based upon historical experience and available sources of liquidity, management anticipates that the Company will have sufficient funds to meet current funding commitments. For additional discussion refer to “Financial Condition,” above, and “Qualitative and Quantitative Disclosures about Market Risk” in Part I, Item 3, below.

Capital Resources The Company’s ratio of shareholders’ equity to total assets was 12.22% at March 31, 2014, compared to 11.97% at December 31, 2013. The increase in this ratio was due in part to the Company’s net income, less the dividends it paid during the period. Also contributing was a decline in the Company’s total assets during the period, as noted in earlier paragraphs.

At March 31, 2014, the Bank exceeded each of the applicable regulatory capital requirements (refer to Note 8, “Shareholders’ Equity,” of the Unaudited Condensed Consolidated Financial Statements, above). In order to be classified as "well-capitalized" by the FDIC, the Bank is required to have Tier 1 (leverage) capital to total adjusted assets of at least 5.0% and total risk-based capital to risk-weighted assets of at least 10.0%. At March 31, 2014, the Bank had a Tier 1 capital ratio of 11.18% and a total risk-based capital ratio of 18.24%.

The payment of dividends 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 also subject to any 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 the Company will choose to or be able to repurchase its common stock in future periods.

In 2013 the FRB and the OCC published final regulatory capital rules under Basel III. These new rules will become effective on January 1, 2015, although certain aspects of the new rules will phase in over the following four years. At this time management does not expect these new rules to have a significant impact on the regulatory capital of the Bank, its financial condition, or its results of operations, although there can be no assurances. In addition, the Dodd-Frank Act will eventually impose specific capital requirements on savings and loan holding companies such as the Company. These developments, as well as other requirements that could be imposed by regulators, may impact the ability of the Company and/or its Bank to pay dividends or, in the case of the Company, repurchase its common stock.

Contractual Obligations, Commitments, Off-Balance Sheet Arrangements, and Contingencies

Contractual Obligations The following table presents, as of March 31, 2014, significant fixed and determinable contractual obligations to third parties by payment date (excluding interest payments due in the future on deposits and borrowed funds):

	Payments Due In
			One to		Three to		Over
	One Year		Three		Five		Five
	Or Less		Years		Years		Years		Total
	(Dollars in thousands)
Deposits with no stated maturity	$	1,143,422		–		–		–	$	1,143,422
Certificates of deposits		488,424	$	88,319	$	22,305		–		599,048
Borrowed funds		32,500		46,900		74,819	$	75,377		229,596
Operating leases		959		1,463		817		2,455		5,694
Purchase obligations		1,680		3,360		3,360		840		9,240
Deferred retirement plans and deferred compensation plans		1,405		1,627		1,594		5,831		10,457

The Company’s operating lease obligations represent short- and long-term lease and rental payments for facilities, certain software and data processing equipment, 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 executives and directors as described in Note 10, “Employee Benefit Plans,” to the Unaudited Condensed Consolidated Financial Statements, above.

Commitments to Extend Credit The following table details the amounts and expected maturities of approved commitments as of March 31, 2014:

Payments Due In

One to

Three to

Over

One Year

Three

Five

Or Less

Years

Total

(Dollars in thousands)

Commercial lines of credit

104,715

–

104,715

Commercial loans

4,670

283

–

5,044

Standby letters of credit

2,552

277

–

2,874

Multi-family and commercial real estate loans

131,070

–

131,070

Residential real estate loans

102,327

–

102,327

Revolving home equity and credit card lines

170,531

–

170,531

Net commitments to sell mortgage loans

6,804

–

6,804

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.

Off-Balance Sheet Arrangements At March 31, 2014, the Company had forward commitments to sell one- to four-family mortgage loans of $6.8 million to Fannie Mae. As described in Note 12, “Financial Instruments with Off-Balance Sheet Risk,” to the Company’s Unaudited Condensed Consolidated Financial Statements, the Company uses forward commitments to sell loans to mitigate interest rate risk on one- to four-family IRLCs and loans held-for-sale.

Contingent Liabilities The Company did not have a material exposure to contingent liabilities as of March 31, 2014.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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.

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 March 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 substantially from these assumptions.

Borrowings—based upon final maturity.

	March 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	$	37,522		$	61,122		$	159,434		$	144,841		$	23,435		$	426,354
Adjustable		208,380			59,234			82,724			36,434			–			386,772
Retail loans:
Fixed		25,229			53,786			95,800			51,049			59,202			285,066
Adjustable		134,148			142,515			83,162			32,803			29,489			422,117
Interest-earning deposits		17,396			–			–			–			–			17,396
Mortgage-related securities:
Fixed		32,061			87,216			161,868			121,301			121,818			524,264
Adjustable		43,876			–			–			–			–			43,876
Other interest-earning assets		13,240			–			–			–			–			13,240
Total interest-earning assets		511,852			403,873			582,988			386,428			233,944			2,119,085

Deposit liabilities:
Non-interest-bearing demand accounts		1,001			2,967			7,657			7,298			148,262			167,185
Interest-bearing demand accounts		1,445			4,283			11,051			10,532			213,980			241,291
Savings accounts		1,478			4,373			11,229			10,631			196,811			224,522
Money market accounts		510,425			–			–			–			–			510,425
Certificates of deposit		247,266			257,493			71,985			22,305			–			599,049
Advance payments by borrowers for taxes and insurance		–			13,000			–			–			–			13,000
Borrowings		25,305			8,442			49,585			76,286			69,978			229,596
Total non-interest- and interest- bearing liabilities		786,920			290,558			151,507			127,052			629,031			1,985,068
Interest rate sensitivity gap	$	(275,068	)	$	113,315		$	431,481		$	259,376		$	(395,087	)	$	134,017
Cumulative interest rate sensitivity gap	$	(275,068	)	$	(161,753	)	$	269,728		$	529,104		$	134,017
Cumulative interest rate sensitivity gap as a percent of total assets		(11.87	)%		(6.98	)%		11.63	%		22.82	%		5.78	%
Cumulative interest-earning assets as a percentage of non-interest- and interest-bearing liabilities		65.04	%		84.99	%		121.95	%		139.02	%		106.75	%

Based on the above gap analysis, at March 31, 2014, the Company’s interest-bearing liabilities maturing or repricing within one year exceeded its interest-earning assets maturing or repricing within the same period. Based on this information, over the course of the next year the Company’s net interest income could be adversely impacted by an increase in market interest rates. Alternatively, the Company’s net interest income could be favorably impacted by a decline in market interest rates. 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 Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Cautionary Statement,” as well as Part I, Item 1A, “Risk Factors,” of the Company’s 2013 Annual Report on Form 10-K.

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 March 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 a 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	$	279,694	$	(120,225	)		(30.1	)%		13.04	%		(23.9	)%
+300		307,268		(92,651	)		(23.2	)		14.03			(18.1	)
+200		338,482		(61,437	)		(15.4	)		15.14			(11.7	)
+100		369,010		(30,909	)		(7.7	)		16.16			(5.7	)
0		399,919		–			–			17.14			–
-100		402,564		2,645			0.7			16.88			(1.5	)

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 and reduced likelihood of calls on certain investment securities), partially offset by a decline in the present value of deposit liabilities and FHLB of Chicago advances. Alternatively, it should be noted 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 Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Cautionary Statement,” above, as well as Part I, Item 1A, “Risk Factors,” of the Company’s 2013 Annual Report on Form 10-K.

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.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as such terms are defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

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 fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

Item 1A. Risk Factors

Refer to “Risk Factors” in Part I, Item 1A, of the Company’s 2013 Annual Report on Form 10-K. Refer also to "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Cautionary Statement" in Part I, Item 2, above.

Item 6. Exhibits

Refer to Exhibit Index, which follows the signature page hereof.

SIGNATURES

Pursuant to the requirements 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
		(Registrant)

Date:	May 6, 2014	/s/ David A. Baumgarten
		David A. Baumgarten
		President and Chief Executive Officer

Date:	May 6, 2014	/s/ Michael W. Dosland
		Michael W. Dosland
		Senior Vice President and
		Chief Financial Officer

EXHIBIT INDEX

BANK MUTUAL CORPORATION

Form 10-Q for Quarter Ended March 31, 2014

Exhibit No.	Description	Incorporated Herein by Reference To	Filed Herewith

10.1	Bank Mutual Corporation 2014 Incentive Compensation Plan		X

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 Chief Executive Officer of Bank Mutual Corporation		X
32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by the Chief Financial Officer of Bank Mutual Corporation		X

101	The following materials are provided from Bank Mutual Corporation’s Quarterly Report on Form 10-Q for the period ended March 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 Statements of Comprehensive Income (iv) Unaudited Condensed Consolidated Statements of Equity, (v) Unaudited Condensed Consolidated Statements of Cash Flow, and (vi) Notes to Unaudited Condensed Consolidated Financial Statements.

101.INS	XBRL Instance Document		X

101.SCH	XBRL Taxonomy Extension Schema Document		X

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document		X

Exhibit No.	Description	Incorporated Herein by Reference To	Filed Herewith

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

Exhibit 10.1

BANK MUTUAL CORPORATION
2014 INCENTIVE COMPENSATION PLAN

I. Introduction.

1.01 Purpose . The Bank Mutual Corporation 2014 Incentive Compensation Plan (the "Plan") is intended to provide incentives that will attract and retain the best available (a) directors of Bank Mutual Corporation (the “Company”), and (b) key employees of the Company or any Subsidiary that now exists or hereafter is organized or acquired by the Company, provide additional incentive to such persons and promote the success and growth of the Company. These purposes may be achieved through the grant of Options to purchase Common Stock of the Company, the grant of Stock Appreciation Rights, the grant of Restricted Stock Awards, the grant of Restricted Stock Unit Awards, the grant of Performance Share Awards and the grant of Cash Incentive Awards, as described below.

1.02 Effective Date . The effective date of the Plan shall be February 3, 2014, subject to approval of the Plan by holders of a majority of the outstanding voting common stock of the Company. Any Award granted prior to such shareholder approval shall be expressly conditioned upon shareholder approval of the Plan.

II. Definitions.

2.01 “ Administrator ” means the administrator described in Section 4.01.

2.02 “ Award ” means an Incentive Stock Option, Non-Qualified Stock Option, Stock Appreciation Right, Restricted Stock Award, Restricted Stock Unit Award, Performance Share Award or Cash Incentive Award, as appropriate.

2.03 “ Award Agreement ” means the agreement between the Company and the Grantee specifying the terms and conditions as described thereunder.

2.04 “ Board ” means the Board of Directors of Bank Mutual Corporation.

2.05 “ Cash Incentive Award ” means a cash incentive award under Article X of the Plan.

2.06 “ Change in Control ” shall be deemed to have occurred if: (a) any “person” (as such term is used in Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) becomes the owner of securities of Bank Mutual, or any person becomes the beneficial owner, directly or indirectly, of a majority of the capital stock of the Company, in a transaction or transactions subject to the notice provisions of the Change in Bank Control Act of 1978, (12 U.S.C. 1817(j)) as amended from time to time, or approval under the Savings and Loan Holding Company Act (12 U.S.C. 1467a), as amended from time to time; (b) someone other than the Company becomes owner of more than 25% of the voting securities of Bank Mutual; (c) during any period of two (2) consecutive years, the individuals, who at the beginning of any such period constituted the directors of the Company, together with persons who were first elected as directors during such two-year period by or upon the recommendation of persons who were members of the Board immediately prior to such two-year period and who constituted a majority of the Board at the time of such election, cease to constitute a majority of the Board; or (d) the filing by the Company of a report or proxy statement with the Securities and Exchange Commission or the Office of Thrift Supervision disclosing in response to Item 1 of Form 8-K or Item 5 of Part II of Form 10-Q, each promulgated pursuant to the Securities Exchange Act of 1934, as amended (“Exchange Act”) or Item 6(e) of Schedule 14A promulgated thereunder, or successor Items, that a change in control of the Company has or may have occurred pursuant to any contract or transaction. However, notwithstanding the foregoing provisions, the merger, consolidation or other combination of Bank Mutual with, or sale of Bank Mutual to, or assumption of Bank Mutual by any company controlled by, controlling or under control with the Company shall not be considered a Change in Control under the Plan.

2.07 “ Code ” means the Internal Revenue Code of 1986, as it may be amended from time to time.

2.08 “ Common Stock ” or “ Stock ” means the common stock, $.01 par value, of the Company.

2.09 “ Company ” means Bank Mutual Corporation, a Wisconsin corporation.

2.10 “ Fair Market Value ” means, as of any date of determination, (a) the closing sale price of a share of Stock on the NASDAQ National Market System (or on such other recognized market or quotation system on which the trading prices of Stock are traded or quoted), or (b) if no such sale shall have been made on that day, on the last preceding day on which there was such a sale. If such Stock is not then listed or quoted as referenced above, Fair Market Value shall be an amount determined in good faith by the Administrator.

2.11 “ Grant Date ” means the date on which an Award is deemed granted, which shall be the date on which the Administrator authorizes the Award or such later date as the Administrator shall determine in its sole discretion.

2.12 “ Grantee ” means an individual who has been granted an Award.

2.13 “ Incentive Stock Option ” or “ ISO ” means an option that is intended to meet the requirements of Section 422 of the Code and regulations thereunder. No Option may be treated as an Incentive Stock Option unless the Plan is approved by the Company's shareholders.

2.14 “ Non-Qualified Stock Option ” or “ NSO ” means an option other than an Incentive Stock Option.

2.15 “ Option ” means an Incentive Stock Option or Non-Qualified Stock Option, as appropriate.

2.16 “ Performance Goal ” means a performance goal established by the Administrator prior to the grant of an Award that is based on the attainment of goals relating to one or more of the following business criteria measured on an absolute basis or in terms of growth or reduction: net income (pre-tax or after-tax and with adjustments as stipulated); earnings per share; return on assets employed ("ROAE"); total shareholder return; return on equity; return on capital employed; return on assets; return on tangible book value; operating income; operating profit; capital ratio; non-interest expense; deposit growth; loan loss provisions; risk adjusted return on capital; nonperforming asset ratio; earnings before depreciation, interest, taxes and amortization (“EBITDA”); loss ratio; expense ratio; stock price; economic value added; operating cash flow; strategic business criteria, consisting of one or more objectives based on meeting specified revenue, sales, credit quality, loan quality, market share, market penetration, geographic business expansion goals, objectively identified project milestones, production volume levels, cost targets and goals relating to acquisitions or divestitures; return on average assets or average equity; achievement of objectives relating to diversity, employee turnover or other human capital metrics; results of customer satisfaction surveys or other objective measures of customer experience; and/or debt ratings, debt leverage and debt service. The specific performance goals may be, on an absolute or relative basis, established based on one or more of the preceding business criteria with respect to the Company, any one or more Subsidiaries or other business units or product lines of the Company or a group of peer companies established by the Administrator. Performance targets shall be adjusted to mitigate the unbudgeted impact of material, unusual or nonrecurring gains and losses, accounting changes or other extraordinary events not foreseen at the time the targets were set unless the Administrator provides otherwise at the time of establishing the targets.

2.17 “ Performance Share Award ” means an Award under Article IX of the Plan, that is conditioned upon the satisfaction of pre-established performance goals.

2.18 “ Plan ” means the Bank Mutual Corporation 2014 Incentive Compensation Plan as set forth herein, as it may be amended from time to time.

2.19 “ Restricted Stock Award ” means a restricted stock award under Article VII of the Plan.

2.20 “ Restricted Stock Unit Award ” means a restricted stock unit award under Article VIII of the Plan.

2.21 “ Stock Appreciation Right ” or “ SAR ” means the right to receive cash or shares of Common Stock based upon the excess of the Fair Market Value of one share of Common Stock on the date the SAR is exercised over the grant price (which shall be not less than the Fair Market Value of a share of Common Stock on the Grant Date).

2.22 “ Subsidiary ” means any corporation in which the Company or another entity qualifying as a Subsidiary within this definition owns 50% or more of the total combined voting power of all classes of stock, or any other entity (including, but not limited to, partnerships and joint ventures) in which the Company or another entity qualifying as a Subsidiary within this definition owns 50% or more of the combined equity thereof.

2.23 “ Substitute Award ” mean an Awards granted or shares of Common Stock issued by the Company in substitution or exchange for awards previously granted by a predecessor or affiliated entity.

III. Shares Subject to Award.

3.01 Share Limit . Subject to adjustment as provided in Section 3.02 below, the number of shares of Common Stock of the Company that may be issued under the Plan shall not exceed three million (3,000,000) shares (the "Share Limit"), all of which may be issued in the form of Incentive Stock Options; provided that no individual may be granted Awards covering, in the aggregate, more than two hundred thousand (200,000) shares of Common Stock in any calendar year. If any Award granted under this Plan is canceled, terminates, expires, or lapses for any reason, any shares subject to such Award again shall be available for the grant of an Award under the Plan. Any Awards or portions thereof that are settled in cash and not in shares of Common Stock shall not be counted against the foregoing Share Limit.

3.02 Changes in Common Stock . Except as provided below, if any stock dividend is declared upon the Common Stock, or if there is any stock split, stock distribution, or other recapitalization of the Company with respect to the Common Stock, resulting in a split or combination or exchange of shares, the Administrator shall make or provide for such adjustment in the number of and class of shares that may be delivered under the Plan, and in the number and class of and/or price of shares subject to outstanding Awards as it may, in its discretion, deem to be equitable. Notwithstanding the foregoing, there shall be no adjustment in connection with any Awards made prior to an initial public offering of the Company's Common Stock unless otherwise determined by the Administrator.

IV. Plan ADMINISTRATION.

4.01 Administration . For purposes of the power to grant Awards to Company directors, the Administrator shall be the entire Board. For other Plan purposes, the Administrator shall be a committee designated by the Board to administer the Plan and shall be the Compensation Committee of the Board. The committee shall be constituted to permit the Plan to comply with the provisions of Rule 16b-3 under the Securities Exchange Act of 1934, as amended or any successor rule, and Section 162(m) of the Code. A majority of the members of the committee shall constitute a quorum. The approval of such a quorum, expressed by a vote at a meeting held either in person or by conference telephone call, or the unanimous consent of all members in writing without a meeting, shall constitute the action of the committee and shall be valid and effective for all purposes of the Plan.

4.02 Administrator Powers . The Administrator is empowered to adopt such rules, regulations and procedures and take such other action as it shall deem necessary or proper for the administration of the Plan. The Administrator shall also have authority to interpret the Plan, and the decision of the Administrator on any questions concerning the interpretation of the Plan shall be final and conclusive. The Administrator may consult with counsel, who may be counsel for the Company, and shall not incur any liability for any action taken in good faith in reliance upon the advice of counsel. Subject to the provisions of the Plan, the Administrator shall have full and final authority to:

(a)

designate the persons to whom Awards shall be granted;

(b)

grant Awards in such form and amount as the Administrator shall determine;

(c)

provide in an Award that vesting will be accelerated in the event of a Grantee's death or disability (as determined by the Administrator), a Change in Control or an event related to a Change in Control;

(d)

impose such limitations, restrictions and conditions upon any such Award as the Administrator shall deem appropriate;

(e)

waive in whole or in part any limitations, restrictions or conditions imposed upon any such Award as the Administrator shall deem appropriate;

(f)

modify, extend or renew any Award previously granted; and

(g)

grant Substitute Awards to individuals in substitution for awards previously granted by a predecessor or affiliated entity.

4.03 Binding Determinations . Any action taken by, or inaction of, the Company, any Subsidiary, or the Administrator relating or pursuant to this Plan and within its authority hereunder or under applicable law shall be within the absolute discretion of that entity or body and shall be conclusive and binding upon all persons. Neither the Board nor any Board committee, nor any member thereof or person acting at the direction thereof, shall be liable for any act, omission, interpretation, construction or determination made in good faith in connection with this Plan (or any award made under this Plan), and all such persons shall be entitled to indemnification and reimbursement by the Company in respect of any claim, loss, damage or expense (including, without limitation, attorneys’ fees) arising or resulting therefrom to the fullest extent permitted by law and/or under any directors and officers liability insurance coverage that may be in effect from time to time.

4.04 Delegation . The Board or designated committee may delegate all or any part of its responsibilities and powers to any executive officer or officers of the Company selected by it. Any such delegation may be revoked by the Board or by the designated committee at any time.

Stock options.

5.01 Granting of Stock Options . The Administrator may, in its discretion, grant Options to non-employee directors of the Company and to key employees of the Company and any of its Subsidiaries. In selecting the individuals to whom Options shall be granted, as well as in determining the number of Options granted, the Administrator shall take into consideration such factors as it deems relevant pursuant to accomplishing the purposes of the Plan. A Grantee may, if he or she is otherwise eligible, be granted an additional Option or Options if the Administrator shall so determine. Option grants under the Plan shall be evidenced by an Award Agreement in such form and containing such provisions as are consistent with the Plan as the Administrator shall from time to time approve.

5.02 Type of Option . At the time each Option is granted, the Administrator shall designate the Option as an Incentive Stock Option or a Non-Qualified Stock Option. Any Option designated as an Incentive Stock Option shall comply with the requirements of Section 422 of the Code, including the requirement that the Plan be approved by the Company's shareholders and that the maximum option term is ten years. If required by applicable tax rules regarding a particular grant, to the extent that the aggregate Fair Market Value (determined as of the date an Incentive Stock Option is granted) of the shares with respect to which an Incentive Stock Option grant under this Plan (when aggregated, if appropriate, with shares subject to other Incentive Stock Option grants made before said grant under this Plan or another plan maintained by the Company or any ISO Group member) is exercisable for the first time by an optionee during any calendar year exceeds $100,000 (or such other limit as is prescribed by the Code), such option grant shall be treated as a grant of Non-Qualified Stock Options pursuant to Code Section 422(d).

5.03 Purchase Price . The purchase price for a share subject to Option shall not be less than 100% of the Fair Market Value of the share on the date the Option is granted, provided, however, the purchase price of an Incentive Stock Option shall not be less than 110% of the Fair Market Value of such share on the date the Option is granted if the Grantee then owns (after the application of the family and other attribution rules of Section 424(d) or any successor rule of the Code) more than 10% of the total combined voting power of all classes of stock of the Company.

5.04 Option Terms . Each Option shall be evidenced by an Award Agreement that shall specify the number of Options granted, the term of the Option, and such other provisions as the Administrator shall determine. An Option will become vested and exercisable over the three-year period after the Option Grant Date, with the Option becoming vested and exercisable with respect to 1/3 of the shares covered by the Option one year after the Grant Date and an additional 1/3 becoming vested and exercisable on the second and third anniversaries of the Grant Date; provided that the Administrator may determine, at the time of grant, that the Option will become vested over a longer period of time.

5.05 Method of Exercise . An Option that has become exercisable may be exercised from time to time by written notice to the Company stating the number of shares being purchased and accompanied by the payment in full of the Option price for such shares. The purchase price may be paid (a) in cash, (b) by check, (c) with the approval of the Administrator, or if the applicable Agreement so provides, by delivering shares of Common Stock (“Delivered Stock”), (d) by surrendering to the Company shares of Common Stock otherwise receivable upon exercise of the Stock Option (a “Net Exercise”), or (e) any combination of the foregoing. For purposes of the foregoing, Delivered Stock and shares of Common Stock used in a Net Exercise shall be valued at their Fair Market Value determined as of the date of exercise of the Stock Option. No Participant shall be under any obligation to exercise any Stock Option hereunder.

VI. Stock Appreciation Rights.

6.01 Granting of SARs . The Administrator may, in its discretion, grant SARs to non-employee directors of the Company and to key employees of the Company and any of its Subsidiaries.

6.02 SAR Terms . Each SAR grant shall be evidenced by an Award Agreement that shall specify the number of SARs granted, the grant price (which shall be not less than the Fair Market Value of a share of Common Stock on the Grant Date), the term of the SAR, and such other provisions as the Administrator shall determine. An SAR will become vested and exercisable over the three-year period after the SAR Grant Date, with the SAR becoming vested and exercisable with respect to 1/3 of the shares covered by the SAR one year after the Grant Date and an additional 1/3 becoming vested and exercisable on the second and third anniversaries of the Grant Date; provided that the Administrator may determine, at the time of grant, that the SAR will become vested over a longer period of time.

6.03 Method of Exercise . An SAR that has become exercisable may be exercised by written notice to the Company stating the number of SARs being exercised.

6.04 Payment upon Exercise . Upon the exercise of SARs, the Grantee shall be entitled to receive an amount determined by multiplying (a) the difference obtained by subtracting the grant price from the Fair Market Value of a share of Common Stock on the date of exercise, by (b) the number of SARs exercised. At the discretion of the Administrator, the payment upon the exercise of the SARs may be in cash, in shares of Common Stock of equivalent value (valued at the Fair Market Value of the Common Stock on the date of exercise), or in some combination thereof. The number of available shares under Section 3.01 shall not be affected by any cash payments.

VII. Restricted Stock AWARDS.

7.01 Administration . The Administrator may, in its discretion, grant shares of Restricted Stock to non-employee directors of the Company and to key employees of the Company and any of its Subsidiaries. The Administrator shall determine the eligible persons to whom and the time or times at which grants of Restricted Stock will be made, the number of shares of restricted Common Stock to be awarded, the time or times within which such Awards may be subject to forfeiture and any other terms and conditions of the Awards. The Administrator may condition the grant of Restricted Stock upon the attainment of Performance Goals so that the grant qualifies as “performance-based compensation” within the meaning of Section 162(m) of the Code. The Administrator may also condition the grant of Restricted Stock upon such other conditions, restrictions and contingencies as the Administrator may determine. The provisions of Restricted Stock Awards need not be the same with respect to each recipient.

7.02 Registration . Any Restricted Stock Award granted hereunder may be evidenced in such manner as the Administrator may deem appropriate, including, without limitation, book-entry registration or issuance of a stock certificate or certificates. In the event any stock certificate is issued in respect of shares of Restricted Stock, such certificate shall be registered in the name of the Grantee and shall bear an appropriate legend (as determined by the Administrator) referring to the terms, conditions and restrictions applicable to such Restricted Stock. In the event such Restricted Stock is issued in book-entry form, the depository and the Company’s transfer agent shall be provided with notice referring to the terms, conditions and restrictions applicable to such Restricted Stock, together with such stop-transfer instructions as the Administrator deems appropriate.

7.03 Terms and Conditions . Restricted Stock Awards shall be subject to the following terms and conditions:

(a)

A Restricted Stock Award will become vested and exercisable over the three-year period after the Grant Date, with 1/3 of the Award becoming vested one year after the Grant Date and an additional 1/3 becoming vested on the second and third anniversaries of the Grant Date; provided that the Administrator may determine, at the time of grant, that the Restricted Stock Award will become vested over a longer period of time.

(b)

Until the applicable restrictions lapse or the conditions are satisfied, the Grantee shall not be permitted to sell, assign, transfer, pledge or otherwise encumber the Restricted Stock Award.

(c)

Except to the extent otherwise provided in the applicable Award Agreement and (d) below, the portion of the Award still subject to restriction shall be forfeited by the Grantee upon termination of a Grantee’s service for any reason.

(d)

In the event of hardship or other special circumstances of a Grantee whose employment is terminated (other than for cause), the Administrator may waive in whole or in part any or all remaining restrictions with respect to such Grantee’s shares of Restricted Stock.

(e)

If and when the applicable restrictions lapse, unlegended certificates for such shares shall be delivered to the Grantee.

(f)

Each Award shall be confirmed by, and be subject to the terms of, an Award Agreement identifying the restrictions applicable to the Award.

7.04 Rights as Shareholder . A Grantee receiving a Restricted Stock Award shall have all of the rights of a shareholder of the Company, including the right to vote the shares and the right to receive any cash dividends. Unless otherwise determined by the Administrator, cash dividends shall be automatically paid in cash and dividends payable in stock shall be paid in the form of additional Restricted Stock.

VIII. RESTICTED STock Unit Awards.

8.01 Administration . The Administrator may, in its discretion, grant Restricted Stock Unit Awards to non-employee directors of the Company and to key employees of the Company and any of its Subsidiaries. Restricted Stock Unit Awards entitle a Grantee to receive shares of Common Stock or cash payments based upon the Fair Market Value of shares of Common Stock if predetermined conditions are satisfied. The Administrator shall determine the eligible persons to whom and the time or times at which Restricted Stock Unit Awards will be made, the number of shares to be covered by the Award, the time or times within which such Awards may be subject to forfeiture and any other terms and conditions of the Awards. The Administrator may condition the grant of a Restricted Stock Unit Award upon the attainment of Performance Goals so that the grant qualifies as “performance-based compensation” within the meaning of Section 162(m) of the Code. The Administrator may also condition the grant of a Restricted Stock Unit Award upon such other conditions, restrictions and contingencies as the Administrator may determine. The provisions of Restricted Stock Unit Awards need not be the same with respect to each recipient.

8.02 Terms and Conditions . Restricted Stock Unit Awards shall be subject to the following terms and conditions:

(a)

A Restricted Stock Unit Award will become vested and exercisable over the three-year period after the Grant Date, with 1/3 of the Award becoming vested one year after the Grant Date and an additional 1/3 becoming vested on the second and third anniversaries of the Grant Date; provided that the Administrator may determine, at the time of grant, that the Restricted Stock Unit Award will become vested over a longer period of time.

(b)

Until the applicable restrictions lapse or the conditions are satisfied, the Grantee shall not be permitted to sell, assign, transfer, pledge or otherwise encumber the Restricted Stock Unit Award.

(c)

(d)

(e)

If and when the applicable restrictions lapse, the Company shall issue shares of Common Stock to the Grantee or pay to Grantee an amount equal to the Fair Market Value of a share of Common Stock multiplied by the number of shares covered by the Award for which the restrictions have then lapsed.

(f)

Each Award shall be confirmed by, and be subject to the terms of, an Award Agreement identifying the restrictions applicable to the Award.

IX. Performance Share Awards.

9.01 Administration . The Administrator may, in its discretion, grant Performance Share Awards to key employees of the Company and any of its Subsidiaries. Performance Share Awards entitle a Grantee to receive shares of Common Stock if predetermined conditions are satisfied. The Administrator shall determine the eligible employees to whom and the time or times at which Performance Share Awards will be made, the number of shares to be awarded, the time or times within which such Awards may be subject to forfeiture and any other terms and conditions of the Awards. The Administrator may condition the grant of a Performance Share Award upon the attainment of Performance Goals so that the grant qualifies as “performance-based compensation” within the meaning of Section 162(m) of the Code. The Administrator may also condition the grant of a Performance Share Award upon such other conditions, restrictions and contingencies as the Administrator may determine. The provisions of Performance Share Awards need not be the same with respect to each recipient.

9.02 Terms and Conditions . Performance Share Awards shall be subject to the following terms and conditions:

(a)

Until the applicable restrictions lapse or the conditions are satisfied, the Grantee shall not be permitted to sell, assign, transfer, pledge or otherwise encumber the Performance Share Award.

(b)

Except to the extent otherwise provided in the applicable Award Agreement and (c) below, the portion of the Award still subject to restriction shall be forfeited by the Grantee upon termination of a Grantee’s service for any reason.

(c)

(d)

If and when the applicable restrictions lapse, if any, unlegended certificates for such shares shall be delivered to the Grantee.

(e)

Each Award shall be confirmed by, and be subject to the terms of, an Award Agreement identifying the restrictions applicable to the Award, if any.

X. Cash Incentive Awards.

10.01 Administration . The Administrator may establish Cash Incentive Awards either alone or in addition to other Awards granted under the Plan. The Administrator shall determine the employees to whom and the time or times at which Cash Incentive Awards shall be granted, and the conditions upon which such Awards will be paid. The maximum Cash Incentive Award payable to an employee in any fiscal year shall not exceed four hundred thousand dollars ($400,000).

10.02 Terms and Conditions . Cash Incentive Awards shall be subject to the following terms and conditions:

(a)

A Cash Incentive Award under the Plan shall be paid solely on account of the attainment of one or more preestablished, objective Performance Goals. Performance Goals shall be based on one or more business criteria that apply to the individual, a business unit, or the Company as a whole. Performance Goals shall be established in writing by the Administrator not later than 90 days after the commencement of the period of service to which the Performance Goal relates The pre-established Performance Goal must state, in terms of an objective formula or standard, the method for computing the amount of compensation payable to any employee if the goal is attained.

(b)

Following the close of the performance period, the Administrator shall determine whether the Performance Goal was achieved, in whole or in part, and determine the amount payable to each employee.

(c)

This Plan does not limit the authority of the Company, the Board or the Administrator, or any Subsidiary to award bonuses or authorize any other compensation to any person.

XI. Effect of Corporate transactions.

11.01 Merger, Consolidation or Reorganization . In the event of a merger, consolidation or reorganization with another corporation in which the Company is not the surviving corporation or a merger, consolidation or reorganization involving the Company in which the Common Stock ceases to be publicly traded, the Administrator shall, subject to the approval of the Board, or the board of directors of any corporation assuming the obligations of the Company hereunder, take action regarding each outstanding and unexercised Award pursuant to either clause (a) or (b) below:

(a)

Appropriate provision may be made for the protection of such Award by the substitution on an equitable basis of appropriate shares of the surviving or related corporation, provided that the excess of the aggregate Fair Market Value of the shares subject to such Award immediately before such substitution over the exercise price thereof is not more than the excess of the aggregate fair market value of the substituted shares made subject to Award immediately after such substitution over the exercise price thereof; or

(b)

The Administrator may cancel such Award. In the event any Option or SAR is canceled, the Company, or the corporation assuming the obligations of the Company hereunder, shall pay the Grantee an amount of cash (less normal withholding taxes) equal to the excess of (i) the value, as determined by the Administrator, of the property (including cash) received by the holder of a share of Company Stock as a result of such event over (ii) the exercise price of such option or the grant price of the SAR, multiplied by the number of shares subject to such Award. In the event any other Award is canceled, the Company, or the corporation assuming the obligations of the Company hereunder, shall pay the Grantee an amount of cash or stock, as determined by the Administrator, based upon the value, as determined by the Administrator, of the property (including cash) received by the holder of a share of Company Stock as a result of such event. No payment shall be made to a Grantee for any Option or SAR if the purchase or grant price for such Option or SAR exceeds the value, as determined by the Administrator, of the property (including cash) received by the holder of a share of Company Stock as a result of such event.

11.02 Change in Control . In the event of a Change in Control, the Administrator shall have the right to cancel any outstanding Awards and pay the Grantee an amount determined under Section 11.01(b) above.

XII. Miscellaneous.

12.01 Withholding . The Company shall have the power and the right to deduct or withhold, or require a Grantee to remit to the Company, an amount sufficient to satisfy Federal, state, and local taxes (including the Grantee’s FICA obligation) required by law to be withheld with respect to any taxable event arising as a result of this Plan. With respect to withholding required upon the exercise of Options or SARs, upon the lapse of restrictions on Restricted Stock or Restricted Stock Units or the payment of Performance Stock, Grantees may elect to satisfy the withholding requirement, in whole or in part, by having the Company withhold shares having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax that could be imposed on the transaction.

12.02 No Employment or Retention Agreement Intended . Neither the establishment of, nor the awarding of Awards under this Plan shall be construed to create a contract of employment or service between any Grantee and the Company or its Subsidiaries; it does not give any Grantee the right to continued service in any capacity with the Company or its Subsidiaries or limit in any way the right of the Company or its Subsidiaries to discharge any Grantee at any time and without notice, with or without cause, or to any benefits not specifically provided by this Plan, or in any manner modify the Company’s right to establish, modify, amend or terminate any profit sharing or retirement plans.

12.03 Non-Transferability of Awards . Any Award granted hereunder shall, by its terms, be non-transferable by a Grantee other than by will or the laws of descent and shall be exercisable during the Grantee’s lifetime solely by the Grantee or the Grantee’s duly appointed guardian or personal representative. Notwithstanding the foregoing, the Administrator may permit a Grantee to transfer a Non-Qualified Stock Option or SAR to a family member or a trust or partnership for the benefit of a family member, in accordance with rules established by the Administrator.

12.04 Securities Laws . No shares of Common Stock will be issued or transferred pursuant to an Award unless and until all then applicable requirements imposed by Federal and state securities and other laws, rules and regulations and by any regulatory agencies having jurisdiction, and by any exchanges upon which the shares of Common Stock may be listed, have been fully met. The Administrator may impose such conditions on any shares of Common Stock issuable under the Plan as it may deem advisable, including, without limitation, restrictions under the Securities Act of 1933, as amended, under the requirements of any exchange upon which such shares of the same class are then listed, and under any blue sky or other securities laws applicable to such shares. The Administrator may also require the Grantee to represent and warrant at the time of issuance or transfer that the shares of Common Stock are being acquired only for investment purposes and without any current intention to sell or distribute such shares.

12.05 Rights as Shareholder . A Grantee receiving an Award shall not have any right of a shareholder of the Company with respect to the shares covered by the Award until shares of Stock have been issued to Grantee.

12.06 Clawback . The Awards granted under this Plan are subject to the terms of the Company’s recoupment, clawback or similar policy as it may be in effect from time to time, as well as any similar provisions of applicable law, any of which could in certain circumstances require repayment or forfeiture of awards or any shares of Common Stock or other cash or property received with respect to the awards (including any value received from a disposition of the shares acquired upon payment of the awards).

12.07 Dissolution or Liquidation . Upon the dissolution or liquidation of the Company, any outstanding Awards theretofore granted under this Plan shall be deemed canceled.

12.08 Controlling Law . The law of the State of Wisconsin, except its law with respect to choice of law, shall be controlling in all matters relating to the Plan.

12.09 Termination and Amendment of the Plan . The Board may from time to time amend, modify, suspend or terminate the Plan; provided, however, that no such action shall impair without the Grantee’s consent any Award theretofore granted under the Plan. To the extent then required by applicable law or any applicable listing agency or required under Sections 162, 422 or 424 of the Code to preserve the intended tax consequences of this Plan, or deemed necessary or advisable by the Board, any amendment to this Plan shall be subject to stockholder approval.

12.10 Section 409A Compliance . To the extent applicable, it is intended that the Plan and all Awards hereunder comply with the requirements of Section 409A of the Code, and the Plan and all Agreements shall be interpreted and applied by the Administrator in a manner consistent with this intent in order to avoid the imposition of any additional tax under Section 409A of the Code. In the event that any provision of the Plan or an Agreement is determined by the Administrator to not comply with the applicable requirements of Section 409A of the Code, the Administrator shall have the authority to take such actions and to make such changes to the Plan or an Agreement as the Administrator deems necessary to comply with such requirements, provided that no such action shall adversely affect any outstanding Award without the consent of the affected Participant.

Exhibit 31.1

CERTIFICATION

I, David A. Baumgarten, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2014, of Bank Mutual Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 6, 2014

/s/ David A. Baumgarten
David A. Baumgarten
President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, Michael W. Dosland, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2014, of Bank Mutual Corporation;

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 6, 2014

/s/ Michael W. Dosland
Michael W. Dosland
Senior Vice President and Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Bank Mutual Corporation (the “Company”) on Form 10-Q for the period ended March 31, 2014, as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), I, David A. Baumgarten, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ David A. Baumgarten
David A. Baumgarten
President and Chief Executive Officer
May 6, 2014

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Bank Mutual Corporation and will be retained by Bank Mutual Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Bank Mutual Corporation (the “Company”) on Form 10-Q for the period ended March 31, 2014, as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), I, Michael W. Dosland, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Michael W. Dosland
Michael W. Dosland
Chief Financial Officer
May 6, 2014