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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

xQuarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2015

  

OR

 

¨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 46,631,125 shares, at May 1, 2015.

 

 
 

 

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, 2015, and December 31, 2014   3
         
    Unaudited Condensed Consolidated Statements of Income  for the Three Months Ended March 31, 2015 and 2014   4
         
    Unaudited Condensed Consolidated Statements of Total Comprehensive Income for the Three Months Ended March 31, 2015 and 2014   5
         
    Unaudited Condensed Consolidated Statements of Equity for the Three Months Ended March 31, 2015 and 2014   6
         
    Unaudited Condensed Consolidated Statements of Cash Flows  for the Three Months Ended March 31, 2015 and 2014   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 2.   Unregistered Sales of Equity Securities and Use of Proceeds   49
         
Item 6.   Exhibits   49
         
SIGNATURES       50

 

2
 

 

PART I

 

Item 1. Financial Statements

 

Bank Mutual Corporation and Subsidiaries

Unaudited Condensed Consolidated Statements of Financial Condition

 

   March 31   December 31 
   2015   2014 
  (Dollars in thousands) 
Assets          
           
Cash and due from banks  $28,844   $34,727 
Interest-earning deposits   9,250    11,450 
Cash and cash equivalents   38,094    46,177 
Mortgage-related securities available-for-sale, at fair value   411,891    321,883 
Mortgage-related securities held-to-maturity, at amortized cost (fair value of $134,970 in 2015 and $134,117 in 2014)   131,817    132,525 
Loans held-for-sale   4,613    3,837 
Loans receivable (net of allowance for loan losses of $21,145 in 2015 and $22,289 in 2014)   1,632,072    1,631,303 
Mortgage servicing rights, net   7,641    7,867 
Other assets   183,743    184,854 
           
Total assets  $2,409,871   $2,328,446 
           
Liabilities and equity          
           
Liabilities:          
Deposit liabilities  $1,743,665   $1,718,756 
Borrowings   313,349    256,469 
Advance payments by borrowers for taxes and insurance   13,311    4,742 
Other liabilities   56,717    63,988 
Total liabilities   2,127,042    2,043,955 
Equity:          
Preferred stock–$0.01 par value:          
Authorized–20,000,000 shares in 2015 and 2014          
Issued and outstanding–none in 2015 and 2014        
Common stock–$0.01 par value:          
Authorized–200,000,000 shares in 2015 and 2014          
Issued–78,783,849 shares in 2015 and 2014          
Outstanding–46,642,625 shares in 2015 and 46,568,284 in 2014   788    788 
Additional paid-in capital   486,086    488,467 
Retained earnings   160,749    159,065 
Accumulated other comprehensive loss   (10,118)   (11,136)
Treasury stock–32,141,224 shares in 2015 and 32,215,565 in 2014   (354,676)   (356,467)
Total shareholders’ equity   282,829    280,717 
Non-controlling interest in real estate partnership       3,774 
Total equity including non-controlling interest   282,829    284,491 
           
Total liabilities and equity  $2,409,871   $2,328,446 

 

Refer to Notes to Unaudited Condensed Consolidated Financial Statements

 

3
 

 

Bank Mutual Corporation and Subsidiaries

Unaudited Condensed Consolidated Statements of Income

 

   Three Months Ended
March 31
 
   2015   2014 
   (Dollars in thousands,
except per share data)
 
Interest income:          
Loans  $16,517   $16,292 
Mortgage-related securities   2,842    3,356 
Investment securities   47    22 
Interest-earning deposits   4    3 
Total interest income   19,410    19,673 
Interest expense:          
Deposit liabilities   1,094    1,363 
Borrowings   1,152    1,163 
Total interest expense   2,246    2,526 
Net interest income   17,164    17,147 
Provision for (recovery of) loan losses   (964)   13 
Net interest income after provision for loan losses   18,128    17,134 
Non-interest income:          
Deposit-related fees and charges   2,803    2,858 
Brokerage and insurance commissions   1,166    688 
Mortgage banking revenue, net   866    630 
Loan-related fees   437    226 
Income from bank-owned life insurance (“BOLI”)   469    467 
Loss on real estate held for investment   (320)    
Other non-interest income   125    26 
Total non-interest income   5,546    4,895 
Non-interest expense:          
Compensation, payroll taxes, and other employee benefits   11,164    9,859 
Occupancy, equipment, and data processing costs   3,800    3,350 
Federal insurance premiums   370    374 
Advertising and  marketing   312    464 
Losses and expenses on foreclosed real estate, net   145    361 
Other non-interest expense   2,266    2,351 
Total non-interest expense   18,057    16,759 
Income before income taxes   5,617    5,270 
Income tax expense   2,064    2,438 
Net income before non-controlling interest   3,553    2,832 
Net loss attributable to non-controlling interest       12 
           
Net income  $3,553   $2,844 
           
Per share data:          
Earnings per share–basic  $0.08   $0.06 
Earnings per share–diluted  $0.08   $0.06 
Cash dividends per share paid  $0.04   $0.03 

 

Refer to Notes to Unaudited Condensed Consolidated Financial Statements

 

4
 

 

Bank Mutual Corporations and Subsidiaries

Unaudited Condensed Consolidated Statements of Total Comprehensive Income

 

   Three Months Ended
March 31
 
   2015   2014 
   (Dollars in thousands) 
         
Net income before non-controlling interest  $3,553   $2,832 
Other comprehensive income, net of tax:          
Change in net unrealized gain on securities available-for-sale, net of deferred income taxes of $417 in 2015 and $337 in 2014   623    503 
Amortization of net prior service costs and unrecognized loss included in net periodic benefit cost, net of deferred income taxes of $265 in 2015 and $68 in 2014   395    101 
Total other comprehensive income, net of tax   1,018    604 
Total comprehensive income before non-controlling interest   4,571    3,436 
Comprehensive loss attributable to non-controlling interest       12 
           
Total comprehensive income  $4,571   $3,448 

 

Refer to Notes to Unaudited Condensed Consolidated Financial Statements

 

5
 

 

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, 2015  $788   $488,467   $159,065   $(11,136)  $(356,467)  $3,774   $284,491 
Net income           3,553                3,553 
Decrease in non-controlling interest in real estate partnership                       (3,774)   (3,774)
Other comprehensive income               1,018            1,018 
Purchase of treasury stock                   (1,190)       (1,190)
Issuance of restricted stock       (2,366)           2,366         
Exercise of stock options       (402)           615        213 
Share based payments       387                    387 
Cash dividends ($0.04 per share)           (1,869)               (1,869)
                                    
Balance at March 31, 2015  $788   $486,086   $160,749   $(10,118)  $(354,676)      $282,829 
                                    
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 restricted stock       (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 

 

Refer to Notes to Unaudited Condensed Consolidated Financial Statements

 

6
 

 

Bank Mutual Corporation and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

 

   Three Months Ended
March 31
 
   2015   2014 
   (Dollars in thousands) 
Operating activities:          
Net income  $3,553   $2,844 
Adjustments to reconcile net income to net cash from operating activities:          
Provision for (recovery of) loan losses   (964)   13 
Loss on foreclosed real estate, net   35    234 
Provision for depreciation   775    698 
Amortization of mortgage servicing rights   508    422 
Decrease in MSR valuation allowance       (1)
Net premium amortization on securities   446    478 
Loans originated for sale   (26,130)   (13,043)
Proceeds from loan sales   25,770    10,784 
Gain on loan sales activities, net   (698)   (336)
Deferred income tax expense   2,065    1,510 
Loss on real estate held for investment   320     
Other, net   (9,239)   (5,936)
Net cash used by operating activities   (3,559)   (2,333)
Investing activities:          
Principal repayments on mortgage-related securities available-for-sale   24,819    25,994 
Principal repayments on mortgage-related securities held-to-maturity   580    385 
Purchases of mortgage-related securities available-for-sale   (114,105)    
Purchases of FHLB of Chicago stock   (1,758)   (995)
Net decrease (increase) in loans receivable   (956)   5,793 
Proceeds from sale of foreclosed properties   747    687 
Net purchases of premises and equipment   (1,407)   (516)
Net cash provided (used) by investing activities   (92,080)   31,348 
Financing activities:          
Net increase (decrease) in deposit liabilities   24,875    (20,212)
Net increase (decrease) in short-term borrowings   57,200    (15,000)
Repayments of long-term borrowings   (320)   (304)
Net increase in advance payments by borrowers for taxes and insurance   8,569    9,569 
Cash dividends   (1,869)   (1,397)
Purchases of treasury stock   (1,190)    
Other, net   291    949 
Net cash provided (used) by financing activities   87,556    (26,395)
Increase (decrease) in cash and cash equivalents   (8,083)   2,620 
Cash and cash equivalents at beginning of period   46,177    42,456 
Cash and cash equivalents at end of period  $38,094   $45,076 
Supplemental information:          
Cash paid in period for:          
Interest on deposit liabilities and borrowings  $2,134   $2,524 
Income taxes   164    905 
Non-cash transactions:          
Loans  transferred to foreclosed properties and repossessed assets   1,151    919 

 

Refer to Notes to Unaudited Condensed Consolidated Financial Statements

 

7
 

 

Bank Mutual Corporation and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

March 31, 2015

 

(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 2014 Annual Report on Form 10-K. Operating results for the three months ended March 31, 2015, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. For the three months ended March 31, 2014, $226 that was originally reported in that period as a component of “other non-interest income” was reclassified to “loan-related fees” to conform to the presentation format in 2015.

 

In the first quarter of 2015 the Company determined that it was no longer necessary under GAAP to consolidate a partial interest it has in a real estate partnership. This change eliminated the non-controlling interest entries in the Company’s Unaudited Consolidated Statements of Financial Condition and Statement of Income as of and for the period ended March 31, 2015, respectively. Effective with this change, the Company determined that the equity method of accounting was appropriate for its ownership interest in this partnership. As such, the $901 carrying value of the Company’s interest in the partnership at March 31, 2015, was included as a component of other assets and its $2 interest in the loss of the partnership during the three months ended March 31, 2015, was included as a component of other non-interest income.

 

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

 

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

 

In the first quarter of 2015 the FASB issued new accounting guidance relating to the consolidation of legal entities for financial reporting purposes. For public companies, the guidance is effective for periods beginning after December 15, 2015, which will be the first quarter of 2016 for the Company. The Company’s adoption of this new guidance is not expected to have a material impact on its results of operations or financial condition.

 

8
 

 

Bank Mutual Corporation and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

March 31, 2015

 

(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, 2015 
       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
Securities available-for-sale:                    
Federal Home Loan Mortgage Corporation  $220,463   $3,877   $(29)  $224,311 
Federal National Mortgage Association   157,452    2,632    (93)   159,991 
Government National Mortgage Association   24    5        29 
Private-label CMOs   27,185    630    (255)   27,560 
Total available-for-sale  $405,124   $7,144   $(377)  $411,891 
Securities held-to-maturity:                    
Federal National Mortgage Association  $131,817   $3,153       $134,970 
Total held-to-maturity  $131,817   $3,153       $134,970 

 

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

 

9
 

 

Bank Mutual Corporation and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

March 31, 2015

 

(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, 2015 
   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  $29    3   $19,639               $29   $19,639 
Federal National Mortgage Association              $93    3   $12,875    93    12,875 
Private-label CMOs   112    6    7,511    143    5    6,564    255    14,075 
Total available-for-sale  $141    9   $27,150   $236    8   $19,439   $377   $46,589 

 

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

 

The Company determined that the unrealized losses on its mortgage-related securities were temporary as of March 31, 2015, and December 31, 2014. 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, 2015, and December 31, 2014, the Company had private-label CMOs, with a fair value of $21,987 and $23,254, respectively, and unrealized gains of $387 and $480, 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.

 

10
 

 

Bank Mutual Corporation and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

March 31, 2015

 

(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 for private label CMOs, as well as the end of period values for securities that have experienced such losses:

 

   Three Months Ended March 31 
   2015   2014 
Beginning balance of unrealized OTTI related to credit losses  $789   $789 
Reductions for actual losses realized   (68)    
Reductions for increase in cash flows expected to be received   (29)    
Ending balance of unrealized OTTI related to credit losses  $692   $789 
Adjusted cost at end of period  $5,230   $6,773 
Estimated fair value at end of period  $5,747   $7,402 

 

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, 2015 or 2014.

 

Mortgage-related securities available-for-sale with a fair value of approximately $64,349 and $79,753 at March 31, 2015, and December 31, 2014, respectively, were pledged to secure deposits, borrowings, and for other purposes as permitted or required by law.

 

11
 

 

Bank Mutual Corporation and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

March 31, 2015

 

(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 
   2015   2014 
Commercial loans:          
Commercial and industrial  $242,108   $226,537 
Commercial real estate   264,344    263,512 
Multi-family real estate   317,558    322,413 
Construction and development loans:          
Commercial real estate   44,758    42,405 
Multi-family real estate   220,812    211,239 
Land and land development   4,629    5,069 
Total construction and development   270,199    258,713 
Total commercial loans   1,094,209    1,071,175 
Retail loans:          
One- to four-family first mortgages:          
Permanent   472,504    480,102 
Construction   25,578    23,905 
Total one- to four-family first mortgages   498,082    504,007 
Home equity loans:          
Fixed term home equity   133,751    139,046 
Home equity lines of credit   77,955    80,692 
Total home equity loans   211,706    219,738 
Other consumer loans:          
Student   9,296    9,692 
Other   12,275    12,681 
Total other consumer loans   21,571    22,373 
Total retail loans   731,359    746,118 
Gross loans receivable   1,825,568    1,817,293 
Undisbursed loan proceeds   (171,089)   (162,471)
Allowance for loan losses   (21,145)   (22,289)
Deferred fees and costs, net   (1,262)   (1,230)
Total loans receivable, net  $1,632,072   $1,631,303 

 

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

 

At March 31, 2015, and December 31, 2014, certain one- to four-family mortgage loans, multi-family mortgage loans, and home equity loans with aggregate carrying values of approximately $418,000 and $342,000 were pledged to secure advances from the Federal Home Loan Bank (“FHLB”) of Chicago.

 

The unpaid principal balance of loans serviced for others was $1,074,119 and $1,087,107 at March 31, 2015, and December 31, 2014, respectively. These loans are not reflected in the consolidated financial statements.

 

12
 

 

Bank Mutual Corporation and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

March 31, 2015

 

(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, 2015 
   Commercial
and
Industrial
   Commercial
Real 
Estate
   Multi-Family
Real Estate
   Construction
and
Development
   One- to
Four-
Family
   Home Equity
and Other
Consumer
   Total 
Allowance for loan losses:                                   
Beginning balance  $2,349   $6,880   $6,078   $2,801   $3,004   $1,177   $22,289 
Provision   (458)   (318)   (111)   (7)   (120)   50    (964)
Charge-offs                   (78)   (200)   (278)
Recoveries   4    54            11    29    98 
Ending balance  $1,895   $6,616   $5,967   $2,794   $2,817   $1,056   $21,145 
Loss allowance individually evaluated for impairment      $262   $629               $891 
Loss allowance collectively evaluated for impairment  $1,895   $6,354   $5,338   $2,794   $2,817   $1,056   $20,254 
                                    
Loan receivable balances at the end of the period:                                   
Loans individually evaluated for impairment  $11,468   $15,266   $9,132   $2,137   $4,545   $482   $43,030 
Loans collectively evaluated for impairment   230,640    249,075    308,426    115,506    475,007    232,795    1,611,449 
Total loans receivable  $242,108   $264,341   $317,558   $117,643   $479,552   $233,277   $1,654,479 

 

   At or for the Three Months Ended March 31, 2014 
   Commercial
and
Industrial
   Commercial
Real
Estate
   Multi-
Family
Real Estate
   Construction
and
Development
   One- to
Four-
Family
   Home Equity
and Other
Consumer
   Total 
Allowance for loan losses:                                   
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 

  

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 net charge-offs, 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 $1,131 during the three months ended March 31, 2015, and a decrease of $340 during the three months ended March 31, 2014.

 

13
 

 

Bank Mutual Corporation and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

March 31, 2015

 

(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, 2015 
   Loans
Receivable
Balance, Net
   Unpaid
Principal
Balance
   Related
Allowance
for Loss
   Average Loan
Receivable
Balance, Net
   Interest
Income
Recognized
 
Impaired loans with an allowance recorded:                         
Commercial and industrial:                         
Term loans                    
Lines of credit                    
Total commercial and industrial                    
Commercial real estate:                         
Office  $1,922   $1,938   $262   $1,922     
Retail/wholesale/mixed                    
Industrial/warehouse                    
Other                    
Total commercial real estate   1,922    1,938    262    1,922     
Multi-family real estate   1,389    1,389    629    1,396   $7 
Construction and development:                         
Commercial real estate                    
Multi-family real estate                    
Land and land development                    
Total construction and development                    
One- to four-family                    
Home equity and other consumer:                         
Home equity                    
Student                    
Other                    
Total home equity and other consumer                    
Total with an allowance recorded  $3,311   $3,327   $891   $3,318   $7 
                          
Impaired loans with no allowance recorded:                         
Commercial and industrial:                         
Term loans  $102   $227       $152   $1 
Lines of credit   34    40        17    1 
Total commercial and industrial   136    267        169    2 
Commercial real estate:                         
Office   599    769        604    5 
Retail/wholesale/mixed   1,733    2,136        1,635    34 
Industrial/warehouse   208    265        210    4 
Other   25    159        27    4 
Total commercial real estate   2,565    3,329        2,476    47 
Multi-family real estate                    
Construction and development:                         
Commercial real estate   597    597        597     
Multi-family real estate                    
Land and land development   183    223        195    5 
Total construction and development   780    820        792    5 
One- to four-family   3,863    4,407        4,006    16 
Home equity and other consumer:                         
Home equity   381    581        437    2 
Student                    
Other   101    124        105     
Total home equity and other consumer   482    705        542    2 
Total with no allowance recorded  $7,826   $9,528       $7,985   $72 

 

14
 

 

Bank Mutual Corporation and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

March 31, 2015

 

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

 

3. Loans Receivable (continued)

 

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

 

15
 

 

Bank Mutual Corporation and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

March 31, 2015

 

(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, 2015 
   Pass   Watch   Special
Mention
   Substandard   Total 
Commercial and industrial:                         
Term loans  $61,904   $1,784   $829   $821   $65,338 
Lines of credit   134,802    27,584    3,737    10,647    176,770 
Total commercial and industrial   196,706    29,368    4,566    11,468    242,108 
Commercial real estate:                         
Office   54,265    5,419    15,258    4,909    79,851 
Retail/wholesale/mixed use   105,879    6,100    20,816    7,238    140,033 
Industrial/warehouse   33,779    1,889    618    3,094    39,380 
Other   5,052            25    5,077 
Total commercial real estate   198,975    13,408    36,692    15,266    264,341 
Multi-family real estate   300,904    7,522        9,132    317,558 
Construction and development:                         
Commercial real estate   19,940            597    20,537 
Multi-family real estate   92,477                92,477 
Land and land development   3,005    84        1,540    4,629 
Total construction/development   115,422    84         2,137    117,643 
One- to four-family   472,817    745    1,445    4,545    479,552 
Home equity and other consumer:                         
Home equity   211,325            381    211,706 
Student   9,296                9,296 
Other   12,143        31    101    12,275 
Total home equity and other consumer   232,764        31    482    233,277 
Total  $1,517,588   $51,127   $42,734   $43,030   $1,654,479 

 

16
 

 

Bank Mutual Corporation and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

March 31, 2015

 

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

 

3. Loans Receivable (continued)

 

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

 

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, 2015, or December 31, 2014. 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, 2015, or December 31, 2014.

 

17
 

 

Bank Mutual Corporation and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

March 31, 2015

 

(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, 2015 
   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          $83   $83   $65,255   $65,338   $102 
Lines of credit  $108   $22        130    176,640    176,770    34 
Total commercial and industrial   108    22    83    213    241,895    242,108    136 
Commercial real estate:                                   
Office   237        1,922    2,159    77,692    79,851    2,521 
Retail/wholesale/mixed   966    158    554    1,678    138,355    140,033    1,733 
Industrial/warehouse   208            208    39,172    39,380    208 
Other                   5,077    5,077    25 
Total commercial real estate   1,411    158    2,476    4,045    260,296    264,341    4,487 
Multi-family real estate   547            547    317,011    317,558    1,389 
Construction and development:                                   
Commercial real estate           597    597    19,940    20,537    597 
Multi-family real estate                   92,477    92,477     
Land and land development   82            82    4,547    4,629    183 
Total construction   82        597    679    116,964    117,643    780 
One- to four-family   8,414    1,430    3,750    13,594    465,958    479,552    3,863 
Home equity and other consumer:                                   
Home equity   696    252    381    1,329    210,377    211,706    381 
Student   62    144    312    518    8,778    9,296     
Other   76    32    101    209    12,066    12,275    101 
Total home equity and other consumer   834    428    794    2,056    231,221    233,277    482 
Total  $11,396   $2,038   $7,700   $21,134   $1,633,345   $1,654,479   $11,137 

 

18
 

 

Bank Mutual Corporation and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

March 31, 2015

 

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

 

3. Loans Receivable (continued)

 

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

 

As of March 31, 2015, and December 31, 2014, $312 and $540 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, 2015, and December 31, 2014, TDRs were $5,085 and $4,872, respectively, and consisted primarily of one- to four-family mortgage loans. TDRs in accrual status as of those same dates were $3,353 and $3,315, respectively. Additions to TDRs during the three month periods ended March 31, 2015 and 2014, 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.

 

19
 

 

Bank Mutual Corporation and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

March 31, 2015

 

(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 
   2015   2014 
MSRs at beginning of the period, net  $7,867   $8,737 
Additions   282    120 
Amortization   (508)   (422)
Decrease in valuation allowance       (1)
MSRs at end of the period, net  $7,641   $8,434 

 

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

 

      Amount 
Estimate for nine months ending December 31:  2015  $938 
Estimate for years ending December 31:  2016   1,079 
   2017   937 
   2018   799 
   2019   680 
   2020   652 
   Thereafter   2,556 
   Total  $7,641 

 

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, 2015. 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 
   2015   2014 
Accrued interest:          
Loans receivable  $4,691   $4,748 
Mortgage-related securities   1,177    1,027 
Interest-earning deposits   1     
Total accrued interest   5,869    5,775 
Foreclosed properties and repossessed assets:          
Commercial real estate   2,744    2,566 
Land and land development   1,349    1,693 
One-to four-family   944    409 
Total foreclosed properties and repossessed assets   5,037    4,668 
Bank-owned life insurance   60,272    59,830 
Premises and equipment, net   51,384    52,594 
Deferred tax asset, net   22,997    25,595 
Federal Home Loan Bank stock, at cost   15,967    14,209 
Other assets   22,217    22,183 
Total other assets  $183,743   $184,854 

 

20
 

 

Bank Mutual Corporation and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

March 31, 2015

 

(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 $2,646 and $3,243 at March 31, 2015, and December 31, 2014, respectively.

 

6. Deposit Liabilities

 

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

 

   March 31   December 31 
   2015   2014 
Checking accounts:          
Non-interest-bearing  $192,056   $187,852 
Interest-bearing   248,840    253,595 
Total checking accounts   440,896    441,447 
Money market accounts   536,729    532,705 
Savings accounts   222,684    220,557 
Certificates of deposit:          
Due within one year   344,218    383,814 
After one but within two years   110,861    66,586 
After two but within three years   65,661    48,328 
After three but within four years   12,271    10,401 
After four but within five years   10,345    14,918 
Total certificates of deposits   543,356    524,047 
Total deposit liabilities  $1,743,665   $1,718,756 

 

7. Borrowings

 

The following table summarizes borrowings as of the dates indicated:

 

   March 31, 2015   December 31, 2014 
       Weighted-       Weighted- 
       Average       Average 
   Balance   Rate   Balance   Rate 
FHLB overnight advances  $20,000    0.13%  $42,800    0.13%
FHLB term advances maturing in:                    
2015   95,950    0.21    18,450    0.79 
2016   48,450    0.82    48,450    0.82 
2017   35,256    1.45    32,765    1.50 
2018   37,247    2.15    37,293    2.16 
2019   19,262    3.00    19,307    3.00 
2020 and thereafter   57,184    3.65    57,404    3.65 
Total borrowings  $313,349    1.47%  $256,469    1.78%

 

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

 

21
 

 

Bank Mutual Corporation and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

March 31, 2015

 

(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. Regulatory Capital Requirements

 

The Company and Bank are subject to various regulatory capital requirements administered by federal banking agencies and as defined in applicable regulations. 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 Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and 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 Company and Bank to maintain minimum capital amounts and ratios as shown in the following table and as defined in the applicable regulations. Management believes, as of March 31, 2015, that the Company and the Bank met or exceeded all regulatory capital adequacy requirements to which it is subject. The following table presents the Company and the Bank’s actual and required regulatory capital amounts and ratios as of the dates indicated. However, it should be noted that the Company was not subject to regulatory capital regulations prior to January 1, 2015, nor was the Bank subject to a common equity tangible Tier 1 (“CET1”) capital requirement prior to that same date. Furthermore, effective January 1, 2015, new regulatory capital adequacy requirements became effective which changed the inputs and methodology for computing the total capital, Tier 1 capital, and Tier 1 leverage capital ratios after that date.

 

   Actual   Required to be 
Adequately
Capitalized
   Required to be Well
Capitalized
 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
As of March 31, 2015:                        
At the Company:                              
Total capital  $302,720    17.46%  $138,687    8.00%  $173,359    10.00%
Tier 1 capital   281,575    16.24    104,015    6.00    138,687    8.00 
CET1 capital   281,575    16.24    78,011    4.50    112,683    6.50 
Tier 1 leverage capital   281,575    11.97    94,076    4.00    117,595    5.00 
At the Bank:                              
Total capital   273,816    15.80    138,663    8.00    173,329    10.00 
Tier 1 capital   252,671    14.58    103,997    6.00    138,663    8.00 
CET1 capital   252,671    14.58    77,998    4.50    112,664    6.50 
Tier 1 leverage capital   252,671    10.74    94,110    4.00    117,638    5.00 
                               
As of December 31, 2014                              
At the Bank:                              
Total capital  $285,406    18.19%  $125,489    8.00%  $156,861    10.00%
Tier 1 capital   265,765    16.94    62,744    4.00    94,117    6.00 
Tier 1 leverage capital   265,765    11.44    92,957    4.00    116,197    5.00 
                               

 

22
 

 

Bank Mutual Corporation and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

March 31, 2015

 

(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
 
   2015   2014 
Basic earnings per share:          
Net income  $3,553   $2,844 
Weighted average shares outstanding   46,240,124    46,249,884 
Vested restricted stock for period   48,887    31,561 
Basic shares outstanding   46,289,011    46,281,445 
Basic earnings per share  $0.08   $0.06 
           
Diluted Earnings Per Share:          
Net income  $3,553   $2,844 
Weighted average shares outstanding used in basic earnings per share   46,289,011    46,281,445 
Net dilutive effect of:          
Stock option shares   338,013    275,829 
Non-vested restricted stock   30,244    33,221 
Diluted shares outstanding   46,657,268    46,590,495 
Diluted earnings per share  $0.08   $0.06 

 

The Company had stock options for 452,200 shares outstanding as of March 31, 2015, and for 1,976,500 shares as of March 31, 2014, that were not included in the computation of diluted earnings per share because they were anti-dilutive. These options had weighted average exercise prices of $7.81 and $10.19 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 expensed by the Company were $192 and $170 during the three months ended March 31, 2015 and 2014, 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.

 

23
 

 

Bank Mutual Corporation and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

March 31, 2015

 

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

 

10. Employee Benefit Plans (continued)

 

In a prior period the Company closed the qualified defined benefit pension plan and supplemental plan to employees that were not eligible to participate in the plan as of the closing date, as well as any employees hired after that date. In addition, the Company reduced certain benefits paid under the plans and froze the benefits of participants in the plans that had less than 20 years of service.

 

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

 

   Three Months Ended 
   March 31 
   2015   2014 
Service cost  $242   $224 
Interest cost   660    667 
Expected return on plan assets   (735)   (722)
Amortization of net loss from earlier periods   656    165 
Net periodic benefit cost  $823   $334 

 

The net periodic benefit cost for the Company’s supplemental plan was $122 and $115 for the three months ended March 31, 2015 and 2014, respectively. The amount in 2015 consisted of interest cost of $99 and amortization of net loss from earlier periods of $23. The amount in 2014 consisted of interest cost of $113 and amortization of net loss from earlier periods of $2. The amount of the 2015 contribution, if any, will be determined based on a number of factors, including the results of an actuarial valuation report as of January 1, 2015. As of March 31, 2015, the amount of the 2015 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.

 

In 2014 the Company’s shareholders approved the 2014 Incentive Compensation Plan (the “2014 Plan”), which provides for the award of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, and cash awards. Stock-related awards under the 2014 Plan vest over a period of three or more years and, if applicable, have a maximum term of ten years. The number of shares of common stock of the Company that may be issued under the 2014 Plan is limited to 3,000,000 shares. As of March 31, 2015, 2,709,700 shares remain eligible for award under the 2014 Plan.

 

Restricted stock 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 $204 and $90 for the three month periods ended March 31, 2015 and 2014, respectively. Outstanding non-vested restricted stock grants had a fair value of $2,636 and an unamortized cost of $2,229 at March 31, 2015. The cost of these shares is expected to be recognized over a weighted-average period of 1.5 years.

 

During the three months ended March 31, 2015 and 2014, the Company recorded stock option compensation expense of $105 and $98, respectively. As of March 31, 2015, there was $954 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 1.5 years.

 

24
 

 

Bank Mutual Corporation and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

March 31, 2015

 

(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 
   2015   2014 
   Stock
Options
   Weighted
Average
Exercise
Price
   Stock
Options
   Weighted
Average
Exercise
Price
 
Outstanding at beginning of period   1,631,000   $5.2980    2,955,000   $8.0742 
Granted   37,000    6.7000    228,500    7.1700 
Exercised   (50,000)   4.2690         
Forfeited   (8,800)   5.0802    (10,000)   10.6730 
Outstanding at end of period   1,609,200   $5.3634    3,173,500   $8.0010 

 

The following table provides additional information regarding the Company’s outstanding options as of March 31, 2015.

 

    Remaining     Non-Vested Options     Vested Options  
    Contractual
Life
    Stock
Options
    Intrinsic
Value
    Stock
Options 
    Intrinsic
Value
 
Exercise price:                                      
$11.160   3.1                   32,000        
$12.025   3.4                   50,000        
$7.226   5.1       10,000     $ 1       40,000     $ 4  
$4.740   5.7       14,000       36       56,000       144  
$5.050   5.8       65,000       148       267,000       606  
$4.300   6.0       5,000       15       20,000       60  
$3.720   6.3       7,000       25       10,500       38  
$3.390   6.8       146,000       574       228,500       898  
$3.800   7.0       6,000       21       4,000       14  
$4.820   7.8       165,000       413       123,000       308  
$5.360   8.1       16,000       31       4,000       8  
$5.700   8.2       16,000       26       4,000       6  
$6.340   8.4       8,000       8       2,000       2  
$7.170   8.8       168,000       25       57,700       9  
$6.010   9.1       7,500       10              
$5.850   9.1       20,000       29              
$6.100   9.4       20,000       24              
$6.700   9.8       37,000       23              
Total           710,500     $ 1,409       898,700     $ 2,097  
Weighted-average remaining contractual life           7.8 years               6.3 years          
Weighted-average exercise price         $ 5.3365             $ 5.3848          

 

  

There were 50,000 options exercised during the three months ended March 31, 2015, which had an intrinsic value of $143. There were no options exercised during the three months ended March 31, 2014. The weighted average grant date fair value of non-vested options at March 31, 2015, was $1.53 per share. During the three months ended March 31, 2015, options for 37,000 shares were granted, options for 243,200 shares became vested, and non-vested options for 8,800 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

 

25
 

 

Bank Mutual Corporation and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

March 31, 2015

 

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

 

11. Stock-Based Benefit Plans (continued)

 

options and changes in the subjective input assumptions can materially affect the fair value estimate. Option valuation models such as Black-Scholes require the input of highly subjective assumptions including the expected stock price volatility, which is computed using ten years of actual price activity in the Company’s stock. The Company uses historical data of employee behavior as a basis to estimate the expected life of the options, as well as forfeitures due to employee terminations. The Company also uses its actual dividend yield at the time of the grant, as well as actual U.S. Treasury yields in effect at the time of the grant to estimate the risk-free rate. The following weighted-average assumptions were used to value 37,000 options granted during the three month period ended March 31, 2015: risk free rate of 1.75%, dividend yield of 2.40%, expected stock volatility of 31%, and expected term to exercise of 7.5 years. These options had a weighted-average value of $2.09 per option using these assumptions. 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.

 

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 
   2015   2014 
Unused commercial lines of credit  $110,250   $104,406 
Commercial loans   1,482    4,609 
Standby letters of credit   4,091    3,774 
Real estate loan commitments:          
Fixed rate   29,010    33,040 
Adjustable rate   279,350    216,714 
Unused consumer lines of credit   166,813    165,600 

 

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, 2015, and December 31, 2014, net unrealized gains of $120 and $84, respectively, were recognized in net gain on loan sales activities on these derivative instruments. These amounts were exclusive of net unrealized gains of $133 and $117 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

 

26
 

 

Bank Mutual Corporation and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

March 31, 2015

 

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

 

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

 

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, 2015 and 2014, net unrealized gains of $2,498 and $74, respectively, and net losses of $2,498 and $74, respectively, related to interest rate swaps and embedded derivatives were recorded in loan-related fees.

 

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

 

   March 31, 2015   December 31, 2014 
   Notional
Amount
   Fair Value   Notional
Amount
   Fair Value 
Interest rate lock commitments  $15,299   $386   $7,219   $142 
Forward commitments to sell loans   16,182    (266)   7,415    (58)
Embedded derivatives on commercial loans   23,933    910    23,985    649 
Receive-fixed interest rate swaps   31,189    1,588    20,144    910 
Pay-fixed interest rate swaps   55,122    (2,498)   44,129    (1,559)
Net unrealized gains       $120        $84 

 

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, 2015.

 

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

 

27
 

 

Bank Mutual Corporation and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

March 31, 2015

 

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

 

13. Fair Value Measurements (continued)

 

the impact of loan performance data, including, but not limited to, expectations relating to loan prepayments, default rates, and loss severities. Management has reviewed the pricing methodology used by its pricing service to verify that prices are determined in accordance with the fair value guidance specified in GAAP. The Company considers the fair value of mortgage-related securities to be Level 2 in the fair value hierarchy.

 

Loans 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, 2015:

 

   Weighted-Average   Range
Loan size  $118   $1-$417
Contractual interest rate   3.76%  2.00%-7.15%
Constant prepayment rate (“CPR”)   10.52%  5.59%-22.17%
Remaining maturity in months   227   5-480
Servicing fee   0.25% 
Annual servicing cost per loan (not in thousands)  $60  
Annual ancillary income per loan (not in thousands)  $30  
Discount rate   9.55%  9.50%-11.25%

 

MSR pools with an amortized cost basis greater than fair value are carried at fair value in the Company’s financial statements. There were no pools determined to be impaired at March 31, 2015 or December 31, 2014. Accordingly, the Company had no valuation allowance as of March 31, 2015, or December 31, 2014. The Company recorded a gain of $1 in the three months ended March 31, 2014, which was the change in the valuation allowance during that period.

 

Federal Home Loan Bank Stock FHLB of Chicago stock is carried at cost, which is its redeemable (fair) value, since the market for this stock is restricted. The Company considers the fair value of FHLB of Chicago stock to be Level 2 in the fair value hierarchy.

 

Accrued Interest Receivable and Payable The carrying values of accrued interest receivable and payable approximate their fair value. The Company considers the 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

 

28
 

 

Bank Mutual Corporation and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

March 31, 2015

 

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

 

13. Fair Value Measurements (continued)

 

current market borrowing interest rates to a schedule of aggregated expected monthly maturities on deposits. The Company considers the fair value of certificates of deposit to be Level 3 in the fair value hierarchy. The advance payments by borrowers for taxes and insurance are equal to their carrying amounts at the reporting date. The Company considers the fair value of advance 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
2015
   December 31
2014
 
   Carrying
Value
   Fair 
Value
   Carrying
Value
   Fair 
Value
 
Cash and cash equivalents  $38,094   $38,094   $46,177   $46,177 
Mortgage related securities available-for-sale   411,891    411,891    321,883    321,883 
Mortgage related securities held-to-maturity   131,817    134,970    132,525    134,117 
Loans held-for-sale   4,613    4,613    3,837    3,837 
Loans receivable, net   1,632,072    1,656,707    1,631,303    1,653,170 
Mortgage servicing rights, net   7,641    9,279    7,867    9,550 
Federal Home Loan Bank stock   15,967    15,967    14,209    14,209 
Accrued interest receivable   5,869    5,869    5,774    5,774 
Deposit liabilities   1,743,665    1,745,670    1,718,756    1,620,375 
Borrowings   313,349    322,821    256,469    264,659 
Advance payments by borrowers   13,311    13,311    4,742    4,742 
Accrued interest payable   604    604    492    492 
Unrealized gain (loss) on off-balance-sheet items:                    
Interest rate lock commitments on loans   386    386    142    142 
Forward commitments to sell loans   (266)   (266)   (58)   (58)
Embedded derivatives on commercial loans   910    910    649    649 
Receive-fixed interest rate swaps   1,588    1,588    910    910 
Pay-fixed interest rate swaps   (2,498)   (2,498)   (1,559)   (1,559)

 

29
 

 

Bank Mutual Corporation and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

March 31, 2015

 

(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, 2015 
   Level 1   Level 2   Level 3   Total 
Loans held-for-sale      $4,613       $4,613 
Mortgage-related securities available-for-sale       411,891        411,891 

 

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

 

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, 2015, the range of capitalization rates utilized to determine the fair value of the underlying collateral on certain loans was 6-12%. 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 $891 was recorded for loans with a recorded investment of $43,885 at March 31, 2015. These amounts were $904 and $45,425 at December 31, 2014, respectively. Provision for loan losses related to these loans was a recovery of $14 during the three month period ended March 31, 2015, and a provision of $316 during the twelve month period ended December 31, 2014. Provision for loan losses related to impaired loans at March 31, 2014, was $353 for the three months ended March 31, 2014.

 

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, 2015, $4,018 in foreclosed properties was valued at collateral value compared to $4,311 at December 31, 2014. Losses of $54 and $856 related to these foreclosed properties were recorded during the three months ended March 31, 2015, and the twelve months ended December 31, 2014, respectively. Losses on foreclosed properties valued at collateral value at March 31, 2014 were $248 for the three months ended March 31, 2014.

 

30
 

 

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 affect both collateral values and loan activity; periods of relatively high unemployment or economic weakness and other factors which could affect borrowers’ ability to repay their loans; negative developments affecting particular borrowers, which could further adversely impact loan repayments and collection; legislative and regulatory initiatives and changes, including action taken, or that may be taken, in response to difficulties in financial markets and/or which could negatively affect the rights of creditors; monetary and fiscal policies of the federal government; the effects of further regulation and consolidation within the financial services industry; regulators’ strict expectations for financial institutions’ capital levels and restrictions imposed on institutions, as to payments of dividends, share repurchases, or otherwise, to maintain or achieve those levels, including the possible effects of new regulatory capital requirements under Basel III; recent, pending, and/or potential rulemaking or other actions by the Consumer Financial Protection Bureau (“CFPB”); potential regulatory or other actions affecting the Company or the Bank; potential changes in Fannie Mae and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), which could impact the home mortgage market; increased competition and/or disintermediation within the financial services industry; changes in tax rates, deductions and/or policies; potential further changes in Federal Deposit Insurance Corporation (“FDIC”) premiums and other governmental assessments; changes in deposit flows; changes in the cost of funds; fluctuations in general market rates of interest and/or yields or rates on competing loans, investments, and sources of funds; demand for loan or deposit products; illiquidity of financial markets and other negative developments affecting particular investment and mortgage-related securities, which could adversely impact the fair value of and/or cash flows from such securities; changes in customers’ demand for other financial services; the Company’s potential inability to carry out business plans or strategies; changes in accounting policies or guidelines; natural disasters, acts of terrorism, or developments in the war on terrorism or other global conflicts; the risk of failures in computer or other technology systems or data maintenance, or breaches of security relating to such systems; and the factors discussed in the Company’s filings with the Securities and Exchange Commission, particularly under Part I, Item 1A, “Risk Factors,” of the Company’s 2014 Annual Report on Form 10-K.

 

Results of Operations

 

Overview The Company’s net income was $3.6 million or $0.08 per diluted share during the three months ended March 31, 2015, compared to $2.8 million or $0.06 per diluted share during the same period in 2014. Net income during these periods represented a return on assets (“ROA”) of 0.60% and 0.49%, respectively, and a return on equity (“ROE”) of 5.04% and 4.03%, respectively. The improvement in the 2015 quarter was due primarily to a recovery of loan losses in the 2015 period and higher brokerage and insurance commissions compared to the first quarter of 2014. Also contributing were higher mortgage banking revenue and loan-related fees, as well as lower income tax expense. These developments were partially offset by higher compensation-related costs, higher occupancy, equipment, and data processing costs, and a loss on real estate held for investment in the 2015 quarter. 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, 2015 and 2014.

 

31
 

 

Net Interest Income The Company’s net interest income increased slightly during the first three months of 2015 compared to the same period in 2014. This increase was primarily attributable to a $54.0 million or 2.6% increase in average earning assets between the periods, which was principally due to growth in the Company’s average loans receivable. Average loans receivable increased by $124.5 million or 8.3% during the three months ended March 31, 2015, compared to the same period in 2014. Management believes this annual rate of loan growth may be sustainable for the foreseeable future, although there can be no assurances.

 

The favorable impact of loan growth on net interest income was partially offset by an eight basis point decrease in the Company’s net interest margin in the first quarter of 2015 compared to the same quarter in the prior year. Net interest margin was 3.19% in the 2015 quarter compared to 3.27% in the 2014 quarter. During the quarter just ended, the average yield on the Company’s earning assets declined by 15 basis points compared to same period last year, but its average cost of funds declined by only six basis points between those periods. The decline in the average yield on earning assets was due in part to the continued repricing of the Company’s loan and securities portfolios to modestly lower levels in the current interest rate environment. The six basis point decline in the Company’s average cost of funds between the 2015 and 2014 quarters was due primarily to a nine basis point decline in the average cost of the Company’s certificates of deposit, also due to continued repricing of such deposits at lower rates. However, it should be noted that the Company’s average cost of certificates of deposit actually increased by five basis points in the first quarter of 2015 compared to the preceding fourth quarter of 2014. In recent months the Company has increased rates and lengthened maturity terms on certain of the certificates of deposit it offers customers in an effort to fund growth in earning assets and to manage exposure to future changes in interest rates. Accordingly, management believes that the Company’s certificates of deposit, which increased by $19.3 million or 3.7% during the first three months of 2015, may continue to increase in the near term and that the average cost of such deposits may also continue to increase in the future.

 

Also contributing to the six basis point decline in the Company’s average cost of funds in the first quarter of 2015 was an increase in average borrowings from the FHLB of Chicago compared to the same quarter in 2014. This increase was primarily in overnight and short-term borrowings, which were drawn to fund the aforementioned growth in earning assets between the periods. These borrowings typically have a lower interest cost than deposit liabilities, particularly certificates of deposit, which effectively reduces the Company’s average cost of funds. Management expects to replace these borrowings in the near term with increases in certificates of deposit, as described in the previous paragraph. However, there can be no assurances. If this occurs, management anticipates that the Company’s average cost of funds will increase in the near term.

 

Management believes the Company’s quarterly net interest margin will continue to trend modestly lower in the near term due to the reasons noted in the preceding paragraphs. Although a decline in net interest margin would generally have a negative impact on the Company’s net interest income, management anticipates that such impact may be more than offset by future growth in the Company’s earning assets, similar to that experienced in the first quarter of 2015, although such cannot be assured.

32
 

 

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 
   2015   2014 
       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)  $1,619,379   $16,517    4.08%  $1,494,848   $16,292    4.36%
Mortgage-related securities   504,368    2,842    2.25    582,234    3,356    2.31 
Investment securities (2)   14,860    47    1.27    13,050    22    0.67 
Interest-earning deposits   15,206    4    0.11    9,689    3    0.12 
Total interest-earning assets   2,153,813    19,410    3.60    2,099,821    19,673    3.75 
Non-interest-earning assets   226,052              226,867           
Total average assets  $2,379,865             $2,326,688           
                               
Liabilities and equity:                              
Interest-bearing liabilities:                              
Regular savings deposits  $218,458    14    0.03   $220,613    13    0.02 
Money market accounts   510,585    185    0.14    492,744    179    0.15 
Interest-bearing demand accounts   239,079    8    0.01    232,479    7    0.01 
Certificates of deposit   537,492    887    0.66    617,409    1,164    0.75 
Total deposit liabilities   1,505,614    1,094    0.29    1,563,245    1,363    0.35 
Advance payments by borrowers for taxes and insurance   9,203        0.00    8,749        0.00 
Borrowings   291,441    1,152    1.58    239,843    1,163    1.94 
Total interest-bearing liabilities   1,806,258    2,246    0.50    1,811,837    2,526    0.56 
Non-interest-bearing liabilities:                              
Non-interest-bearing deposits   192,373              160,672           
Other non-interest-bearing liabilities   99,334              71,863           
Total non-interest-bearing liabilities   291,707              232,535           
Total liabilities   2,097,965              2,044,372           
Total equity   281,900              282,316           
Total average liabilities and equity  $2,379,865             $2,326,688           
Net interest income and net interest rate spread       $17,164    3.10%       $17,147    3.19%
Net interest margin             3.19%             3.27%
Average interest-earning assets to average interest-bearing liabilities   1.19x             1.16x          

 

(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.

 

33
 

 

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, 2015
Compared to March 31, 2014
 
   Increase (Decrease) 
   Volume   Rate   Net 
   (Dollars in thousands) 
Interest-earning assets:               
Loans receivable  $1,309   $(1,084)  $225 
Mortgage-related securities   (429)   (85)   (514)
Investment securities   3    22    25 
Interest-earning deposits   2    (1)   1 
Total interest-earning assets   885    (1,148)   (263)
Interest-bearing liabilities:               
Savings accounts   (5)   6    1 
Money market accounts   7    (1)   6 
Interest-bearing demand accounts       1    1 
Certificates of deposit   (141)   (136)   (277)
Total deposit liabilities   (139)   (130)   (269)
Advance payments by borrowers for taxes and insurance            
Borrowings   225    (236)   (11)
Total interest-bearing liabilities   86    (366)   (280)
Net change in net interest income  $799   $(782)  $17 

 

Provision for Loan Losses The Company’s provision for (recovery of) loan losses was $(964,000) in the first quarter of 2015 compared to $13,000 in the same quarter last year. A continued decline in the Company’s actual loan charge-off experience in recent periods has had a favorable impact on the methodology the Company uses to compute general valuation allowances, which is the principal reason for the loss recovery in the first quarter of the year. Also contributing was a continued decline in the level of the Company’s non-performing and classified loans (for additional discussion refer to “Financial Condition—Asset Quality,” below). General economic, employment, and real estate conditions continue to be stable in the Company’s markets. If such conditions continue in the near term and the Company continues to experience stable or reduced levels of non-performing loans, classified loans, and/or loan charge-off experience, management anticipates that the provision for (recovery of) loan losses may continue to be net recoveries for the remainder of 2015. However, there can be no assurances that these trends will continue or that classified loans, non-performing loans, and/or loan charge-off experience will be stable or trend lower in future periods. Accordingly, there can be no assurances that the Company’s provision for (recovery of) loan losses will not fluctuate considerably from period to period.

 

Non-Interest Income Total non-interest income increased by $651,000 or 13.3% during the three months ended March 31, 2015, compared to the same period in 2014. Significant reasons for the changes in the components of non-interest income are discussed in the following paragraphs.

 

Deposit-related fees and charges declined by $55,000 or 1.9% during the three months ended March 31, 2015, compared to the same period in the previous year. Deposit-related fees and charges consist of overdraft fees, ATM and debit card fees, merchant processing fees, account service charges, and other revenue items related to services performed by the Company for its retail and commercial deposit customers. Management attributes the decline in deposit-related fees and charges to changes in 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.

 

34
 

 

Brokerage and insurance commissions were $1.2 million during the first quarter of 2015, which was $478,000 or almost 70% higher than the same quarter in the previous year. This revenue item generally consists of commissions earned on sales of tax-deferred annuities, mutual funds, and certain other securities, as well as personal and business insurance products. However, the Company recently entered into a new relationship with a third-party financial service provider that will enable the Company to expand the investment products and services that it provides to its brokerage and investment advisory customers. In consideration for this new relationship, the Company received a one-time, non-refundable, incentive payment from the third party. This incentive payment accounted for the increase in this revenue item in the first quarter of 2015. The impact of this payment was partially offset by a decline in commissions from sales of tax-deferred annuities in the first quarter of 2015 compared to the same quarter of last year.

 

Mortgage banking revenue, net, was $866,000 and $630,000 during three-month periods ended March 31, 2015 and 2014, respectively. The following table presents the components of mortgage banking revenue, net, for the periods indicated:

 

   Three Months Ended
March 31
 
   2015   2014 
   (Dollars in thousands) 
Gross loan servicing fees  $676   $715 
Mortgage servicing rights amortization   (508)   (422)
Mortgage servicing rights valuation recovery       1 
Loan servicing revenue, net   168    294 
Gain on loan sales activities, net   698    336 
Mortgage banking revenue, net  $866   $630 

 

Loan servicing revenue, net, was $168,000 in the first quarter of 2015 compared to $294,000 in the same period in 2014. This decrease was caused by a combination of lower gross loan servicing fees and higher amortization of mortgage servicing rights (“MSRs”). Gross loan servicing fees declined in the 2015 period due to an overall decline in loans serviced for third-party investors. As of March 31, 2015, the Company serviced $1.07 billion in loans for third-party investors compared to $1.13 billion one year earlier.

 

Amortization of MSRs increased by $86,000 or 20.4% during the first quarter of 2015 compared to the same quarter of 2014. Lower market interest rates for one- to four-family residential loans in late 2014 and early 2015 caused higher levels of actual and expected loan prepayment activity, which resulted in higher MSR amortization in the first quarter of 2015 compared to the same quarter in the prior year.

 

The change in the valuation allowance that the Company establishes against its MSRs is recorded as a recovery or loss, as the case may be, in the period in which the change occurs. As of March 31, 2015, the Company had no valuation allowance against its MSRs, which had a net book value of $7.6 million as of that date. MSR valuation allowances typically increase in periods of lower market interest rates, such as that which has occurred in recent months. During such rate environments, loan refinance activity and expectations for future loan prepayments generally increase, which typically reduces the fair value of MSRs and results in an increase in the MSR valuation allowance. However, market interest rates for one- to four-family mortgage loans as of March 31, 2015, had not declined sufficiently to generate an MSR valuation allowance as of that date. However, there can be no assurances that an increase in the MSR valuation allowance will not be required in the future, particularly if market interest rates for one- to four-family residential loans remain low or decline further. An increase in the MSR valuation allowance, if any, would result in a charge to earnings in the period of the increase.

 

35
 

 

Gain on loan sales activities, net, was $698,000 and $336,000 during the three-month periods ended March 31, 2015 and 2014, respectively. The Company typically sells most of the fixed-rate, one- to four-family mortgage loans that it originates. In the first quarter of 2015, sales of these loans were $25.4 million, which was $14.7 million or almost 140% higher than the same quarter of 2014. Lower market interest rates for one- to four-family residential loans in recent periods, as previously noted, resulted in higher originations and sales of such loans in the first quarter of 2015 compared to the same quarter of last year. Management anticipates that lower rates early in 2015, combined with expectations for an improving housing market in 2015, could continue to result in higher originations and sales of residential loans by the Company in 2015 compared to 2014. However, the origination and sale of residential loans is subject to variations in market interest rates and other factors outside of management’s control. Accordingly, there can be no assurances that such originations and sales will increase or will not vary considerably from period to period.

 

Loan-related fees were $437,000 and $226,000 during the first three months of 2015 and 2014, respectively. In previous periods, loan-related fees were reported as a component of other non-interest income. Loan-related fees consist of periodic income from lending activities that are not deferred as yield adjustments under the applicable accounting rules. The most significant source of fees in this revenue category are those realized from interest rate swaps related to commercial loan relationships. The Company mitigates the interest rate risk associated with certain of its loan relationships by executing interest rate swaps, the accounting for which results in the recognition of a certain amount of fee income at the time the swap contracts are executed. Management expects that this source of revenue will vary from period to period depending on borrower preference for the types of loan relationships that generate the interest rate swaps.

 

During the first quarter of 2015 the Company recorded a $320,000 loss on a number of real estate properties that are held for investment purposes. The losses were the result of recent third-party appraisals that were obtained on certain properties to assist management in making a decision on whether the properties should be listed for sale. Management intends to sell certain properties that it holds for investment in the near future, but does not expect to realize significant proceeds or to record material gains or losses on the disposition of such properties. However, there can be no assurances that the Company will be successful at selling the properties or that additional losses related to such properties will not be incurred in the future.

 

Other non-interest income was $125,000 during the first quarter of 2015 compared to $26,000 during the same quarter in 2014. This change was due primarily to an increase in the fair value of certain investments held in trust for non-qualified employee benefit plans.

 

Non-Interest Expense Total non-interest expense increased by $1.3 million or 7.8% during the three months ended March 31, 2015, compared to the same period in 2014. Significant reasons for the changes in the components of non-interest expense are discussed in the following paragraphs.

 

Compensation-related expenses increased by $1.3 million or 13.2% during the three months ended March 31, 2015, compared to the same period in 2014. This increase was partially the result of increased costs associated with the Company’s defined benefit pension plan, which was caused in large part by a decrease in the discount rate used to determine the present value of the pension obligation, but also to a change in certain other actuarial assumptions. Also contributing to the increase in compensation-related expenses was a change in 2014 in the manner in which employees earned benefits for compensated absences. This change reduced the Company’s expense for compensated absences in 2014, which resulted in that expense being $161,000 higher in the first quarter of 2015 than it was in the same period last year. Compensation-related expenses in the first quarter of 2015 were also higher because of normal annual merit increases granted to most employees at the beginning of the year. Finally, compensation-related expenses in the 2015 period included $83,000 for employee severance costs related to the Company’s recent announcement that it was closing seven retail branch offices, as more fully-described later in this report.

 

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Occupancy, equipment, and data processing expenses increased by $450,000 or 13.4% during the three months ended March 31, 2015, compared to the same period in the prior year. Most of this increase was caused by $215,000 in asset disposition costs and $54,000 in other costs associated with the Company’s recent announcement that it was closing seven retail branch offices, as noted later in this report. Contributing to a lesser degree was an increase in certain data processing and software costs related to new systems Bank Mutual has installed in recent periods.

 

Advertising and marketing-related expense was $312,000 and $464,000 during the three months ended March 31, 2015 and 2014, respectively. Management expects that advertising and marketing-related expense in the full year of 2015 will approximate what it was during the full year of 2014. However, this result will depend on future management decisions and there can be no assurances.

 

Net losses and expenses on foreclosed real estate were $145,000 and $361,000 during the three months ended March 31, 2015 and 2014, respectively. In general, the Company has experienced lower losses (or in some cases gains) and lower expenses on foreclosed real estate in recent periods due to reduced levels of foreclosed properties and improved market conditions.

 

During the first quarter of 2015 the Company announced that it was closing seven retail branch offices in connection with an efficiency and expense reduction effort. Management anticipates that this action will result in annual net cost savings of approximately $1.5 million, although closures will not be completed until later in the second quarter of 2015. The Company will continue to provide products and services to affected customers through its other nearby locations, as well as its internet, mobile banking, and telephone channels. Management also believes that it will retain the majority of deposits and loans currently serviced through these locations, which were $72.7 million and $25.4 million, respectively, at March 31, 2015, although there can be no assurances.

 

In connection with the closures, the Company recorded $352,000 in one-time costs in non-interest expense during the three months ended March 31, 2015. These estimated costs consisted of $215,000 in asset disposition costs, $83,000 in employment severance costs, and $54,000 in other costs, as previously noted in this release. The asset disposition costs were principally based on recent third-party appraisals of the related real estate. The Company transferred $917,000 in net book value of real estate related to the closed offices to held for investment as of March 31, 2015. Management intends to list these properties for sale following the closure of the offices in the second quarter.

 

Income Tax Expense Income tax expense was $2.1 million and $2.4 million during the three months ended March 31, 2015 and 2014, respectively. The first quarter of 2014 included a one-time charge of $518,000 related to a state tax settlement, net of the related federal benefit. Excluding that charge, the Company’s effective tax rates (“ETRs”) were 36.8% and 36.4% during the first quarters 2015 and 2014, respectively. The Company’s ETR will vary from period to period due primarily to the impact of non-taxable revenue items, such as earnings from bank-owned life insurance (“BOLI”) and tax-exempt interest income. 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 increased by $81.4 million or 3.5% during the three months ended March 31, 2015. During this period the Company’s mortgage-related securities available-for-sale increased by $90.0 million, which was funded by a $56.9 million increase in borrowings from the FHLB of Chicago and a $24.9 million increase in deposit liabilities. The Company’s total shareholders’ equity was $282.8 million at March 31, 2015, compared to $280.7 million at December 31, 2014. The following paragraphs describe these changes in greater detail, as well as other changes in the Company’s financial condition during the three months ended March 31, 2015.

 

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Mortgage-Related Securities Available-for-Sale The Company’s portfolio of mortgage-related securities available-for-sale increased by $90.0 million or 28.0% during the three months ended March 31, 2015. This increase was principally due to the purchase of $114.1 million in securities intended by management to maintain the available-for-sale portfolio at a level considered sufficient to sustain liquidity on the Company’s balance sheet.

 

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 $6.8 million at March 31, 2015, compared to a net unrealized gain of $5.7 million at December 31, 2014.

 

The Company maintains an investment in private-label CMOs that were purchased prior to 2007 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, 2015, and December 31, 2014, the carrying value of the Company’s investment in private-label CMOs was $27.6 million and $29.5 million, respectively. The net unrealized gain on the securities as of such dates was $387,000 and $480,000, respectively. As of March 31, 2015, $22.0 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 $387,000. As of December 31, 2014, $23.3 million of the Company’s private-label CMOs were rated less than investment grade and had a net unrealized gain of $480,000.

 

As of March 31, 2015, 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, 2015.

 

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 $4.6 million and $3.8 million at March 31, 2015, and December 31, 2014, respectively. For reasons noted previously in this report, management believes that sales of one- to four-family mortgage loans during the remainder of 2015 could continue to exceed the level of sales recorded during the same period in 2014, although there can be no assurances.

 

Loans Receivable The Company’s loans receivable increased by $769,000 or 0.05% during the three months ended March 31, 2015. During this period commercial and industrial loans increased by $15.6 million or 6.9%, due to increased originations and credit line utilization by borrowers, and construction loans, net of the undisbursed portion, increased by $4.5 million or 3.8%, also due to increased originations. However, most of the Company’s other loan categories experienced decreases during the period due to increased loan repayment activity and certain seasonal factors.

 

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Management believes economic, employment, and real estate conditions continue to be stable in the Company’s markets. As such, management continues to expect growth in the Company’s total loans during the remainder of 2015 to be similar to what it has been in recent years. Total loans receivable grew by 8.1%, 7.6%, and 6.2% in 2014, 2013, and 2012, respectively. However, growth in loans is subject to economic, market, and competitive factors outside of its control and there can be no assurances that expected loan growth will continue or that total loans will not decrease in future periods.

 

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
 
   2015   2014 
   (Dollars in thousands) 
Commercial loans:          
Commercial and industrial  $28,535   $18,838 
Commercial real estate   10,304    6,913 
Multi-family real estate   19,453    8,188 
Construction and development   34,983    3,950 
Total commercial loans   93,275    37,889 
Retail loans:          
One- to four-family first mortgages (1)   14,714    15,027 
Home equity   6,060    7,887 
Other consumer   318    336 
Total retail loans   21,092    23,250 
Total loan originations  $114,367   $61,139 

 

(1)Excludes $26.1 million and $13.0 million in loans originated for sale during the three months ended March 31, 2015 and 2014, respectively.

 

Mortgage Servicing Rights The carrying value of the Company’s MSRs was $7.6 million at March 31, 2015, and $7.9 million at December 31, 2014, respectively. The Company maintained no valuation allowance against its MSRs as of either of those dates. As of March 31, 2015, the Company serviced $1.07 billion in loans for third-party investors compared to $1.09 billion at December 31, 2014. Refer to “Results of Operations—Non-Interest Income,” above, for additional discussion related to the Company’s MSRs.

 

Other Assets As of March 31, 2015, and December 31, 2014, the Company’s net deferred tax asset, which is included as component of other assets, was $23.0 million and $25.6 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 $5.0 million and $4.7 million March 31, 2015, and December 31, 2014, respectively. There can be no assurances that foreclosed properties and repossessed assets will not fluctuate significantly from period to period.

 

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Deposit Liabilities The Company’s deposit liabilities increased by $24.9 million or 1.4% during the three months ended March 31, 2015. Certificates of deposit increased by $19.3 million or 3.7% during the period and transaction deposits, consisting of checking, savings, and money market accounts, increased by $5.6 million or 0.5%. As noted earlier in this report, in recent months the Company has increased rates and lengthened maturity terms on certain of the certificates of deposit it offers customers. Accordingly, management believes that the average cost of the Company’s certificates of deposit may increase modestly in the near term and that such trend could continue for the foreseeable future. Furthermore, management anticipates that certificates of deposit will continue to increase in 2015 as a result of this strategy and that such increase will be used to reduce the Company’s overnight and short-term borrowings from the FHLB of Chicago and/or fund growth in its earning assets, although there can be no assurances.

 

The Company’s transaction deposits have increased in recent periods due largely to management’s efforts to increase sales of such products and related services to commercial businesses, as well as its efforts to focus retail sales efforts on such products and services. Transaction deposits increased by 5.8%, 6.9%, and 7.9% in 2014, 2013, and 2012, respectively, due in large part to these efforts. Also contributing to these increases, however, has been customer reaction to the relatively low interest rate environment for deposit products. Management believes that this environment has encouraged some customers to switch to transaction deposits in an effort to retain flexibility in the event interest rates increase in the future. If interest rates increase in the future, customer preference may shift from transaction deposits back to certificates of deposit, which typically have a higher interest cost to the Company. This development could increase the Company’s cost of funds in the future, which would have an adverse impact on its net interest margin.

 

Borrowings Borrowings, which consist of advances from the FHLB of Chicago, increased by $56.9 million or 22.2% during the three months ended March 31, 2015. This increase was primarily caused by an increase in overnight and short-term borrowings from the FHLB of Chicago, which were drawn to fund growth in the Company’s earning assets during the period, as previously described. 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 $13.3 million at March 31, 2015, compared to $4.7 million at December 31, 2014. 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 was $282.8 million at March 31, 2015, compared to $280.7 million at December 31, 2014. The book value of the Company’s common stock as of these dates was $6.06 per share and $6.03 per share, respectively. These increases were due primarily to $3.6 million in net income during the period, as well as a $1.0 million decline in other accumulated comprehensive loss (the latter due principally to an increase in the fair value of mortgage-related securities available-for-sale, net of income taxes). These developments were partially offset by the payment of a regular quarterly dividend and the repurchase of common stock during the period. During the three months ended March 31, 2015, the Company repurchased 168,459 shares of its common stock at an average price of $7.07 per share.

 

On May 4, 2015, the Company’s board of directors declared a $0.05 per share dividend payable on May 29, 2015, to shareholders of record on May 15, 2015. For additional discussion relating to the Company’s ability to pay dividends or repurchase its common stock refer to “Liquidity and Capital Resources—Capital Resources,” below.

 

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Non-Controlling Interest in Real Estate Partnership In the first quarter of 2015 the Company determined that it was no longer necessary under GAAP to consolidate a partial interest it has in a real estate partnership. This change eliminated the non-controlling interest entries in the Company’s Unaudited Consolidated Statements of Financial Condition and Statement of Income as of and for the period ended March 31, 2015, respectively. Effective with this change, the Company determined that the equity method of accounting was appropriate for its ownership interest in this partnership. As such, the $901,000 net carrying value of the Company’s interest in the partnership at March 31, 2015, was included as a component of other assets and its $2,000 interest in the loss of the partnership during the three months ended March 31, 2015, was included as a component of other non-interest income.

 

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

 

   At March 31   At December 31 
   2015   2014 
   (Dollars in thousands) 
Non-accrual commercial loans:          
Commercial and industrial  $136   $201 
Commercial real estate   4,487    4,309 
Multi-family real estate   1,389    1,402 
Construction and development   780    803 
Total commercial loans   6,792    6,715 
Non-accrual retail loans:          
One- to four-family first mortgages   3,863    4,148 
Home equity   381    493 
Other consumer   101    108 
Total non-accrual retail loans   4,345    4,749 
Total non-accrual loans   11,137    11,464 
Accruing loans delinquent 90 days or more (1)   312    540 
Total non-performing loans   11,449    12,004 
Foreclosed real estate and repossessed assets   5,037    4,668 
Total non-performing assets  $16,486   $16,672 
           
Non-performing loans to total loans   0.70%   0.74%
Non-performing assets to total assets   0.68%   0.72%
Interest income that would have been recognized if non-accrual loans had been current (2)  $176   $634 
Interest income on non-accrual loans included in interest income (2)  $79   $483 

 

(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, 2015, and the twelve months ended December 31, 2014, respectively.

 

The Company’s non-performing loans were $11.4 million or 0.70% of loans receivable as of March 31, 2015, compared to $12.0 million or 0.74% of loans receivable as of December 31, 2014. Non-performing assets, which includes non-performing loans, were $16.5 million or 0.68% of total assets and $16.7 million or 0.72% 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, 2015, management was closely monitoring $42.7 million in additional loans that were classified as “special mention” and $31.6 million in additional loans that were classified as “substandard” in accordance with the Company’s internal risk rating policy. These amounts compared to $43.5 million and $33.4 million, respectively, as of December 31, 2014. As of March 31, 2015, 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. Management does not believe any of these loans were impaired as of March 31, 2015 although there can be no assurances that the loans will not become impaired in future periods.

 

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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 
   2015   2014 
   (Dollars in thousands) 
Balance at beginning of period  $22,289   $22,565 
Provision for (recovery of) loan losses   (964)   13 
Charge-offs:          
Commercial and industrial        
Commercial real estate       (30)
Multi-family real estate        
Construction and development        
One- to four-family first mortgages   (78)   (210)
Home equity   (42)   (20)
Other consumer   (158)   (123)
Total charge-offs   (278)   (383)
Recoveries:          
Commercial and industrial   4     
Commercial real estate   54    100 
Multi-family real estate        
Construction and development       142 
One- to four-family first mortgages   11    129 
Home equity   15    6 
Other consumer   14    5 
Total recoveries   98    382 
Net charge-offs   (180)   (1)
Balance at end of period   21,145   $23,577 

 

   March 31   December 31 
   2015   2014 
Allowance for loan losses to total loans   1.30%   1.37%
Allowance for loan losses to non-performing loans   184.69%   185.68%
Net charge-offs to average loans (1)   0.04%   0.10%

 

(1)The rate for the three months ended March 31, 2015, is annualized.

 

The Company’s allowance for loan losses was $21.1 million or 1.30% of total loans at March 31, 2015, compared to $22.3 million or 1.37% of total loans at December 31, 2014. As a percent of non-performing loans, the Company’s allowance for loan losses was 184.7% at March 31, 2015, compared to 185.7% at December 31, 2014. Management believes the allowance for loan losses at March 31, 2015, 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.

 

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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), prepayments of loans and mortgage-related securities, and draws by borrowers on unused lines of credit are strongly influenced by interest rates, general and local economic conditions, and/or 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 11.74% at March 31, 2015, compared to 12.06% at December 31, 2014. The decrease in this ratio was due primarily to an increase in the Company’s total assets during the period, as noted earlier in this report.

 

In 2015 the Company and the Bank became subject to new regulatory capital rules under Basel III. At March 31, 2015, the Company and Bank exceeded all of the regulatory capital requirements under these new rules, including the minimum amounts necessary to be classified as “well capitalized” (refer to Note 8, “Regulatory Capital Requirements,” of the Unaudited Condensed Consolidated Financial Statements, above).

 

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.

 

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

 

Contractual Obligations The following table presents, as of March 31, 2015, 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  $1,200,309               $1,200,309 
Certificates of deposit   344,218   $176,522   $22,616        543,356 
Borrowed funds   118,450    83,706    54,009   $57,184    313,349 
Operating leases   1,028    1,389    1,137    2,654    6,208 
Purchase obligations   2,400    4,800    3,600        10,800 
Deferred retirement plans and deferred compensation plans   822    1,586    1,646    5,088    9,142 

 

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, 2015:

 

   Payments Due In 
       One to   Three to   Over     
   One Year   Three   Five   Five     
   Or Less   Years   Years   Years   Total 
   (Dollars in thousands) 
Commercial lines of credit  $110,250               $110,250 
Commercial loans   1,482                1,482 
Standby letters of credit   3,402   $414       $275    4,091 
Multi-family and commercial real estate loans   282,741    979            283,720 
Residential real estate loans   24,640                24,640 
Revolving home equity and credit card lines   166,813                166,813 
Net commitments to sell mortgage loans   16,182                16,182 

 

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.

 

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Off-Balance Sheet Arrangements At March 31, 2015, the Company had forward commitments to sell one- to four-family mortgage loans of $16.2 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, 2015.

 

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, 2015, 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.
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   March 31, 2015 
   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  $38,506   $79,152   $157,164   $82,255   $13,285   $370,362 
Adjustable   397,198    77,717    78,195    22,922    919    576,951 
Retail loans:                              
Fixed   18,027    34,228    71,373    47,536    98,151    269,315 
Adjustable   122,541    124,100    89,613    43,300    53,594    433,148 
Interest-earning deposits   9,245                    9,245 
Mortgage-related securities:                              
Fixed   19,201    55,238    132,647    163,069    146,701    516,856 
Adjustable   20,085                    20,085 
Other interest-earning assets   15,967                    15,967 
Total interest-earning assets   640,770    370,435    528,992    359,082    312,650    2,211,929 
                               
Deposit liabilities:                              
Non-interest-bearing demand accounts                   192,055    192,055 
Interest-bearing demand accounts                   248,840    248,840 
Savings accounts                   222,684    222,684 
Money market accounts   536,729                    536,729 
Certificates of deposit   149,136    199,858    171,742    22,620        543,356 
Advance payments by borrowers for taxes and insurance       13,311                13,311 
Borrowings   100,320    3,488    102,377    54,986    52,178    313,349 
Total non-interest- and interest- bearing liabilities   786,186    216,657    274,119    77,606    715,757    2,070,325 
Interest rate sensitivity gap  $(145,416)  $153,778   $254,873   $281,476   $(403,107)  $141,604 
Cumulative interest rate sensitivity gap  $(145,416)  $8,362   $263,235   $544,711   $141,604      
Cumulative interest rate sensitivity gap as a percent of total assets   -6.03%   0.35%   10.92%   22.60%   5.88%     
Cumulative interest-earning assets as a percentage of non-interest- and interest-bearing liabilities   81.50%   100.83%   120.61%   140.21%   106.84%     

 

Based on the above gap analysis, at March 31, 2015, the Company’s interest-bearing liabilities maturing or repricing within one year approximates its interest-earning assets maturing or repricing within the same period. Based on this information, over the course of the next year increases or decreases could have a neutral effect on the Company’s net interest income. However, it should be noted that the Company’s future net interest income is affected by more than just future market interest rates. Net interest income is also affected by absolute and relative levels of earning assets and interest-bearing liabilities, the level of non-performing loans and other investments, and by other factors outlined in 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 2014 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.

 

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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 present value ratio over a range of interest rate change scenarios at March 31, 2015. The present value ratio 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.

 

Change in
Interest Rates
(Basis Points)
   Present Value
Ratio
   Change in
Ratio
 
 +400    13.4%   0.5%
 +300    13.3    0.4 
 +200    13.2    0.3 
 +100    12.9     
 0    12.9     
 -100    14.2    1.3 

 

Based on the above analysis, the Company’s present value ratio is not expected to be materially impacted by changes 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.

 

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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.

 

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PART II

 

Item 1A. Risk Factors

Refer to “Risk Factors” in Part I, Item 1A, of the Company’s 2014 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 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The following discloses information regarding the shares of Bank Mutual common stock repurchased by the Company during the first quarter of fiscal 2015, all of which were purchased pursuant to the Board’s authorization on February 2, 2015, which the Company publicly announced on that date.

 

Period  Shares
purchased
   Average
price
per share
   Shares purchased as
part of publicly
announced plans or
programs
   Approximate
number of shares
that may yet be
purchased
under publicly
announced
plans or
programs
 
01/01/15 to 01/31/15                
02/01/15 to 02/28/15   126,995   $7.04    126,995    2,211,059 
03/01/15 to 03/31/15   41,464    7.13    41,464    2,169,595 
Total/Average   168,459   $7.07    168,459      

 

Item 6. Exhibits

 

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

 

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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 5, 2015   /s/ David A. Baumgarten
    David A. Baumgarten
    President and Chief Executive Officer
     
Date: May 5, 2015   /s/ Michael W. Dosland
    Michael W. Dosland
    Senior Vice President and
    Chief Financial Officer

 

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EXHIBIT INDEX

 

BANK MUTUAL CORPORATION

 

Form 10-Q for Quarter Ended March 31, 2015

 

Exhibit No.   Description   Incorporated Herein
by Reference To
  Filed Herewith
             
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, 2015, 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

 

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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

 

52