10-K 1 v460394_10k.htm FORM 10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 - K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

Commission file number: 000-31207

BANK MUTUAL CORPORATION

(Exact name of registrant as specified in its charter)

Wisconsin	39-2004336
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

4949 West Brown Deer Road, Milwaukee, Wisconsin	53223
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code: (414) 354-1500

Securities registered pursuant to Section 12(b) of the Act:

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

Securities registered pursuant to Section 12(g) of the Act:

NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act

Yes ¨ No x

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

Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

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

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

Yes x No ¨

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

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

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

Yes ¨ No x

As of February 28, 2017, 45,887,719 shares of Common Stock were validly issued and outstanding. The aggregate market value of the Common Stock (based upon the $7.68 last sale price on The NASDAQ Global Select Market on June 30, 2016, the last trading date of the Company’s second fiscal quarter) held by non-affiliates (excluding outstanding shares reported as beneficially owned by directors and executive officers; does not constitute an admission as to affiliate status) was approximately $288.9 million.

		Part of Form 10-K Into Which
Documents Incorporated by Reference		Portions of Document are Incorporated

Proxy Statement for Annual Meeting of Shareholders on May 1, 2017		Part III

BANK MUTUAL CORPORATION

FORM 10-K ANNUAL REPORT TO

THE SECURITIES AND EXCHANGE COMMISSION

FOR THE YEAR ENDED DECEMBER 31, 2016

Table of Contents

Item		Page

Part I

1	Business	3

1A	Risk Factors	20

1B	Unresolved Staff Comments	24

2	Properties	24

3	Legal Proceedings	24

4	Mine Safety Disclosures	24

Part II

5	Market for Registrant's Common Equity, Related Stockholders Matters, and Issuer Purchases of Equity Securities	25

6	Selected Financial Data	27

7	Management's Discussion and Analysis of Financial Condition and Results of Operations	29

7A	Quantitative and Qualitative Disclosures About Market Risk	49

8	Financial Statements and Supplementary Data	52

9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	98

9A	Controls and Procedures	98

9B	Other Information	100

Part III

10	Directors, Executive Officers, and Corporate Governance	101

11	Executive Compensation	102

12	Security Ownership of Certain Beneficial Owners, Management, and Related Stockholder Matters	102

13	Certain Relationships and Related Transactions and Director Independence	102

14	Principal Accountant Fees and Services	102

Part IV

15	Exhibits, Financial Statement Schedules	103

16	Form 10-K Summary	103

SIGNATURES		104

Part I

Cautionary Statement

This report contains or incorporates by reference various forward-looking statements concerning the Company's prospects that are based on the current expectations and beliefs of management. Forward-looking statements may contain, and are intended to be identified by, words such as “anticipate,” “believe,” “estimate,” “expect,” “objective,” “projection,” “intend,” and similar expressions; the use of verbs in the future tense and discussions of periods after the date on which this report is issued are also forward-looking statements. The statements contained herein and such future statements involve or may involve certain assumptions, risks, and uncertainties, many of which are beyond the Company's control, that could cause the Company's actual results and performance to differ materially from what is stated or expected. In addition to the assumptions and other factors referenced specifically in connection with such statements, the following factors could impact the business and financial prospects of the Company: general economic conditions, including volatility in credit, lending, and financial markets; weakness and declines in the real estate market, which could affect both collateral values and loan activity; periods of relatively high unemployment or economic weakness and other factors which could affect borrowers’ ability to repay their loans; negative developments affecting particular borrowers, which could further adversely impact loan repayments and collection; legislative and regulatory initiatives and changes, including action taken, or that may be taken, in response to difficulties in financial markets and/or which could negatively affect the rights of creditors; monetary and fiscal policies of the federal government; the effects of further regulation and consolidation within the financial services industry; regulators’ strict expectations for financial institutions’ capital levels and restrictions imposed on institutions, as to payments of dividends, share repurchases, or otherwise, to maintain or achieve those levels; recent, pending, and/or potential rulemaking or various federal regulatory agencies that could affect the Company or the Bank, particularly as such relates to guidelines concerning certain types of lending; increased competition and/or disintermediation within the financial services industry; changes in tax rates, deductions and/or policies; potential further changes in Federal Deposit Insurance Corporation (“FDIC”) premiums and other governmental assessments; changes in deposit flows; changes in the cost of funds; fluctuations in general market rates of interest and/or yields or rates on competing loans, investments, and sources of funds; demand for loan or deposit products; illiquidity of financial markets and other negative developments affecting particular investment and mortgage-related securities, which could adversely impact the fair value of and/or cash flows from such securities; changes in customers’ demand for other financial services; the Company’s potential inability to carry out business plans or strategies; changes in accounting policies or guidelines; natural disasters, acts of terrorism, or developments in the war on terrorism or other global conflicts; the risk of failures in computer or other technology systems or data maintenance, or breaches of security relating to such systems; and the factors discussed in “Item 1A. Risk Factors,” as well as “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.”

Item 1. Business

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

General

Bank Mutual Corporation (the “Company”) is a Wisconsin corporation headquartered in Milwaukee, Wisconsin. The Company owns 100% of the common stock of Bank Mutual (the “Bank”) and currently engages in no substantial activities other than its ownership of such stock. Consequently, the Company’s net income and cash flows are derived primarily from the Bank’s operations and capital distributions. The Company is regulated as a savings and loan holding company by the Board of Governors of the Federal Reserve System (“FRB”). The Company’s common stock trades on The NASDAQ Global Select Market under the symbol BKMU.

The Bank was founded in 1892 and is a federally-chartered savings bank headquartered in Milwaukee, Wisconsin. It is regulated by the Office of the Comptroller of the Currency (“OCC”) and its deposits are insured within limits established by the FDIC. The Bank's primary business is community banking, which includes attracting deposits from and making loans to the general public and private businesses, as well as governmental and non-profit entities. In addition to deposits, the Bank obtains funds through borrowings from the Federal Home Loan Bank (“FHLB”) of Chicago. These funding sources are principally used to originate loans, including commercial and industrial loans, multi-family residential loans, non-residential commercial real estate loans, one- to four-family loans, home equity loans, and other consumer loans. From time-to-time the Bank also purchases and/or participates in loans from third-party financial institutions and is an active seller of residential loans in the secondary market. It also invests in mortgage-related and other investment securities.

The Company’s principal executive office is located at 4949 West Brown Deer Road, Milwaukee, Wisconsin, 53223, and its telephone number at that location is (414) 354-1500. The Company’s website is www.bankmutualcorp.com. The Company will make available through that website, free of charge, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, as soon as reasonably practical after the Company files those reports with, or furnishes them to, the Securities and Exchange Commission (“SEC”). Also available on the Company’s website are various documents relating to the corporate governance of the Company, including its Code of Ethics and its Code of Conduct.

Market Area

At December 31, 2016, the Company had 64 banking offices in Wisconsin and one in Minnesota. The Company is the third largest financial institution headquartered in Wisconsin based on total assets and the fourth largest based on deposit market share. At June 30, 2016, the Company had a 1.30% market share of all deposits held by FDIC-insured institutions in Wisconsin.

The largest concentration of the Company’s offices is in southeastern Wisconsin, consisting of the Milwaukee Metropolitan Statistical Area (“MSA”), and Racine and Kenosha Counties. The Company has 24 offices in these areas. The Company also has five offices in south central Wisconsin, consisting of the Madison MSA and the Janesville/Beloit MSA, as well as five other offices in communities in east central Wisconsin. The Company also operates 17 banking offices in northeastern Wisconsin, including the Green Bay MSA. Finally, the Company has 13 offices in northwestern Wisconsin, including the Eau Claire MSA, and one office in Woodbury, Minnesota, which is part of the Minneapolis-St. Paul MSA. A number of the Company’s banking offices are located near the Michigan and Illinois borders. Therefore, the Company may also draw customers from nearby regions in those states.

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

Competition

The Company faces significant competition in attracting deposits, making loans, and selling other financial products and services. Wisconsin has many banks, savings banks, savings and loan associations, and tax-exempt credit unions, which offer the same types of banking products and services as the Company. The Company also faces competition from other types of financial service companies, such as mortgage brokerage firms, finance companies, insurance companies, investment brokerage firms, and mutual funds. As a result of advancements in information technology and increases in internet-based commerce in recent years, the Company also competes with financial service providers outside of Wisconsin, as well as non-bank financial technology firms that offer products and services that compete with those offered by the Company.

Lending Activities

General At December 31, 2016, the Company’s total loans receivable was $1.9 billion or 73.4% of total assets. The Company’s loan portfolio consists of loans to both commercial and retail borrowers. Loans to commercial borrowers include loans secured by real estate such as multi-family properties, non-residential commercial properties (referred to as “commercial real estate”), and construction and development projects secured by these same types of properties, as well as land. In addition, commercial loans include loans to businesses that are not secured by real estate (referred to as “commercial and industrial loans”). Loans to retail borrowers include loans to individuals that are secured by real estate such as one- to four-family first mortgages, home equity term loans, and home equity lines of credit. In addition, retail loans include student loans, automobile loans, and other loans not secured by real estate (collectively referred to as “other consumer loans”).

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

Commercial and Industrial Loans At December 31, 2016, the Company’s portfolio of commercial and industrial loans was $241.7 million or 11.0% of its gross loans receivable. This portfolio consists of loans and lines of credit to businesses for equipment purchases, working capital, debt refinancing or restructuring, business acquisition or expansion, Small Business Administration (“SBA”) loans, and domestic standby letters of credit. The unfunded portion of approved commercial and industrial lines of credit and letters of credit was $185.5 million as of December 31, 2016. Typically, commercial and industrial loans are secured by general business security agreements and personal guarantees. The Company offers variable, adjustable, and fixed-rate commercial and industrial loans. The Company also has commercial and industrial loans that have an initial period where interest rates are fixed, generally for one to five years, and thereafter are adjustable based on various market indices. Fixed-rate loans are priced at either a margin over various market indices with maturities that correspond to the maturities of the notes or to match competitive conditions and yield requirements. Term loans are generally amortized over a three to seven year period. Commercial lines of credit generally have a term of one year and are subject to annual renewal thereafter. The Company performs an annual credit review of all commercial and industrial borrowers having an exposure to the Company of $500,000 or more.

Multi-family and Commercial Real Estate Loans At December 31, 2016, the Company’s aggregate portfolio of multi-family and commercial real estate loans was $881.6 million or 40.2% of its gross loans receivable. The Company’s multi-family and commercial real estate loan portfolios consist of fixed-rate and adjustable-rate loans originated at prevailing market rates usually tied to various market indices. This portfolio generally consists of loans secured by apartment buildings, office buildings, retail centers, warehouses, and industrial buildings. Loans in this portfolio may be secured by either owner or non-owner occupied properties. Loans in this portfolio typically do not exceed 80% of the lesser of the purchase price or an independent appraisal by an appraiser designated by the Company. Loans originated with balloon maturities are generally amortized on a 20 to 30 year basis with a typical balloon term of 3 to 10 years. If a multi-family or commercial real estate borrower desires a fixed-rate loan with a balloon maturity beyond five years, the Company generally requires the borrower to commit to an adjustable-rate loan that is converted back into a fixed-rate exposure through an interest rate swap agreement between the Company and the borrower. The Company then enters into an offsetting interest rate swap agreement with a third-party financial institution that converts the Company’s interest rate risk exposure back into a floating-rate exposure. The Company will generally record fee income related to the difference in the fair values of the respective interest rate swaps on the date of the transaction. Refer to “Financial Derivatives,” below, for additional discussion.

Loans secured by multi-family and commercial real estate are granted based on the income producing potential of the property, the financial strength and/or income producing potential of the borrower, and the appraised value of the property. In most cases, the Company also obtains personal guarantees from the principals involved, the assessment of which is also based on financial strength and/or income producing potential. The Company’s approval process includes a review of the other debt obligations and overall sources of cash flow available to the borrower and guarantors. The property’s expected net operating income must be sufficient to cover the payments relating to the outstanding debt. The Company generally requires an assignment of rents or leases to be assured that the cash flow from the property will be used to repay the debt. Appraisals on properties securing multi-family and larger commercial real estate loans are performed by independent state certified or licensed appraisers approved by the board of directors. Title and hazard insurance are required as well as flood insurance, if applicable. Environmental assessments are performed on certain multi-family and commercial real estate loans in excess of $1.0 million, as well as all loans secured by certain properties that the Company considers to be “environmentally sensitive.” In addition, the Company performs an annual credit review of its multi-family and commercial real estate loans over $500,000.

Loans secured by multi-family and commercial real estate properties are generally larger and involve a greater degree of credit risk than one- to four-family residential mortgage loans. Such loans typically involve large balances to single borrowers or groups of related borrowers. The Bank has internal lending limits to single borrowers or a group of related borrowers that are adjusted from time-to-time, but are generally well below the Bank’s legal lending limit of approximately $42.8 million as of December 31, 2016. Because payments on loans secured by multi-family and commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. Furthermore, borrowers’ problems in areas unrelated to the properties that secure the Company’s loans may have an adverse impact on such borrowers’ ability to comply with the terms of the Company’s loans.

Construction and Development Loans At December 31, 2016, the Company’s portfolio of construction and development loans was $374.8 million or 17.1% of its gross loans receivable. This amount included the unfunded portion of approved construction and development loans of $200.8 million as of that same date. Construction and development loans typically have terms of 18 to 24 months, are interest-only, and carry variable interest rates tied to a market index. Disbursements on these loans are based on draw requests supported by appropriate lien waivers. Construction loans typically convert to permanent loans at the completion of a project, but may or may not remain in the Company’s loan portfolio depending on the competitive environment for permanent financing at the end of the construction term. Development loans are typically repaid as the underlying lots or housing units are sold. Construction and development loans are generally considered to involve a higher degree of risk than mortgage loans on completed properties. The Company's risk of loss on a construction and development loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction, the estimated cost of construction, the appropriate application of loan proceeds to the work performed, the borrower's ability to advance additional construction funds if necessary, and the stabilization period for lease-up after the completion of construction. In addition, in the event a borrower defaults on the loan during its construction phase, the construction project often needs to be completed before the full value of the collateral can be realized by the Company. The Company performs an annual credit review of its construction and development loans over $500,000.

Residential Mortgage Loans At December 31, 2016, the Company’s portfolio of one- to four-family first mortgage loans was $500.0 million or 22.8% of its gross loans receivable. This amount included the unfunded portion of approved construction loans of $26.8 million as of that same date. Most of these loans are for owner-occupied residences; however, the Company also originates first mortgage loans secured by second homes, seasonal homes, and investment properties.

The Company originates primarily conventional fixed-rate residential mortgage loans and adjustable-rate residential mortgage (“ARM”) loans with maturity dates up to 30 years. Such loans generally are underwritten to the Federal National Mortgage Association (“Fannie Mae”) and other regulatory standards. In general, ARM loans are retained by the Company in its loan portfolio. Conventional fixed-rate residential mortgage loans are generally sold in the secondary market without recourse, although the Company typically retains the servicing rights to such loans. When the Company sells residential mortgage loans in the secondary market, it makes representations and warranties to the purchasers about various characteristics of each loan, including the underwriting standards applied and the documentation being provided. Failure of the Company to comply with the requirements established by the purchaser of the loan may result in the Company being required to repurchase the loan. There have not been any material instances where the Company has been required to repurchase loans.

The Company also originates “jumbo” single family mortgage loans in excess of the Fannie Mae maximum loan amount, which was $417,000 for single family homes in its primary market areas. Fannie Mae has higher limits for two-, three- and four-family homes. The Company generally retains fixed-rate jumbo single family mortgage loans in its portfolio.

From time-to-time the Company also originates fixed-rate and ARM loans under special programs for low- to moderate-income households and first-time home buyers. These programs are offered to help meet the credit needs of the communities the Company serves and are retained by the Company in its loan portfolio. Among the features of these programs are lower down payments, no mortgage insurance, and generally less restrictive requirements for qualification compared to the Company’s conventional one- to four-family mortgage loans. These loans generally have maturities up to 30 years.

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

ARM loans pose credit risks different from the risks inherent in fixed-rate loans, primarily because as interest rates rise, the underlying payments from the borrowers increase, which increases the potential for payment default. At the same time, the marketability and/or value of the underlying property may be adversely affected by higher interest rates. ARM loans generally have an initial fixed-rate term of five or seven years. Thereafter, they are adjusted on an annual basis up to a maximum of 200 basis points per year. The Company originates ARM loans with lifetime caps set at 6% above the origination rate. Monthly payments of principal and interest are adjusted when the interest rate adjusts. The Company does not offer ARM loans with negative amortization or with interest-only payment features. The Company currently utilizes the monthly average yield on United States treasury securities, adjusted to a constant maturity of one year (“constant maturity treasury index”) as the base index to determine the interest rate payable upon the adjustment date of ARM loans. The volume and types of ARM loans the Company originates have been affected by the level of market interest rates, competition, consumer preferences, and the availability of funds. ARM loans are susceptible to early prepayment during periods of lower interest rates as borrowers refinance into fixed-rate loans.

The Company requires an appraisal of the real estate that secures a residential mortgage loan, which must be performed by an independent state certified or licensed appraiser approved by the board of directors, but contracted and administered by an independent third party. A title insurance policy is required for all real estate first mortgage loans. Evidence of adequate hazard insurance and flood insurance, if applicable, is required prior to closing. Borrowers are required to make monthly payments to fund principal and interest as well as private mortgage insurance and flood insurance, if applicable. With some exceptions for lower loan-to-value ratio loans, borrowers are also generally required to escrow in advance for real estate taxes. Generally, no interest is paid on these escrow deposits. If borrowers with loans having a lower loan-to-value ratio want to handle their own taxes and insurance, an escrow waiver fee is charged. With respect to escrowed real estate taxes, the Company generally makes this disbursement directly to the borrower as obligations become due.

The Company’s staff underwriters review all pertinent information prior to making a credit decision on an application. All recommendations to deny are reviewed by a designated senior officer of the Company, in addition to staff underwriters, prior to the final disposition of the application. The Company’s lending policies generally limit the maximum loan-to-value ratio on single family mortgage loans secured by owner-occupied properties to 95% of the lesser of the appraised value or purchase price of the property. This limit is lower for loans secured by two-, three-, and four-family homes. Loans above 80% loan-to-value ratios are subject to private mortgage insurance to reduce the Company’s exposure to less than 80% of value, except for certain low to moderate income loan program loans.

In addition to servicing the loans in its own portfolio, the Company continues to service most of the loans that it sells to Fannie Mae and other third-party investors (“loans serviced for third-party investors”). Servicing mortgage loans, whether for its own portfolio or for third-party investors, includes such functions as collecting monthly principal and interest payments from borrowers, maintaining escrow accounts for real estate taxes and insurance, and making certain payments on behalf of borrowers. When necessary, servicing of mortgage loans also includes functions related to the collection of delinquent principal and interest payments, loan foreclosure proceedings, and disposition of foreclosed real estate. As of December 31, 2016, loans serviced for third-party investors amounted to $997.0 million. These loans are not reflected in the Company’s Consolidated Statements of Financial Condition.

When the Company services loans for third-party investors, it is compensated through the retention of a servicing fee from borrowers' monthly payments. The Company pays the third-party investors an agreed-upon yield on the loans, which is generally less than the interest agreed to be paid by the borrowers. The difference, typically 25 basis points or more, is retained by the Company and recognized as servicing fee income over the lives of the loans, net of amortization of capitalized mortgage servicing rights (“MSRs”). The Company also receives fees and interest income from ancillary sources such as delinquency charges and float on escrow and other funds.

Management believes that servicing mortgage loans for third-party investors partially mitigates other risks inherent in the Company's mortgage banking operations. For example, fluctuations in volumes of mortgage loan originations and resulting gains on sales of such loans caused by changes in market interest rates will generally be offset by opposite changes in the amortization of the MSRs. These fluctuations are usually the result of actual loan prepayment activity and/or changes in management expectations for future prepayment activity, which impacts the amount of MSRs amortized in a given period. However, fluctuations in the recorded value of MSRs may also be caused by valuation allowances required to be recognized under generally accepted accounting principles (“GAAP”). That is, the value of servicing rights may fluctuate because of changes in the future prepayment assumptions or discount rates used to periodically assess the impairment of MSRs. Although most of the Company's serviced loans that prepay are replaced by new serviced loans (thus preserving the future servicing cash flow), GAAP requires impairment losses resulting from a change in future prepayment assumptions to be recorded when the change occurs. MSRs are particularly susceptible to impairment losses during periods of declining interest rates during which prepayment activity typically accelerates to levels above that which had been anticipated when the servicing rights were originally recorded. Alternatively, in periods of increasing interest rates, during which prepayment activity typically declines, the Company could potentially recapture through earnings all or a portion of a previously established valuation allowance for impairment.

Home Equity Loans At December 31, 2016, the Company’s portfolio of home equity loans was $175.6 million or 8.0% of its gross loans receivable. Home equity loans include fixed term home equity loans and home equity lines of credit. The unfunded portion of approved home equity lines of credit was $111.0 million as of December 31, 2016. Home equity loans are typically secured by junior liens on owner-occupied one- to four-family residences, but in many instances are secured by first liens on such properties. Underwriting procedures for the home equity and home equity lines of credit loans include a comprehensive review of the loan application, an acceptable credit score, verification of the value of the equity in the home, and verification of the borrower’s income.

The Company originates fixed-rate home equity term loans with loan-to-value ratios of up to 89.99% (when combined with any other mortgage on the property). Pricing on fixed-rate home equity term loans is periodically reviewed by management. Generally, loan terms are in the three to fifteen year range in order to minimize interest rate risk.

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

Other Consumer Loans At December 31, 2016, the Company’s portfolio of other consumer loans was $18.2 million or 0.8% of its gross loans receivable. Other consumer loans include student loans, automobile loans, recreational vehicle and boat loans, deposit account loans, overdraft protection lines of credit, and unsecured consumer loans, including loans through credit card programs that are administered by third parties. The Company no longer originates student loans through programs guaranteed by the federal government. Student loans that continue to be held by the Company are administered by a third party. The unfunded portion of customers’ approved credit card lines was $49.9 million as of December 31, 2016.

Other consumer loans generally have shorter terms and higher rates of interest than conventional mortgage loans, but typically involve more credit risk because of the nature of the collateral and, in some instances, the absence of collateral. In general, other consumer loans are more dependent upon the borrower's continuing financial stability, more likely to be affected by adverse personal circumstances, and often secured by rapidly depreciating personal property. In addition, various laws, including bankruptcy and insolvency laws, may limit the amount that may be recovered from a borrower. The Company believes that the higher yields earned on other consumer loans compensate for the increased risk associated with such loans and that consumer loans are important to the Company’s efforts to increase the interest rate sensitivity and shorten the average maturity of its loan portfolio.

Asset Quality

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

Internal Risk Ratings and Classified Assets OCC regulations require thrift institutions to review and, if necessary, classify their assets on a regular basis. Accordingly, the Company has internal policies and procedures in place to evaluate and/or maintain risk ratings on all of its loans and certain other assets. In general, these internal risk ratings correspond with regulatory requirements to adversely classify problem loans and certain other assets as “substandard,” “doubtful,” or “loss.” A loan or other asset is adversely classified as substandard if it is determined to involve a distinct possibility that the Company could sustain some loss if deficiencies associated with the loan are not corrected. A loan or other asset is adversely classified as doubtful if full collection is highly questionable or improbable. A loan or other asset is adversely classified as loss if it is considered uncollectible, even if a partial recovery could be expected in the future. The regulations also provide for a “special mention” designation, described as loans or assets which do not currently expose the Company to a sufficient degree of risk to warrant adverse classification, but which demonstrate clear trends in credit deficiencies or potential weaknesses deserving management's close attention (refer to the following paragraph for additional discussion). As of December 31, 2016, $54.4 million or 2.8% the Company’s loans were classified as special mention and $22.5 million or 1.2% were classified as substandard. The latter includes all loans placed on non-accrual in accordance with the Company’s policies, as described below. In addition, as of December 31, 2016, $11.6 million of the Company’s mortgage-related securities, consisting of private-label collateralized mortgage obligations (“CMOs”) rated less than investment grade, were classified as substandard in accordance with regulatory guidelines. The Company had no loans or other assets classified as doubtful or loss at December 31, 2016.

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

Delinquent Loans When a borrower fails to make required payments on a loan, the Company takes a number of steps to induce the borrower to cure the delinquency and restore the loan to a current status. In the case of one- to four-family mortgage loans, the Company’s loan servicing department is responsible for collection procedures from the 15th day of delinquency through the completion of foreclosure. Specific procedures include late charge notices, telephone contacts, and letters. If these efforts are unsuccessful, foreclosure notices will eventually be sent. The Company may also send either a qualified third party inspector or a loan officer to the property in an effort to contact the borrower. When contact is made with the borrower, the Company attempts to obtain full payment or work out a repayment schedule to avoid foreclosure of the collateral. Many borrowers pay before the agreed upon payment deadline and it is not necessary to start a foreclosure action. The Company follows collection procedures and guidelines outlined by Fannie Mae, WHEDA, and, when applicable, other government-sponsored loan programs.

The collection procedures for retail loans, excluding student loans and credit card loans, include sending periodic late notices to a borrower and attempts to make direct contact with a borrower once a loan becomes 30 days past due. If collection activity is unsuccessful, the Company may pursue legal remedies itself, refer the matter to legal counsel for further collection efforts, seek foreclosure or repossession of the collateral (if any), and/or charge-off the loan. All student loans are serviced by a third party that guarantees that its servicing complies with all U.S. Department of Education guidelines. The Company’s student loan portfolio is guaranteed under programs sponsored by the U.S. government. Credit card loans are serviced by a third party administrator.

The collection procedures for commercial loans include sending periodic late notices to a borrower once a loan is past due. The Company attempts to make direct contact with a borrower once a loan becomes 15 days past due. The Company’s managers of the multi-family and commercial real estate loan areas regularly review loans that are 10 days or more delinquent. If collection activity is unsuccessful, the Company may refer the matter to legal counsel for further collection effort. After 90 days, loans that are delinquent are typically proposed for repossession or foreclosure.

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

The Company’s policies require that management continuously monitor the status of the loan portfolio and report to the board of directors on a monthly basis. These reports include information on classified loans, delinquent loans, restructured or modified loans, allowance for loan losses, and foreclosed real estate.

Non-Accrual Policy With the exception of student loans that are guaranteed by the U.S. government, the Company generally stops accruing interest income on loans when interest or principal payments are 90 days or more in arrears or earlier when the future collectability of such interest or principal payments may no longer be certain. In such cases, borrowers have often been able to maintain a current payment status, but are experiencing financial difficulties and/or the properties that secure the loans are experiencing increased vacancies, declining lease rates, and/or delays in unit sales. In such instances, the Company generally stops accruing interest income on the loans even though the borrowers are current with respect to all contractual payments. Although the Company generally no longer accrues interest on these loans, the Company may continue to record periodic interest payments received on such loans as interest income provided the borrowers remain current on the loans and provided, in the judgment of management, the Company’s net recorded investment in the loans are deemed to be collectible. The Company designates loans on which it stops accruing interest income as non-accrual loans and establishes a reserve for outstanding interest that was previously credited to income. All loans on non-accrual are considered to be impaired. The Company returns a non-accrual loan to accrual status when factors indicating doubtful or uncertain collection no longer exist. In general, non-accrual loans are also classified as substandard, doubtful, or loss in accordance with the Company’s internal risk rating policy. As of December 31, 2016, $8.2 million or 0.42% of the Company’s loans were considered to be non-performing in accordance with the Company’s policies.

Foreclosed Properties and Repossessed Assets As of December 31, 2016, $2.9 million or 0.1% of the Company’s total assets consisted of foreclosed properties and repossessed assets. In the case of loans secured by real estate, foreclosure action generally starts when the loan is between the 90th and 120th day of delinquency following review by a senior officer and the executive loan committee of the board of directors. If, based on this review, the Company determines that repayment of a loan is solely dependent on the liquidation of the collateral, the Company will typically seek the shortest redemption period possible, thus waiving its right to collect any deficiency from the borrower. Depending on whether the Company has waived this right and a variety of other factors outside the Company’s control (including the legal actions of borrowers to protect their interests), an extended period of time could transpire between the commencement of a foreclosure action by the Company and its ultimate receipt of title to the property.

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

Foreclosed real estate properties are initially recorded at the lower of the recorded investment in the loan or fair value. Thereafter, the Company carries foreclosed real estate at fair value less estimated selling costs (typically 5% to 10%). Foreclosed real estate is inspected periodically to evaluate its condition. Additional outside appraisals are obtained as deemed necessary or appropriate. Additional write-downs may occur if the property value deteriorates further after it is acquired. These additional write-downs are charged to the Company’s results of operations as they occur.

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

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

Allowance for Loan Losses As of December 31, 2016, the Company’s allowance for loan losses was $19.9 million or 1.03% of loans receivable and 242.5% of non-performing loans. The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses inherent in the loan portfolio and is based on factors such as the size and current risk characteristics of the portfolio, an assessment of individual problem loans and pools of homogenous loans within the portfolio, and actual loss, delinquency, and/or risk rating experience within the portfolio. The Company also considers current economic conditions and/or events in specific industries and geographical areas, including unemployment levels, trends in real estate values, peer comparisons, and other pertinent factors, including regulatory guidance. Finally, as appropriate, the Company also considers individual borrower circumstances and the condition and fair value of the loan collateral, if any. For additional information relating to the Company’s allowance for loan losses for the periods covered by this report, refer to “Results of Operations—Provision for Loan Losses” and “Financial Condition—Asset Quality” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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

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

The Company maintains general allowances for loan loss against certain homogenous pools of loans. These pools generally consist of smaller loans of all types that do not warrant individual review due to their size. In addition, pools may also consist of larger commercial loans that have not been individually identified as impaired by management. Certain of these pools are further segmented by management’s internal risk rating of the loans. Management has developed loss factors for each pool or segment based on the historical loss experience of each pool or segment and internal risk ratings. In addition, management has developed loss factors for each pool or segment that are intended to capture management’s judgments relating to changes in economic and business conditions, underlying collateral values, underwriting and credit management policies and procedures, experience and ability of lending managers, legal and regulatory requirements, etc. Given the significant amount of management judgment involved in this process there could be significant variation in the Company’s allowance for loan losses and provision for loan losses from period to period.

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

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

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

Investment Activities

At December 31, 2016, the Company’s portfolio of mortgage-related securities available-for-sale was $371.9 million or 14.0% of its total assets. As of the same date its portfolio of mortgage-related securities held-to-maturity was $93.2 million or 3.5% of total assets. Mortgage-related securities consist principally of mortgage-backed securities (“MBSs”) and CMOs. Most of the Company’s mortgage-related securities are directly or indirectly insured or guaranteed by Fannie Mae, the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or the Government National Mortgage Association (“Ginnie Mae”). The remaining securities are private-label CMOs. Private-label CMOs generally carry higher credit risks and higher yields than mortgage-related securities insured or guaranteed by the aforementioned agencies of the U.S. Government. Although the latter securities have less exposure to credit risk, like private-label CMOs they remain exposed to fluctuating interest rates and instability in real estate markets, which may alter the prepayment rate of underlying mortgage loans and thereby affect the fair value of the securities. For additional information related to the Company’s mortgage-related securities, refer to “Financial Condition—Mortgage-Related Securities Available-for-Sale” and “Financial Condition—Mortgage-Related Securities Held-to-Maturity” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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

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

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

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

Financial Derivatives

The Company’s policies permit the use of financial derivatives such as financial futures, forward commitments, and interest rate swaps, to manage its exposure to interest rate risk. At December 31, 2016, the Company was using forward commitments to manage interest rate risk related to its sale of residential loans in the secondary market and interest rate swaps to manage interest rate risk related to certain fixed-rate commercial loans and forecasted transaction cash flows. For additional information, refer to “Note 1. Summary of Significant Accounting Policies” and “Note 13. Financial Instruments with Off-Balance-Sheet Risk and Derivative Financial Instruments” in “Item 8. Financial Statements and Supplementary Data.”

Deposit Liabilities

At December 31, 2016, the Company’s deposit liabilities were $1.9 billion or 70.4% of its total liabilities and equity. The Company offers a variety of deposit accounts having a range of interest rates and terms for both retail and business customers. The Company currently offers regular savings accounts, interest-bearing demand accounts, non-interest-bearing demand accounts, money market accounts, and certificates of deposit. The Company also offers IRA time deposit accounts and health savings accounts. When the Company determines its deposit rates, it considers rates offered by local competitors, benchmark rates on U.S. Treasury securities, and rates on other sources of funds such as FHLB of Chicago advances. For additional information, refer to “Financial Condition—Deposit Liabilities” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Deposit flows are significantly influenced by general and local economic conditions, changes in prevailing interest rates, pricing of deposits, and competition. The Company’s deposits are primarily obtained from the market areas surrounding its bank offices. The Company relies primarily on competitive rates, quality service, and long-standing relationships with customers to attract and retain these deposits. The Company does not rely on a particular customer or related group of individuals, organizations, or institutions for its deposit funding. From time to time the Company has used third-party brokers and a nationally-recognized reciprocal deposit gathering network to obtain wholesale deposits. The Company had no such deposits as of December 31, 2016.

Borrowings

At December 31, 2016, the Company’s borrowed funds were $439.2 million or 16.6% of its total liabilities and equity. The Company borrows funds to finance its lending, investing, and operating activities. Substantially all of the Company’s borrowings have traditionally consisted of advances from the FHLB of Chicago on terms and conditions generally available to member institutions. The Company’s FHLB of Chicago borrowings typically carry fixed rates of interest, have stated maturities, and are generally subject to significant prepayment penalties if repaid prior to their stated maturity. The Company has pledged certain one- to four-family first and second mortgage loans, as well as certain multi-family mortgage loans, as blanket collateral for current and future advances. From time to time the Company may also pledge mortgage-related securities as collateral for advances.

For additional information regarding the Company’s outstanding advances from the FHLB of Chicago as of December 31, 2016, refer to “Financial Condition—Borrowings” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Shareholders’ Equity

At December 31, 2016, the Company’s shareholders’ equity was $286.6 million or 10.8% of its total liabilities and equity. The Company and the Bank are both required to maintain specified amounts of regulatory capital pursuant to regulations promulgated by their respective federal regulators. Management’s objective is to maintain the Company and the Bank’s regulatory capital in an amount sufficient to be classified in the highest regulatory category (i.e., as a “well capitalized” institution). At December 31, 2016, the Company and the Bank exceeded all regulatory minimum requirements, as well as the amount required to be classified as a “well capitalized” institution. For additional discussion relating to regulatory capital standards refer to “Regulation and Supervision of the Company —Regulatory Capital Requirements” and “Regulation and Supervision of the Bank—Regulatory Capital Requirements,” below. For additional information related to the Company’s equity and the Company and Bank’s regulatory capital, refer to “Financial Condition—Shareholders’ Equity” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as “Note 8. Shareholders’ Equity” in “Item 8. Financial Statements and Supplementary Data.”

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

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

Subsidiaries

BancMutual Financial and Insurance Services, Inc. (“BMFIS”), a wholly-owned subsidiary of the Bank that does business as “Mutual Financial Group,” provides investment, wealth management, and insurance products and services to the Bank’s customers and the general public. These products and services include equity and debt securities, mutual fund investments, tax-deferred annuities, life, disability, and long-term care insurance, property and casualty insurance, financial advisory services, and other brokerage-related services. BMFIS also offers fee-based financial planning and third-party-administered trust services to customers. These products and services are provided through an operating agreement with a leading, third-party, registered broker-dealer.

MC Development LTD (“MC Development”), a wholly-owned subsidiary of the Bank, is involved in land development and sales. It owns five parcels of developed land totaling 15 acres in Brown Deer, Wisconsin. It also owns 50% of Arrowood Development LLC, which was formed to develop approximately 300 acres for residential purposes in Oconomowoc, Wisconsin. Neither MC Development nor Arrowood Development LLC is currently engaged in significant efforts to develop its respective parcels of land.

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

Employees

At December 31, 2016, the Company employed 548 full time and 74 part time associates. Management considers its relations with its associates to be good.

Regulation and Supervision

General

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

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

Regulation and Supervision of the Bank

General As a federally-chartered, FDIC-insured savings bank, the Bank is subject to extensive regulation by the OCC, as well as the regulations of the FDIC. This federal regulation and supervision establishes a comprehensive framework of activities in which a federal savings bank may engage and is intended primarily for the protection of the FDIC and depositors rather than the shareholders of the Company. This regulatory structure gives authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies regarding the classification of assets and the establishment of adequate loan loss reserves.

The OCC regularly examines the Bank and issues a report on its examination findings to the Bank’s board of directors. The Bank’s relationships with its depositors and borrowers are also regulated by federal law, especially in such matters as the ownership of savings accounts and the form and content of the Bank’s loan documents. The Bank must file reports with the OCC and the FDIC concerning its activities and financial condition, and must obtain regulatory approvals prior to entering into transactions such as mergers or acquisitions.

Regulatory Capital Requirements The Bank is subject to various regulatory capital standards administered by the federal banking agencies and as defined in the applicable regulations. These regulatory capital standards, require financial institutions such as the Bank to meet the following minimum regulatory capital standards to be classified as “adequately capitalized” under the regulations: (i) common equity Tier 1 (“CET1”) capital equal to at least 4.5% of total risk-weighted assets, (ii) Tier 1 capital equal to at least 4% of adjusted total assets (known as the “leverage ratio”), (iii) Tier 1 risk-based capital equal to at least 6% of total risk-weighted assets, and (iv) total risk-based capital equal to at least 8% of total risk-weighted assets. At December 31, 2016, the Bank’s regulatory capital ratios exceeded both the minimum requirements to be classified as “adequately capitalized,” as well as the higher requirements necessary to be classified as a “well capitalized” for regulatory capital purposes. For additional information related to the Bank’s regulatory capital ratios, refer to “Note 8. Shareholders’ Equity” in “Item 8. Financial Statements and Supplementary Data.”

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

Dividend and Other Capital Distribution Limitations Federal regulations generally govern capital distributions by savings associations such as the Bank, which include cash dividends or other capital distributions. Currently, the Bank must file an application with the OCC for approval of a capital distribution because the total amount of its capital distributions for the most recent calendar year has exceeded the sum of its earnings for that period plus its earnings that have been retained in the preceding two years. In certain other circumstances, however, the Bank may only be required to give the OCC a minimum of 30 days’ notice before the board of directors declares a dividend or approves a capital distribution. The Bank is also required to notify the FRB of its intent to declare a dividend or approve a capital distribution.

The FRB or the OCC may disapprove or restrict dividends or other capital distributions if (i) the savings association would be undercapitalized, significantly undercapitalized or critically undercapitalized following the distribution; (ii) the proposed capital distribution raises safety and soundness concerns; or (iii) the capital distribution would violate any applicable statute, regulation, agreement or regulatory-imposed condition. The FRB and OCC have substantial discretion in making these decisions. Refer to “Regulation and Supervision of the Company—Dividend and Other Capital Distribution Limitations,” below, for the impact that regulatory restrictions on the Bank’s capital distributions could have on the Company.

Loan Concentration Guidelines As part of their ongoing supervisory monitoring processes, federal regulatory agencies have established certain criteria to identify financial institutions such as the Bank that are potentially exposed to significant multi-family, non-owner occupied commercial real estate, and construction loan concentration risks. An institution that has experienced rapid growth in these types of loans or has notable exposure to such loans may be identified for further supervisory analysis to assess the nature and risk posed by such concentrations. Specifically, the federal regulatory agencies use the following criteria to identify concentrations in these types of loans:

Total reported loans for construction, land development, and other land loans represent 100% or more of the institution's total risk-based capital; or

Total multi-family, non-owner occupied commercial real estate, construction, land development, and other land loans, represent 300 percent or more of the institution's total risk-based capital, and the total outstanding balance of such loans has increased by 50% or more during the past three years.

As of December 31, 2016, the Bank’s holdings of and growth in multi-family, non-owner occupied commercial real estate, construction, land development, and other land loans exceeded the guidelines noted in the second bullet, above. As such, regulators have subjected the Bank’s lending operations and risk management controls to increased scrutiny. In response, management has taken steps to implement certain enhancements in its lending operations and controls that it believes will be satisfactory to its regulator. However, there can be no assurances that these enhancements will be considered adequate by the Bank’s regulator, that additional enhancements will not be required by its regulator, and/or that the Bank’s ability to originate or retain these types of loans will not be restricted by its regulator in the future. Such action could have an adverse impact on the Bank’s ability to grow its loan portfolio and its future results of operations.

Qualified Thrift Lender Test Federal savings associations must meet a qualified thrift lender (“QTL”) test or they become subject to operating restrictions. The Bank met the QTL test as of December 31, 2016, and anticipates that it will maintain an appropriate level of mortgage-related investments (which must be at least 65% of portfolio assets as defined in the regulations) and will otherwise continue to meet the QTL test requirements.

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

As a member of the FHLB of Chicago, the Bank must meet certain eligibility requirements and must purchase and maintain common stock in the FHLB of Chicago in an amount equal to the greater of (i) $10,000, (ii) 0.40% of its mortgage-related assets at the most recent calendar year end, or (iii) 4.5% of its outstanding advances from the FHLB of Chicago. The FHLB of Chicago may require less than 4.5% for amounts borrowed under certain advance programs offered to member institutions. At December 31, 2016, the Bank owned $20.3 million in FHLB of Chicago common stock, which was in compliance with the minimum common stock ownership guidelines established by the FHLB of Chicago.

Deposit Insurance The deposit accounts held by customers of the Bank are insured by the FDIC up to maximum limits, as provided by law. Insurance on deposits may be terminated by the FDIC if it finds that the Bank has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OCC. The management of the Bank does not know of any practice, condition, or violation that might lead to termination of the Bank’s deposit insurance.

The FDIC establishes deposit insurance premiums for individual banks or savings associations based upon the risks a particular institution poses to its deposit insurance fund. Under its assessment system for relatively smaller institutions such as the Bank, the FDIC assigns an institution to one of four categories based on the composite assessment of the institution by its primary regulator, which along with certain financial ratios, determines its initial base assessment rate. The initial base assessment rate may be adjusted higher or lower depending on the amount of unsecured debt held by an institution, which results in a total assessment rate for an institution. Depending on these factors an institution’s total assessment rate could range from 1.5 to 30 basis points. The assessment base used by the FDIC in determining deposit insurance premiums consists of an insured institution’s average consolidated total assets minus average tangible equity and certain other adjustments.

In 2016 the FDIC issued a new rule that could result in the creation of insurance premium credits for insured institutions with less than $10 billion in assets, such as the Bank. Each insured institution’s credits would be determined by the FDIC at a future date in accordance with performance measures established for the insurance fund, as specified in the new rule. The credits could be used by insured institutions to offset future premium costs until the credits are exhausted. At this time, management is unable to determine the amount or timing of credits that might be awarded, if any.

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

Transactions With Affiliates Sections 23A and 23B of the Federal Reserve Act and FRB Regulation W govern transactions between an insured federal savings association, such as the Bank, and any of its affiliates, such as the Company. An affiliate is any company or entity that controls, is controlled by or is under common control with it. Sections 23A and 23B limit the extent to which an institution or a subsidiary may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such savings association’s capital stock and surplus, and limit all such transactions with all affiliates to 20% of such stock and surplus. The term “covered transaction” includes the making of loans, purchase of assets, issuance of guarantees, derivatives transactions, securities borrowing, and lending transactions to the extent that they result in credit exposure to an affiliate. Further, most loans by a savings association to any of its affiliates must be secured by specified collateral amounts. All such transactions must be on terms that are consistent with safe and sound banking practices and must be on terms that are at least as favorable to the savings association as those that would be provided to a non-affiliate. At December 31, 2016, the Company and Bank did not have any covered transactions.

Acquisitions and Mergers Under the federal Bank Merger Act, any merger of the Bank with or into another institution would require the approval of the OCC, or the primary federal regulator of the resulting entity if it is not an OCC-regulated institution. Refer also to “Regulation and Supervision of the Company—Acquisition of Bank Mutual Corporation,” below.

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

Uniform Real Estate Lending Standards The federal banking agencies adopted uniform regulations prescribing standards for extensions of credit that are secured by liens on interests in real estate or are made to finance the construction of a building or other improvements to real estate. All insured depository institutions must adopt and maintain written policies that establish appropriate limits and standards for such extensions of credit. These policies must establish loan portfolio diversification standards, prudent underwriting standards that are clear and measurable, loan administration procedures, and documentation, approval and reporting requirements.

These lending policies must reflect consideration of the Interagency Guidelines for Real Estate Lending Policies that have been adopted by the federal bank regulators. These guidelines, among other things, require a depository institution to establish internal loan-to-value limits for real estate loans that are not in excess of specified supervisory limits, which generally vary and provide for lower loan-to-value limits for types of collateral that are perceived as having more risk, are subject to fluctuations in valuation, or are difficult to dispose. Although there is no supervisory loan-to-value limit for owner-occupied one- to four-family and home equity loans, the guidelines provide that an institution should require credit enhancement in the form of mortgage insurance or readily marketable collateral for any such loan with a loan-to-value ratio that equals or exceeds 90% at origination. The guidelines also clarify expectations for prudent appraisal and evaluation policies, procedures, and practices.

Community Reinvestment Act Under the Community Reinvestment Act (“CRA”), any insured depository institution, including the Bank, must, consistent with its safe and sound operation, help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires the OCC to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, including applications for additional branches and acquisitions.

Among other things, the CRA regulations contain an evaluation system that rates an institution based on its actual performance in meeting community needs. In particular, the evaluation system focuses on three tests: (i) a lending test, to evaluate the institution’s record of making loans in its service areas, (ii) an investment test, to evaluate the institution’s record of making community development investments, and (iii) a service test, to evaluate the institution’s delivery of services through its branches, ATMs and other offices. The CRA requires the OCC to provide a written evaluation of the Bank’s CRA performance utilizing a four-tiered descriptive rating system and requires public disclosure of the CRA rating. The Bank received a “satisfactory” overall rating in its most recent CRA examination.

Safety and Soundness Standards Each federal banking agency, including the OCC, has guidelines establishing general standards relating to internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, customer privacy, liquidity, earnings, and compensation and benefits. The guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines also prohibit excessive compensation as an unsafe and unsound practice.

Loans to Insiders A savings association’s loans to its executive officers, directors, any owner of more than 10% of its stock (each, “an insider”) and certain entities affiliated with any such person (an insider’s “related interest”) are subject to the conditions and limitations imposed by Section 22(h) of the Federal Reserve Act and the FRB’s Regulation O thereunder. Under these restrictions, the aggregate amount of the loans to any insider and related interests may not exceed the loans-to-one-borrower limit applicable to national banks. All loans by a savings association to all insiders and related interests in the aggregate may not exceed the savings association’s unimpaired capital and surplus. With certain exceptions, the Bank’s loans to an executive officer (other than certain education loans and residential mortgage loans) may not exceed $100,000. Regulation O also requires that any proposed loan to an insider or a related interest be approved in advance by a majority of the Bank’s board of directors, without the vote of any interested director, if such loan, when aggregated with any existing loans to that insider and related interests, would exceed $500,000. Generally, such loans must be made on substantially the same terms as, and follow credit underwriting procedures that are no less stringent than, those for comparable transactions with other persons and must not present more than a normal risk of collectability. There is an exception for extensions of credit pursuant to a benefit or compensation plan of a savings association that is widely available to employees that does not give preference to officers, directors, and other insiders. As of December 31, 2016, total loans to insiders were $768,000 (including $659,000 which relates to residential mortgages that have been sold in the secondary market).

Regulation and Supervision of the Company

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

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

Federal law prohibits a savings and loan holding company from acquiring control of another savings institution or holding company without prior regulatory approval. With some exceptions, it also prohibits the acquisition or retention of more than 5% of the equity securities of a company engaged in activities that are not closely related to banking or financial in nature or acquiring an institution that is not federally-insured. In evaluating applications to acquire savings institutions, the regulator must consider the financial and managerial resources, future prospects of the institution involved, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community and competitive factors.

Regulatory Capital Requirements The Company is subject to various regulatory capital standards administered by the federal banking agencies and as defined in the applicable regulations. These capital requirements are substantially the same as those required for the Bank (refer to “Regulation and Supervision of the Bank—Regulatory Capital Requirements,” above). However, the requirements are separately applied to the Company on a consolidated basis. As of December 31, 2016, the Company’s regulatory capital ratios exceeded both the minimum requirements to be classified as “adequately capitalized,” as well as higher requirements necessary to be classified as “well capitalized” for regulatory capital purposes. For additional information related to the Company’s regulatory capital ratios, refer to “Note 8. Shareholders’ Equity” in “Item 8. Financial Statements and Supplementary Data.”

Dividend and Other Capital Distribution Limitations FRB regulations generally govern capital distributions by savings and loan holding companies such as the Company, which include cash dividends and stock repurchases. Currently, the Company is not required to give the FRB any notice or application before the board of directors declares a dividend or approves a stock repurchase. In certain other circumstances, however, the Bank would be required to give the FRB a notice or an application that meets certain filing requirements before the board of directors declares a dividend or stock repurchase.

The FRB may disapprove or restrict dividends or stock repurchases if (i) the savings and loan holding company would be undercapitalized, significantly undercapitalized or critically undercapitalized following the distribution; (ii) the proposed capital distribution raises safety and soundness concerns; or (iii) the capital distribution would violate any applicable statute, regulation, agreement or regulatory-imposed condition. The FRB has substantial discretion in making these decisions.

The Company is highly dependent on the ability of the Bank to pay dividends or otherwise distribute its capital to the Company. Neither the Company nor the Bank can provide any assurances that dividends will continue to be paid by the Bank to the Company or the amount of any such dividends. Furthermore, the Company cannot provide any assurances that dividends will continue to be paid to shareholders, the amount of any such dividends, or whether additional shares of common stock will be repurchased under its current stock repurchase plan. For additional discussion related to the Company’s dividends and common stock repurchases refer to “Financial Condition—Shareholders’ Equity” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

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

Federal and State Taxation

Federal Taxation The Company and its subsidiaries file a calendar year consolidated federal income tax return, reporting income and expenses using the accrual method of accounting. The federal income tax returns for the Company and its subsidiaries have been examined or closed without examination by the Internal Revenue Service (“IRS”) for tax years prior to 2013.

State Taxation The Company and its subsidiaries are subject to combined reporting in the state of Wisconsin. The state income tax returns for the Company and its subsidiaries have been examined and closed by the Wisconsin Department of Revenue for tax years prior to 2012.

Item 1A. Risk Factors

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

The Company’s Loan Losses Could Be Significant in the Future and/or Could Exceed Established Allowances for Loan Losses, Which Could Have a Material Adverse Effect on the Company’s Results of Operations

The Company has policies and procedures in place to manage its exposure to risk related to its lending operations. However, despite these practices, the Company’s loan customers may not repay their loans according to the terms of the loans and the collateral securing the payment of these loans may be insufficient to pay any remaining loan balance. Economic weakness, including high unemployment rates and lower values for the collateral underlying loans, may affect borrowers’ ability or willingness to repay their loan obligations that could lead to increased loan losses or provisions. As a result, the Company may experience significant loan losses, including losses that may exceed the amounts established in the allowance for loan losses, which could have a material adverse effect on its operating results and capital.

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

From time-to-time the Company’s market areas have experienced lower real estate values, higher levels of residential and non-residential tenant vacancies, and weakness in the market for sale of new or existing properties, for both commercial and residential real estate. Such developments could negatively affect the value of the collateral securing the Company’s mortgage and related loans and could in turn lead to increased losses on loans and foreclosed real estate. Increased losses would affect the Company’s loan loss allowance and may cause it to increase its provision for loan losses resulting in a charge to earnings and capital.

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

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

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

Regulators Could Restrict or Limit Future Growth in the Bank’s Loans

In recent periods banking regulatory agencies have publicly expressed increased concern about financial institutions whose holdings of non-owner occupied commercial real estate and construction loans and growth in such loans exceed guidelines issued in certain regulatory pronouncements. Specifically, financial institutions whose holdings of such loans exceed 300% of total risk-based capital and whose growth in such loans exceeds 50% over the past three years can expect increased scrutiny from their primary regulator. As of December 31, 2016, the Bank’s holdings of, and three-year growth in, these types of loans exceeded these guidelines. As such, the Bank’s regulator has subjected its lending operations and risk management controls to increased scrutiny in recent months. In response, management has taken steps to implement certain enhancements in its lending operations and controls that it believes will be satisfactory to its regulator. However, there can be no assurances that these enhancements will be considered adequate by the Bank’s regulator, that additional enhancements will not be required by its regulator, and/or that the Bank’s ability to originate or retain these types of loans will not be restricted by its regulator in the future. Such action could have an adverse impact on the Bank’s ability to grow its loan portfolio and its future results of operations.

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

In addition to the effect of new laws and regulations, the regulatory climate in the U.S., particularly for financial institutions, continues to be strict, especially with regards to matters related to consumer compliance and customer information security. As a consequence, regulatory activities affecting financial institutions relating to a wide variety of matters continues to be elevated. Such regulatory activity, if directed at the Company or the Bank, could have an adverse effect on the Company's or the Bank's costs of compliance and results of operations.

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

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

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

Global financial markets continue to be volatile from time to time, and economic performance has been inconsistent in various countries. Developments relating to the federal budget, federal borrowing authority, and/or other political issues could also negatively impact these markets, as could global developments such as a foreign sovereign debt crisis, challenges in the European Union, or in the war on terrorism. Volatility and/or instability in global financial markets could also affect the Company’s ability to sell investment securities and other financial assets, which in turn could adversely affect the Company’s liquidity and financial position. These factors could also affect the prices at which the Company could make any such sales, which could adversely affect its results of operations and financial condition. Conditions could also negatively affect the Company’s ability to secure funds or raise capital for acquisitions and other projects, which in turn, could cause the Company to use deposits or other funding sources for such projects.

In addition, the volatility of the markets and weakness of global economies could affect the strength of the Company’s customers or counterparties, their willingness to do business with, and/or their ability or willingness to fulfill their obligations to the Company, which could further affect the Company’s results of operations. Conditions such as high unemployment, weak corporate performance, and soft real estate markets, could negatively affect the volume of loan originations and prepayments, the value of the real estate securing the Company’s mortgage loans, and borrowers’ ability or willingness to repay loan obligations, all of which could adversely impact the Company’s results of operations and financial condition.

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

Instability, volatility, and failures in the credit and financial institutions markets in recent years have led regulators and legislators from time-to-time to consider and/or adopt proposals that will significantly affect financial institutions and their holding companies, including the Company. Although designed to address safety, soundness, and compliance issues in the banking system, these actions, if any, could have a material adverse impact on financial markets, and/or the Company’s business, financial condition, results of operations, and access to credit.

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

Volatile interest rate environments make it difficult for the Company to coordinate the timing and amount of changes in the rates of interest it pays on deposits and borrowings with the rates of interest it earns on loans and securities. In addition, volatile interest rate environments cause corresponding volatility in the demand by individuals and businesses for the loan and deposit products offered by the Company. These factors have a direct impact on the Company’s net interest income, and consequently, its net income. Future interest rates could continue to be volatile and management is unable to predict the impact such volatility would have on the net interest income and profits of the Company.

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

The Company encounters strong competition both in attracting deposits from customers and originating loans to commercial and retail borrowers. The Company competes with commercial banks, savings institutions, mortgage banking firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms. The Company’s market area includes branches of several commercial banks that are substantially larger than the Company in terms of deposits and loans. In addition, tax-exempt credit unions operate in most of the Company’s market area and aggressively price their products and services to a large part of the population. If competitors succeed in attracting business from the Company’s customers, its deposits and loans could be reduced, which would likely affect earnings.

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

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

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

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

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

Security breaches in the Company’s internet, telephonic, or other electronic banking activities could expose it to possible liability and damage its reputation. Any compromise of the Company’s security also could deter customers from using its internet or other banking services that involve the transmission and/or retention of confidential information. The Company relies on internet and other security systems to provide the security and authentication necessary to effect secure transmission of data. These precautions may not protect the Company’s systems from compromises or breaches of its security measures, which could result in damage to the Company’s reputation and business and affect its results of operations.

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

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

The Company’s Ability to Grow May Be Limited if It Cannot Make Acquisitions

The Company will continue to seek to expand its banking franchise by growing internally, acquiring other financial institutions or branches, acquiring other financial services providers, and opening new offices. The Company’s ability to grow through selective acquisitions of other financial institutions or branches will depend on successfully identifying, acquiring, and integrating those institution or branches. The Company has not made any acquisitions in recent years, as management has not identified acquisitions for which it was able to reach an agreement on terms management believed were appropriate and/or that met its acquisition criteria. The Company cannot provide any assurance that it will be able to generate internal growth, identify attractive acquisition candidates, make acquisitions on favorable terms, or successfully integrate any acquired institutions or branches.

The Company Depends on Certain Key Personnel and the Company’s Business Could Be Harmed by the Loss of Their Services or the Inability to Attract Other Qualified Personnel

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

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

As of December 31, 2016, the Company and its subsidiaries conducted their business through an executive office and 65 banking offices. As of December 31, 2016, the Company owned the building and land for 57 of its property locations and leased the space for eight.

The Company also owns 15 acres of developed land in a suburb of Milwaukee, Wisconsin, through its MC Development subsidiary, as well as approximately 300 acres of undeveloped land in another community located near Milwaukee through MC Development’s 50% ownership in Arrowood Development LLC. The Company’s interest in the net book value of these parcels of land was $2.2 million at December 31, 2016.

Item 3. Legal Proceedings

The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Management believes that these routine legal proceedings, in the aggregate, are immaterial to the Company’s financial condition, results of operations, and cash flows.

Item 4. Mine Safety Disclosures

Not applicable.

Executive Officers

Refer to “Item 10. Directors, Executive Officers, and Corporate Governance,” for information regarding the executive officers of the Company and the Bank.

Part II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters’ and Issuer Purchase of Equity Securities

The common stock of the Company is traded on The NASDAQ Global Select Market under the symbol BKMU.

As of February 28, 2017, there were 45,887,719 shares of common stock outstanding and approximately 8,100 shareholders of record.

The Company paid a total cash dividend of $0.215 per share in 2016. A cash dividend of $0.055 per share was paid on February 27, 2017, to shareholders of record on February 17, 2017. For additional discussion relating to the Company’s dividends, refer to “Financial Condition—Shareholders’ Equity” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The payment of dividends in the future is discretionary with the Company’s board of directors and will depend on the Company’s operating results, financial condition, and other considerations. Refer also to “Item 1. Business—Regulation and Supervision” for information relating to regulatory limitations on the Company’s payment of dividends to shareholders, as well as the payment of dividends by the Bank to the Company, which in turn could affect the payment of dividends by the Company.

The quarterly high and low trading prices of the Company’s common stock from January 1, 2015, through December 31, 2016, and the dividends paid in each quarter, were as follows:

	2016 Stock Prices				2015 Stock Prices				Cash Dividends Paid
	High		Low		High		Low		2016		2015
1^stQuarter	$	7.88	$	7.21	$	7.39	$	6.37	$	0.050	$	0.040
2^nd Quarter		8.30		7.24		7.75		7.02		0.055		0.050
3^rd Quarter		7.99		7.51		7.78		6.78		0.055		0.050
4^thQuarter		9.65		7.69		8.05		7.03		0.055		0.050
								Total	$	0.215	$	0.190

From January 1, 2017, to February 28, 2017, the trading price of the Company's common stock ranged between $9.25 to $10.15 per share, and closed this period at $9.70 per share.

The Company’s board of directors announced a stock repurchase plan on February 1, 2016, that authorized the purchase of up to 1.0 million shares of the Company’s common stock. In 2016 the Company repurchased 30,168 shares of stock under this plan at an average price of $7.35. No shares were repurchased under this plan during the fourth quarter of 2016 and no shares were repurchased from January 1, 2017, to January 31, 2017, on which date the plan expired. On February 6, 2017, the Company’s board of directors announced a new stock repurchase plan that authorized the purchase of up to 500,000 shares of the Company’s common stock. From February 6, 2017, to February 28, 2017, no shares were repurchased under this new plan. For additional information relating to the Company’s stock repurchase plans, refer to “Financial Condition—Shareholders’ Equity,” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” For additional discussion relating to the Company’s ability to repurchase of its common stock, refer to “Item 1. Business—Shareholders’ Equity” and “Item 1. Business—Regulation and Supervision.”

Set forth below is a line graph comparing the cumulative total shareholder return on Company common stock, based on the market price of the common stock and assuming reinvestment of cash dividends, with the cumulative total return of companies on the NASDAQ Stock Market U.S. Index (“NASDAQ Composite Index”) and the NASDAQ Stock Market Bank Index. The graph assumes that $100 was invested on December 31, 2011, in Company common stock and each of those indices.

	Period Ending December 31
Index	2011		2012		2013		2014		2015		2016
Bank Mutual Corporation		100.00		136.93		226.90		227.29		265.21		348.14
NASDAQ Composite Index		100.00		117.45		164.57		188.84		201.98		219.89
NASDAQ Bank Index		100.00		134.74		184.08		205.85		210.40		266.24

Item 6. Selected Financial Data

The following table provides selected financial data for the Company for its past five fiscal years. The data is derived from the Company’s audited financial statements, although the table itself is not audited. The following data should be read together with the Company’s consolidated financial statements and related notes and “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.”

	At December 31
	2016		2015		2014		2013		2012
Selected financial condition data:	(Dollars in thousands, except number of shares and per share amounts)
Total assets	$	2,648,524	$	2,502,167	$	2,328,446	$	2,347,349	$	2,418,264
Loans receivable, net		1,942,907		1,740,018		1,631,303		1,508,996		1,402,246
Loans held-for-sale		5,952		3,350		3,837		1,798		10,739
Mortgage-related securities available-for-sale		371,880		407,874		321,883		446,596		550,185
Mortgage-related securities held-to-maturity		93,234		120,891		132,525		155,505		157,558
Mortgage servicing rights, net		6,569		7,205		7,867		8,737		6,821
Deposit liabilities		1,864,730		1,795,591		1,718,756		1,762,682		1,867,899
Borrowings		439,150		372,375		256,469		244,900		210,786
Shareholders' equity		286,641		279,394		280,717		281,037		271,853
Number of shares outstanding, net of treasury stock		45,691,790		45,443,548		46,568,284		46,438,284		46,326,484
Book value per share	$	6.27	$	6.15	$	6.03	$	6.05	$	5.87

	For the Year Ended December 31
	2016		2015			2014		2013		2012
Selected operating data:	(Dollars in thousands, except per share amounts)
Total interest income	$	83,148	$	77,901		$	79,265	$	79,456	$	83,022
Total interest expense		10,801		9,566			9,416		13,112		21,641
Net interest income		72,347		68,335			69,849		66,344		61,381
Provision for (recovery of) loan losses		2,998		(3,665	)		233		4,506		4,545
Total non-interest income		26,844		23,239			22,349		26,116		29,259
Total non-interest expense		69,127		72,727			68,461		71,504		76,057
Income before income taxes		27,066		22,512			23,504		16,450		10,038
Income tax expense		10,112		8,335			8,850		5,702		3,336
Net income before non- controlling interest		16,954		14,177			14,654		10,748		6,702
Net loss attributable to non-controlling interest		–		–			11		48		52
Net income	$	16,954	$	14,177		$	14,665	$	10,796	$	6,754
Earnings per share-basic	$	0.37	$	0.31		$	0.32	$	0.23	$	0.15
Earnings per share-diluted	$	0.37		0.31			0.31		0.23		0.15
Cash dividends paid per share		0.215		0.19			0.15		0.10		0.05

	At or For the Year Ended December 31
	2016			2015			2014			2013			2012
Selected financial ratios:
Net interest margin (1)		3.03	%		3.11	%		3.32	%		3.11	%		2.67	%
Net interest rate spread		2.94			3.02			3.24			3.02			2.57
Return on average assets		0.66			0.59			0.63			0.46			0.27
Return on average shareholders' equity		5.93			5.07			5.14			3.93			2.50
Efficiency ratio (2)		69.70			79.61			74.34			77.34			84.04
Non-interest expense as a percent of adjusted average assets		2.67			3.00			2.94			3.03			3.03
Shareholders' equity to total assets		10.82			11.17			12.06			11.97			11.24

Selected asset quality ratios:
Non-performing loans to loans receivable, net		0.42	%		0.78	%		0.74	%		0.86	%		1.84	%
Non-performing assets to total assets		0.42			0.68			0.72			0.84			1.64
Allowance for loan losses to non-performing loans		242.46			129.51			185.68			181.62			83.64
Allowance for loan losses to total loans receivable, net		1.03			1.01			1.37			1.56			1.54
Charge-offs to average loans		0.04			0.06			0.10			0.18			0.78

(1)

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

(2)

Efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income and non-interest income (excluding gains and losses on investments and real estate).

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

The discussion and analysis in this section should be read in conjunction with “Item 8. Financial Statements and Supplementary Data,” and “Item 7A. Quantitative and Qualitative Disclosures about Market Risk,” as well as “Item 1. Business” and “Item 1A. Risk Factors.”

Results of Operations

Overview The Company’s net income for the years ended December 31, 2016, 2015, and 2014, was $17.0 million, $14.2 million, and $14.7 million, respectively. Diluted earnings per share during these periods were $0.37, $0.31, and $0.31, respectively. The Company’s net income during these periods represented a return on average assets (“ROA”) of 0.66%, 0.59%, and 0.63%, respectively, and a return on average equity (“ROE”) of 5.93%, 5.07%, and 5.14%, respectively.

The Company’s net income in 2016 was impacted by the following favorable developments compared to 2015:

•

a $4.0 million or 5.9% increase in net interest income;

•

a $3.5 million or over 150% increase in loan-related fees;

•

a $3.0 million or 6.7% decrease in compensation-related expenses;

•

a $786,000 or 22.7% increase in mortgage banking revenue;

•

a $606,000 or 4.2% decrease in occupancy, equipment, and data processing costs; and

•

a $579,000 or 72.3% decrease in net losses and expenses on foreclosed real estate.

These favorable developments were partially offset by the following unfavorable developments in 2016 compared to 2015:

•

a $6.7 million adverse change in provision for (recovery of) loan losses;

•

a $482,000 or 25.2% increase in advertising and marketing expense;

•

a $402,000 or 11.2% decrease in brokerage and insurance commissions; and

•

a $1.8 million or 21.3% increase in income tax expense.

The Company’s net income in 2015 was impacted by the following unfavorable developments compared to 2014:

•

a $3.5 million or 8.5% increase in compensation-related expenses;

•

a $1.5 million or 2.2% decrease in net interest income;

•

a $1.5 million or 22.8% increase in occupancy, equipment, and data processing costs; and

•

a $920,000 or 33.0% decrease in income from bank-owned life insurance.

These unfavorable developments were partially offset by the following favorable developments in 2015 compared to 2014:

•

a $3.9 million favorable change in provision for (recovery of) loan losses;

•

a $1.0 million or 39.0% increase in brokerage and insurance commissions;

•

a $713,000 or 7.1% decrease in other non-interest expense;

•

a $676,000 or 41.6% increase in loan-related fees; and

•

a $518,000 non-recurring charge in 2014 related to state income taxes, net of federal benefit.

The following paragraphs discuss these developments in greater detail, as well as other changes in the components of net income during the years ended December 31, 2016, 2015, and 2014.

Net Interest Income The Company’s net interest income increased by $4.0 million or 5.9% during the twelve months ended December 31, 2016, compared to the same period in 2015. This increase was due in part to an increase in the Company’s average earning assets in 2016 compared to 2015, as well as an increase in funding from non-interest bearing checking accounts between the periods. Also contributing to the increase was an increase in call premiums received on mortgage-related securities that were called during the periods. These favorable developments were partially offset by a decrease in the Company’s net interest margin in the 2016 periods compared to the same periods in 2015.

The Company’s average earning assets increased by $185.0 million or 8.4% in 2016 compared to 2015. This increase was primarily attributable to a $205.1 million or 12.5% increase in average loans receivable was only partially offset by a $22.1 million or 4.2% decrease in average mortgage-related securities between these years.

Also contributing favorably to the Company’s net interest income in 2016, as well as its net interest margin, was an increase in funding from non-interest-bearing checking accounts. The average balance in these accounts increased by $45.5 million or 21.9% in 2016 compared to 2015.

The Company’s net interest margin was 3.03% in 2016 compared to 3.11% in 2015. In 2016 the average yield on the Company’s earning assets declined by 11 basis points (excluding the impact of call premiums) and its average cost of funds increased by three basis points compared to 2015. The decline in the average yield on earning assets was largely due to the continued repricing of the Company’s loan portfolio to lower yields in the current interest rate environment, as well as its continued emphasis on the origination of variable-rate loans, which generally have lower initial yields than fixed-rate loans. However, management believes that the negative impact these developments have had on the Company’s loan portfolio yield may have run their course and that the loan portfolio yield may stabilize or even improve slightly in the near term. However, future results will depend in large part on developments affecting interest rates throughout the U.S. economy, so there can be no assurances. Also contributing to the decline in yield on earning assets in the 2016 was the purchase of mortgage-related securities at yields that were less than the prevailing rates in the investment portfolio.

The increase in the Company’s average cost of funds in 2016 was primarily due to a six basis point increase in its average cost of deposits compared to 2015. The impact of this increase was offset slightly by a decline in the average cost of borrowings from the FHLB of Chicago. This decline was caused by an increase in overnight borrowings, which were drawn to fund growth in earning assets in 2016. Overnight borrowings generally have a lower interest cost than the rates the Company offers on its certificates of deposit.

The Company’s net interest income declined by $1.5 million or 2.2% during the twelve months ended December 31, 2015, compared to the same period in 2014. This decline was primarily attributable to a decrease in the Company’s net interest margin that was only partially offset by an increase in earning assets and an increase in funding from non-interest-bearing checking accounts. The Company’s net interest margin was 3.11% in 2015 compared to 3.32% in 2014. In 2015 the average yield on the Company’s earning assets declined by 23 basis points compared to 2014, but the average cost of funds declined by only one basis point. The decline in the average yield on earning assets was largely due to the continued repricing of the Company’s loan portfolio to lower rates, as well as an emphasis on the origination of variable-rate loans, which generally have lower initial yields than fixed-rate loans. Also contributing to the decline in yield on earning assets in 2015 was the purchase of mortgage-related securities at yields that were generally less than the prevailing yields in the securities portfolio.

The one basis point decline in the Company’s average cost of funds in 2015 compared to 2014 was due principally to a decrease in its average cost of borrowed funds. This decrease was caused by an increase in overnight borrowings from FHLB of Chicago, which were drawn to fund growth in earning assets in 2015. The benefit of this lower interest cost more than offset an increase in the average cost of the Company’s certificates of deposits in 2015. In that year the Company increased the rates and lengthened the 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.

The Company’s average earning assets increased by $97.7 million or 4.6% in 2015 compared to 2014. This increase was primarily attributable to a $99.7 million or 6.5% increase in average loans receivable in 2015. This development was partially offset by a small decrease in average mortgage-related securities in 2015 compared to 2014. Although the full-year average of mortgage-related securities declined between these years, the average balance of such securities actually increased during the last half of 2015 due to an increase in purchases of such securities.

Also contributing favorably to the Company’s net interest income in 2015, as well as its net interest margin in that year, was an increase in funding from non-interest-bearing checking accounts. The average balance in these accounts increased by $22.9 million or 12.4% in 2015 compared to 2014.

Finally, included in net interest income in 2016, 2015, and 2014, were call premiums of $1.3 million, $219,000, and $512,000, respectively, that the Company received on mortgage-related securities called by their issuer in those periods. These call premiums increased the Company’s reported net interest margin by five, one, and two basis points in these periods, respectively.

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 prepayment fees, accretion or amortization of deferred fees and costs, and accretion or amortization of purchase discounts and premiums, all of which are considered adjustments to the yield of the related assets. Net interest spread is the difference between the yield on interest-earning assets and the rate paid on interest-bearing liabilities. Net interest margin is derived by dividing net interest income by average interest-earning assets. The Company’s tax exempt investments are insignificant, so no tax equivalent adjustments have been made.

	Year Ended December 31
	2016								2015								2014
				Interest		Avg.						Interest		Avg.						Interest		Avg.
	Average			Earned/		Yield/			Average			Earned/		Yield/			Average			Earned/		Yield/
	Balance			Paid		Cost			Balance			Paid		Cost			Balance			Paid		Cost
Assets:	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net (1)	$	1,846,665		$	70,782		3.83	%	$	1,641,567		$	65,954		4.02	%	$	1,541,879		$	66,261		4.30	%
Mortgage-related securities		503,139			11,867		2.36			525,222			11,684		2.22			533,902			12,850		2.41
Investment securities (2)		18,646			467		2.50			16,362			244		1.49			13,633			139		1.02
Interest-earning deposits		17,029			32		0.19			17,333			19		0.11			13,339			15		0.11
Total interest-earning assets		2,385,479			83,148		3.49			2,200,484			77,901		3.54			2,102,753			79,265		3.77
Non-interest-earning assets		199,775								221,267								225,444
Total average assets	$	2,585,254							$	2,421,751							$	2,328,197

Liabilities and equity:
Interest-bearing liabilities:
Interest-bearing demand accounts	$	256,865			45		0.02		$	246,711			30		0.01		$	228,578			30		0.01
Money market accounts		533,954			839		0.16			511,793			702		0.14			503,090			735		0.15
Savings deposits		227,573			30		0.01			220,038			46		0.02			222,930			55		0.02
Certificates of deposit		541,605			4,847		0.89			536,457			3,993		0.74			564,505			3,834		0.68
Total deposit liabilities		1,559,997			5,761		0.37			1,514,999			4,771		0.31			1,519,103			4,684		0.31
Borrowings		389,891			5,039		1.29			313,655			4,794		1.53			252,128			4,731		1.88
Advance payment by borrowers for taxes and insurance		19,514			1		0.01			20,107			1		0.00			20,949			1		0.00
Total interest-bearing liabilities		1,969,402			10,801		0.55			1,848,761			9,566		0.52			1,792,180			9,416		0.53
Non-interest-bearing liabilities:
Non-interest-bearing deposits		252,861								207,372								184,479
Other non-interest-bearing liabilities		77,240								85,928								66,067
Total non-interest-bearing liabilities		330,101								293,300								250,546
Total liabilities		2,299,503								2,142,061								2,042,726
Total equity		285,751								279,690								285,471
Total average liabilities and equity	$	2,585,254							$	2,421,751							$	2,328,197
Net interest income and net interest rate spread				$	72,347		2.94	%				$	68,335		3.02	%				$	69,849		3.24	%
Net interest margin							3.03	%							3.11	%							3.32	%
Average interest-earning assets to interest-bearing liabilities		1.21	x							1.19	x							1.17	x

(1)

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

(2)

Investment securities consist of FHLB of Chicago common stock, which is owned as a condition of membership in that organization.

The following tables present the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to the change attributable to change in volume (change in volume multiplied by prior rate), the change attributable to change in rate (change in rate multiplied by prior volume), and the net change. The change attributable to the combined impact of volume and rate has been allocated proportionately to the change due to volume and the change due to rate.

	Year Ended December 31, 2016, Compared to Year Ended December 31, 2015
	Increase (Decrease)
	Volume			Rate			Net
Interest-earning assets:		(Dollars in thousands)
Loans receivable	$	8,054		$	(3,226	)	$	4,828
Mortgage-related securities		(533	)		716			183
Investment securities		38			185			223
Interest-earning deposits		–			13			13
Total interest-earning assets		7,559			(2,312	)		5,247
Interest-bearing liabilities:
Interest-bearing demand deposits		1			14			15
Money market deposits		32			105			137
Savings deposits		7			(23	)		(16	)
Certificates of deposit		38			816			854
Borrowings		1,055			(810	)		245
Advance payment by borrowers for taxes and insurance		–			–			–
Total interest-bearing liabilities		1,133			102			1,235
Net change in net interest income	$	6,426		$	(2,414	)	$	4,012

	Year Ended December 31, 2015, Compared to Year Ended December 31, 2014
	Increase (Decrease)
	Volume			Rate			Net
Interest-earning assets:	(Dollars in thousands)
Loans receivable	$	4,150		$	(4,457	)	$	(307	)
Mortgage-related securities		(165	)		(1,001	)		(1,166	)
Investment securities		32			73			105
Interest-earning deposits		4			–			4
Total interest-earning assets		4,021			(5,385	)		(1,364	)
Interest-bearing liabilities:
Interest-bearing demand deposits		2			(2	)		–
Money market deposits		13			(46	)		(33	)
Savings deposits		(7	)		(2	)		(9	)
Certificates of deposit		(197	)		326			129
Borrowings		1,035			(972	)		63
Advance payment by borrowers for taxes and insurance		–			–			–
Total interest-bearing liabilities		846			(696	)		150
Net change in net interest income	$	3,175		$	(4,689	)	$	(1,514	)

Provision for Loan Losses The Company’s provision for (recovery of) loan losses was $3.0 million, $(3.7) million, and $233,000 during the years ended December 31, 2016, 2015, and 2014, respectively. Management believes that general economic, employment, and real estate conditions continue to be relatively stable in the Company’s local markets. In addition, the Company’s level of non-performing loans, as well as its actual loan charge-offs, have continued to trend lower in recent periods, as noted in “Financial Condition—Asset Quality,” below. However, the Company has experienced a modest increase in classified loans in recent periods, as also noted below. Management believes that this development could be an early indication of emerging difficulties in the lending environment for Company. This consideration, along with growth in the Company’s loan portfolio, contributed to management’s conclusion in 2016 that an increase in the allowance for loan losses was appropriate. As such, the Company’s allowance for loan losses increased from $17.6 million at December 31, 2015, to $19.9 million at December 31, 2016. Management anticipates that the Company’s provision for loan losses will continue to consist of provisions rather than recoveries for the foreseeable future, particularly if the Company’s loan portfolio continues to grow.

The Company’s provision for (recovery of) loan losses in 2015 and 2014 benefited from a continued decline in Company’s actual loan charge-off experience in those periods, which had a favorable impact on the methodology the Company used to compute general valuation allowances for most of its loan types. Also contributing was a general decline in non-performing and classified loans during those years. Refer to “Financial Condition—Asset Quality,” below, for additional discussion.

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 that can fluctuate considerably from period to period. As such, there can be no assurances that there will not be significant fluctuations in the Company’s non-performing loans, classified loans, and/or loan charge-off activity from period to period, which may result in significant variability in Company’s provision for loan losses.

Non-Interest Income Total non-interest income for the years ended December 31, 2016, 2015, and 2014, was $26.8 million, $23.2 million, and $22.3 million, respectively. The following paragraphs discuss the principal components of non-interest income and primary reasons for its change from 2015 to 2016, as well as 2014 to 2015.

Deposit-related fees and charges were $11.5 million, $11.6 million, and $12.0 million in 2016, 2015, and 2014, respectively. 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 fluctuations in deposit-related fees and charges to changes in retail customer spending behavior in recent years which has generally resulted in lower revenue from overdraft charges and from check printing commissions. Benefiting this revenue line item in recent periods, however, has been increased revenue from treasury management and merchant card processing services that the Company offers to commercial depositors.

Loan-related fees were $5.8 million, $2.3 million, and $1.6 million in 2016, 2015, and 2014, respectively. Loan-related fees consist of periodic income from lending activities that are not deferred as yield adjustments under the applicable accounting rules. The largest source of fees in this revenue category is interest rate swap fees 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. The increases in loan-related fees in the 2016 and 2015 were the result of increased loan production in those periods, as well as a generally lower interest rate environment that increased borrower preference for the types of loan transactions that generate interest rate swap fees. Management believes this source of revenue will vary considerably from period to period depending on the rate environment and on borrower preference for the types of transactions that generate interest rate swaps. Furthermore, a likely future decline in the origination of multi-family and construction loans, which are the types of loans that generate most of the Company’s interest rate swap fees, could have a negative impact on such fee income in the future (refer to “Financial Condition—Loans Receivable,” below, for additional discussion).

Brokerage and insurance commissions were $3.2 million, $3.6 million, and $2.6 million, for the years ended December 31, 2016, 2015, and 2014, respectively. 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, results in 2015 included certain non-recurring incentive payments. Excluding these payments, this revenue item would have been $2.7 million in 2015. Management attributes the increase in this revenue item in recent years (excluding consideration of the non-recurring incentive payments) to new products, services, systems, and investment advisors that the Company has added in recent years.

Mortgage banking revenue, net, was $4.2 million, $3.5 million, and $3.0 million in 2016, 2015, and 2014, respectively. The following table presents the components of mortgage banking revenue, net, for the periods indicated:

	Year Ended December 31
	2016			2015			2014
	(Dollars in thousands)
Gross loan servicing fees	$	2,540		$	2,661		$	2,796
MSR amortization		(2,158	)		(1,907	)		(1,772	)
MSR valuation recovery		–			–			1
Loan servicing revenue, net		382			754			1,025
Gain on sales of loan activities, net		3,866			2,708			1,965
Mortgage banking revenue, net	$	4,248		$	3,462		$	2,990

Gross loan servicing fees were $2.5 million, $2.7 million, and $2.8 million in 2016, 2015, and 2014, respectively. Gross loan servicing fees are highly correlated with loans serviced for third-party investors. As of December 31, 2016, 2015, and 2014, loans serviced for third-party investors were $997.0 million, $1.04 billion, and $1.09 billion, respectively. In recent years the Company’s origination of fixed-rate, one- to four-family mortgage loans that it sells and services for third-party investors has not kept pace with repayments of such loans. Management attributes this to increased competition from non-bank sources, such as on-line mortgage banks.

Amortization of MSRs has increased in recent years. Generally lower market interest rates for one- to four-family residential loans has caused higher levels of actual and expected loan prepayment activity, which has resulted in higher MSR amortization in recent periods. In recent months market interest rates for one- to four-family residential loans have increased. As such, management anticipates that that amortization of MSRs will decline in the near term in response to reduced levels of loan refinance activity. However, this development cannot be assured, particularly if market interest rates for one- to four-family residential loans decline in the future.

The change in the valuation allowance that the Company maintains against its MSRs is recorded as a recovery or loss, as the case may be, in the period in which the change occurs. MSR valuation allowances typically increase in lower interest rate environments and decrease in higher interest rate environments. In lower 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. Although market interest rates for one- to four-family mortgage loans were generally lower in 2016 and 2015, they were not low enough to generate an MSR valuation allowance during those periods. 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 decline in the future.

Net gains on loan sales activities were $3.9 million, $2.7 million, and $2.0 million, during the years ended December 31, 2016, 2015, and 2014, respectively. The Company’s policy is to sell substantially all of its fixed-rate, one- to four-family mortgage loan originations in the secondary market. During 2016, 2015, and 2014, sales of one- to four-family residential loans were $151.2 million, $111.5 million, and $77.8 million, respectively. Generally lower market interest rates for one- to four-family residential loans since 2014 have resulted in increased sales of loans in 2015 and 2016. Although interest rates for one- to four-family residential loans have increased in recent months, management believes that origination and sales of such loans may not be adversely impacted due to continued strength in housing markets in Wisconsin, increases in the number and quality of the Company’s loan production personnel, and continued improvements in the Company’s loan origination systems and procedures. However, the origination and sale of residential loans are 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 fluctuate considerably from period to period.

Income from BOLI was $1.8 million, $1.9 million, and $2.8 million during the years ended December 31, 2016, 2015, and 2014, respectively. Results in 2016 and 2015 included no payouts related to excess death benefits under the terms of the insurance contracts. In contrast, results in 2014 included payouts of $948,000 related to excess death benefits. Income from BOLI is also not subject to income taxes.

In 2016 and 2015 the Company recorded $12,000 and $218,000 in gains on the disposition of real estate properties that it held for investment purposes. No such gains were recorded in 2014. The Company continues to actively market certain properties that it holds for investment purposes. There can be no assurances that the Company will be able to sell such properties or that gains or losses on sales, if any, will not fluctuate considerably from period to period.

In 2014 the Company recorded a $102,000 gain on the sale of mortgage-related securities that management believed no longer met the yield objectives of that portfolio. The Company did not sell any securities in 2016 or 2015.

Non-Interest Expense Total non-interest expense for the years ended December 31, 2016, 2015, and 2014, was $69.1 million, $72.7 million, and $68.5 million, respectively. The following paragraphs discuss the principal components of non-interest expense and the primary reasons for its change from 2015 to 2016, as well as 2014 to 2015.

Compensation and related expenses were $41.8 million, $44.8 million, and $41.3 million, during the years ended December 31, 2016, 2015, and 2014, respectively. The decrease in 2016 was mostly due to lower costs associated with the Company’s defined benefit pension plan, which was due in part to an increase in the discount rate used to determine the present value of the pension obligation, but also to a freeze of the plan’s benefits at the end of 2015. This latter change also resulted in a lengthening of the amortization period for unrealized losses in the pension plan, which further contributed to lower pension costs in 2016. Also contributing to the decrease in compensation-related expenses in 2016 compared to 2015 was a decline in the number of employees at the Company. This decline was primarily due to the consolidation of seven retail banking offices in the second quarter of 2015 and an additional four in the first quarter of 2016. These developments were partially offset by normal annual merit increases granted to most employees at the beginning of 2016, as well as higher stock-based compensation and employee commission expense compared to 2015.

The increase in compensation-related expenses in 2015 compared to 2014 was partly the result of increased cost related to 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, as well as changes in certain other actuarial assumptions. Also contributing was a change in 2014 in the manner in which employees earned benefits for compensated absences. The one-time impact of this change reduced the Company’s expense for compensated absences in 2014. Compensation-related expenses in the 2015 were also higher because of normal annual merit increases granted to most employees, as well as higher stock-based compensation expense. Finally, compensation-related expenses in 2015 included employee severance-related costs associated with the Company’s 2015 announcements that it intended to consolidate a total of eleven retail branch offices, as noted in the previous paragraph.

As of December 31, 2016, the Company had 548 full-time employees and 74 part-time employees. This compared to 563 full-time and 100 part-time at December 31, 2015, and 616 full-time and 99 part-time at December 31, 2014. The number of employees has declined in recent years as the Company has consolidated retail branch offices and has improved efficiencies in other areas of its operations.

Occupancy, equipment, and data processing costs during the years ended December 31, 2016, 2015, and 2014, were $13.7 million, $14.3 million, and $12.8 million, respectively. The 2015 amount included $715,000 in one-time costs associated with the Company’s announcements in that year that it was consolidating a total of eleven retail branch offices, as previously described. These consolidations resulted in a decline in on-going occupancy-related costs of $364,000 during the year ended December 31, 2016, compared to 2015. However, the impact of these cost declines were partially offset in 2016 by increased data processing, software, and equipment costs associated with other initiatives undertaken by Company in recent periods. The cost of similar initiatives also contributed to the increase in occupancy, equipment, and data processing costs in 2015 compared to 2014.

Advertising and marketing expenses were $2.4 million, $1.9 million, and $1.8 million in 2016, 2015, and 2014, respectively. The Company increased its spending on advertising and marketing in 2016 in an effort to increase sales and expand the Company’s overall brand awareness, especially as such relates to the retail deposit business. Management anticipates that spending on advertising and marketing-related expenses in 2017 may be slightly lower than what it was in 2016. However, this outcome depends on future management decisions and there can be no assurances.

Federal insurance premiums were $1.4 million, $1.5 million, and $1.5 million in 2016, 2015, and 2014, respectively. In 2016 the FDIC issued a final rule that changed how insured financial institutions less than $10 billion in assets, such as the Company, are assessed for deposit insurance. The new rule, which was effective for the last half of 2016, resulted in a lower deposit insurance assessment rate for the Company. For additional information, refer to “Regulation and Supervision of the Bank—Deposit Insurance” in “Item 1. Business—Regulation and Supervision,” above.

Net losses and expenses on foreclosed properties were $222,000, $801,000, and $1.0 million in 2016, 2015, and 2014, respectively. The Company has experienced lower losses and expenses on foreclosed real estate in recent years due to reduced levels of foreclosed properties and improved market conditions.

Other non-interest expense was $9.6 million, $9.4 million, and $10.1 million during the years ended December 31, 2016, 2015, and 2014, respectively. In these years the Company prepaid $31.9 million, $10.0 million, and $20.0 million in fixed-rate, term FHLB of Chicago advances, respectively. Most of these advances had been drawn in prior years to fund the purchase of mortgage-related securities that were called by the issuer in those years, as previously described. However, in 2016 the Company also prepaid certain other fixed-rate, term advances in an effort to manage its overall exposure to interest rate risk. Management elected to prepay these advances concurrent with the calls of the securities. As a result, the Company recorded prepayment penalties of $758,000, $102,000, and $242,000 in 2016, 2015, and 2014, respectively. In 2016 the Company also incurred lower processing costs related to its ATM network, lower deposit account fraud losses, and lower amortization expense related to certain intangible assets. Other non-interest expense in 2015 also included a one-time cost to terminate a contract with a third-party vendor, as well as lower on legal, consulting, and other professional services relative to 2014.

Income Tax Expense Income tax expense was $10.1 million, $8.3 million, and $8.9 million in 2016, 2015, and 2014, respectively. The year ended December 31, 2014, included a non-recurring charge of $518,000 (net of federal income tax benefit) related to a payment by the Company to the Wisconsin Department of Revenue to settle a tax matter. Excluding the impact of this non-recurring charge, the Company’s effective tax rate (“ETR”) in 2016, 2015, and 2014, was 37.4%, 37.0%, and 35.4%, respectively. The Company’s ETR will vary from period to period depending primarily on the impact of non-taxable revenue, such as earnings from BOLI and tax-exempt interest income. The ETR will also vary because of certain tax deductions related to stock-based compensation.

Financial Condition

Overview The Company’s total assets increased by $146.5 million or 5.8% during the twelve months ended December 31, 2016, due principally to an increase in total loans receivable. This increase was primarily funded by increases in deposit liabilities and other borrowings. Also providing funds for the increase in loans receivable was a decrease in mortgage-related securities during the year. The Company’s total shareholders’ equity was $286.6 million at December 31, 2016, compared to $279.4 million at December 31, 2016. The following paragraphs describe these changes in greater detail, as well as other changes in the Company’s financial condition during the twelve months ended December 31, 2016.

Mortgage-Related Securities Available-for-Sale The Company’s portfolio of mortgage-related securities available-for-sale decreased by $36.0 million or 8.8% during the year ended December 31, 2016. This decrease was the result of periodic repayments that exceeded the Company’s purchase of new securities during the period.

The following table presents the carrying value of the Company’s mortgage-related securities available-for-sale at the dates indicated:

	December 31
	2016		2015		2014
	(Dollars in thousands)
Freddie Mac	$	187,838	$	216,278	$	169,168
Fannie Mae		162,610		169,771		123,209
Ginnie Mae		5,202		24		29
Private-label CMOs		16,230		21,801		29,477
Total	$	371,880	$	407,874	$	321,883

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

	Year Ended December 31
	2016			2015			2014
	(Dollars in thousands)
Carrying value at beginning of period	$	407,874		$	321,883		$	446,596
Purchases		85,040			203,729			–
Sales		–			–			(17,692	)
Principal repayments		(117,460	)		(111,640	)		(104,430	)
Premium amortization, net		(1,974	)		(1,725	)		(1,213	)
Other-than-temporary impairment reductions		132			148			–
Change in net unrealized gain or loss		(1,732	)		(4,521	)		(1,378	)
Carrying value at end of period	$	371,880		$	407,874		$	321,883

The table below presents information regarding the carrying values, weighted-average yields, and contractual maturities of the Company’s mortgage-related securities available-for-sale at December 31, 2016:

	One Year or Less					More Than One Year to Five Years					More Than Five Years to Ten Years					More Than Ten Years					Total
	Carrying Value		Weighted Average Yield			Carrying Value		Weighted Average Yield			Carrying Value		Weighted Average Yield			Carrying Value		Weighted Average Yield			Carrying Value		Weighted Average Yield
Securities by issuer and type:	(Dollars in thousands)
Freddie Mac, Fannie Mae, and Ginnie Mae MBSs	$	3		6.58	%	$	6,761		2.75	%	$	74,567		2.06	%	$	32,918		2.20	%	$	114,249		2.14	%
Freddie Mac and Fannie Mae CMOs		–		–			5,366		2.12			86,177		2.56			149,858		2.00			241,401		2.20
Private-label CMOs		–		–			2,606		5.09			–		–			13,624		3.32			16,230		3.61
Total	$	3		6.58	%	$	14,733		2.94	%	$	160,744		2.33	%	$	196,400		2.13	%	$	371,880		2.24	%
Securities by coupon:
Adjustable-rate coupon		–		–			–		–		$	268		1.76	%	$	12,969		3.20	%	$	13,237		3.17	%
Fixed-rate coupon	$	3		6.58	%	$	14,733		2.94	%		160,476		2.33			183,431		2.05			358,643		2.21
Total	$	3		6.58	%	$	14,733		2.94	%	$	160,744		2.33	%	$	196,400		2.13	%	$	371,880		2.24	%

Changes in the fair value of mortgage-related securities available-for-sale are recorded through accumulated other comprehensive loss, net of related income tax effect, which is a component of shareholders’ equity. The fair value adjustment on the Company’s mortgage-related securities available-for-sale was a net unrealized loss of $526,000 at December 31, 2016, compared to a net unrealized gain of $1.2 million at December 31, 2015. The net unrealized loss at the end of 2016 was the result of an increase in market interest rates at the end of that year.

The Company maintains an investment in private-label CMOs that were purchased from 2004 to 2006 and are secured by prime residential mortgage loans. The securities were all rated “triple-A” by various credit rating agencies at the time of their purchase. However, all of the securities in the portfolio have been downgraded since their purchase. Securities rated less than investment grade are adversely classified as substandard in accordance with regulatory guidelines (refer to “Item 1. Business—Asset Quality”). As of December 31, 2016 and 2015, the carrying value of the Company’s investment in private-label CMOs was $16.2 million and $21.8 million, respectively. The net unrealized gain (loss) on the securities as of such dates was $(3,000) and $201,000, respectively. As of December 31, 2016, $11.6 million of the Company’s private-label CMOs were rated less than investment grade by at least one credit rating agency. These securities had a net unrealized gain of $37,000 as of that date. As of December 31, 2015, $15.7 million of the Company’s private-label CMOs were rated less than investment grade and had a net unrealized gain of $237,000.

As of December 31, 2016 and 2015, management determined that none of the Company’s private-label CMOs had incurred OTTI as of those dates. The Company does not intend to sell these securities and it is unlikely it would be required to sell them before recovery of their amortized cost. However, collection is subject to numerous factors outside of the Company’s control and a future determination of OTTI could result in significant losses being recorded through earnings in future periods. For additional discussion refer to “Critical Accounting Policies—Other-Than-Temporary Impairment,” below, and “Item 1. Business—Investment Activities,” above.

Mortgage-Related Securities Held-to-Maturity The Company’s mortgage-related securities held-to-maturity consist of fixed-rate mortgage-backed securities issued and guaranteed by Fannie Mae and backed by multi-family residential loans. The Company classified these securities as held-to-maturity because it has the ability and intent to hold them until they mature.

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

	Year Ended December 31
	2016			2015			2014
	(Dollars in thousands)
Carrying value at beginning of period	$	120,891		$	132,525		$	155,505
Principal repayments		(27,066	)		(10,985	)		(21,977	)
Net premium amortization		(591	)		(649	)		(1,003	)
Carrying value at end of period	$	93,234		$	120,891		$	132,525

In 2016, 2015, and 2014, mortgage-related securities held-to-maturity with carrying values of $25.2 million, $8.9 million, and $20.4 million, respectively, were called by the issuers. In connection with these calls the Company recorded premiums in interest income of $1.3 million, $219,000, and $512,000 in these years, respectively.

The table below presents information regarding the carrying values, weighted-average yields, and contractual maturities of the Company’s mortgage-related securities held-to-maturity at December 31, 2016, all of which are fixed rate:

One Year or Less

More Than One Year
to Five Years

More Than Five
Years to Ten Years

More Than Ten Years

Total

Carrying
Value

Weighted
Average
Yield

Carrying
Value

Weighted
Average
Yield

Carrying
Value

Weighted
Average
Yield

Carrying
Value

Weighted
Average
Yield

Carrying
Value

Weighted
Average
Yield

Securities by issuer and type:

(Dollars in thousands)

Fannie Mae DUS

–

49,567

2.10

43,667

2.52

–

93,234

2.30

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

	Year Ended December 31
	2016			2015			2014
	(Dollars in thousands)
Balance outstanding at beginning of period	$	3,350		$	3,837		$	1,798
Origination of loans held-for-sale (1)		153,863			111,012			79,714
Principal balance of loans sold		(151,185	)		(111,456	)		(77,776	)
Change in net unrealized gain or loss (2)		(76	)		(43	)		101
Total loans held-for-sale	$	5,952		$	3,350		$	3,837

(1)

Amounts do not include one- to four-family mortgage loans originated for the Company’s loan portfolio.

(2)

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

The origination of one- to four-family mortgage loans intended for sale and the corresponding sales of such loans have increased in recent years because of generally lower market interest rates, which resulted in more borrowers refinancing higher-rate loans into lower rate loans. In addition, the Company has increased the number and quality of its residential loan officers in recent years. For additional discussion, refer to “Results of Operations—Non-Interest Income,” above.

Loans Receivable The Company’s loans receivable increased by $202.9 million or 11.7% during the twelve months ended December 31, 2016. During this period increases in multi-family, commercial real estate, and construction loans (net of the undisbursed portion) and commercial and industrial loans were partially offset by declines in the Company’s other loan categories. Management attributes the increases in part to a low interest rate environment that encouraged loan growth in the Company’s local markets, particularly for loans secured by multi-family and commercial real estate. This rate environment also improved the competitiveness of the Company’s loan offerings linked to its interest rate swap loan program, as noted earlier in this release. Because of this improvement, the Company was able to increase new loan production, as well as retain in its loan portfolio a larger portion of construction loans transitioning to permanent financing than it typically has in prior periods. However, management is not certain that the loan growth experienced in recent periods can be sustained in the future. The loan portfolio is subject to economic, market, competitive, and regulatory factors outside of the Company’s 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 presents the composition of the Company’s loan portfolio in dollar amounts and in percentages of the total portfolio at the dates indicated.

	December 31
	2016						2015						2014						2013						2012
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
Commercial loans:	(Dollars in thousands)
Commercial and industrial	$	241,689			11.03	%	$	235,313			11.78	%	$	226,537			12.47	%	$	166,788			10.10	%	$	132,436			8.82	%
Commercial real estate		375,459			17.13			299,550			14.99			263,512			14.50			276,547			16.75			263,775			17.57
Multi-family		506,136			23.09			409,674			20.51			322,413			17.74			265,841			16.10			264,013			17.58
Construction and development:
Commercial real estate		34,125			1.56			28,156			1.41			42,405			2.33			27,815			1.68			11,116			0.74
Multi-family		328,186			14.97			291,380			14.59			211,239			11.62			164,685			9.97			86,904			5.79
Land and land development		12,484			0.57			11,143			0.56			5,069			0.28			6,962			0.42			6,445			0.43
Total construction and development loans		374,795			17.10			330,679			16.56			258,713			14.24			199,462			12.08			104,465			6.96
Total commercial loans		1,498,079			68.35			1,275,216			63.84			1,071,175			58.94			908,638			55.03			764,689			50.93
Retail loans:
One- to four-family first mortgages:
Permanent		457,014			20.85			461,797			23.12			480,102			26.42			449,230			27.21			471,551			31.40
Construction		42,961			1.96			42,357			2.12			23,905			1.32			40,968			2.48			18,502			1.23
Total first mortgages		499,975			22.81			504,154			25.24			504,007			27.73			490,198			29.69			490,053			32.63
Home equity loans:
Fixed term home equity		105,544			4.81			122,985			6.16			139,046			7.65			148,688			9.01			141,898			9.45
Home equity lines of credit		70,043			3.20			75,261			3.77			80,692			4.44			79,470			4.81			81,898			5.45
Total home equity		175,587			8.01			198,246			9.93			219,738			12.09			228,158			13.82			223,796			14.90
Other consumer loans:
Student		6,810			0.31			8,129			0.41			9,692			0.53			11,177			0.68			12,915			0.86
Other		11,373			0.52			11,678			0.58			12,681			0.70			12,942			0.78			10,202			0.68
Total other consumer		18,183			0.83			19,807			0.99			22,373			1.23			24,119			1.46			23,117			1.54
Total retail loans		693,745			31.65			722,207			36.16			746,118			41.06			742,475			44.97			736,966			49.07
Gross loans receivable		2,191,824			100.00	%		1,997,423			100.00	%		1,817,293			100.00	%		1,651,113			100.00	%		1,501,655			100.00	%
Undisbursed loan proceeds		(227,537	)					(238,124	)					(162,471	)					(117,439	)					(76,703	)
Allowance for loan losses		(19,940	)					(17,641	)					(22,289	)					(23,565	)					(21,577	)
Deferred fees and costs, net		(1,440	)					(1,640	)					(1,230	)					(1,113	)					(1,129	)
Total loans receivable, net	$	1,942,907					$	1,740,018					$	1,631,303					$	1,508,996					$	1,402,246

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

	Year Ended December 31
	2016			2015			2014
	(Dollars in thousands)
Balance outstanding at beginning of period	$	1,740,018		$	1,631,303		$	1,508,996
Loan originations:
Commercial loans:
Commercial and industrial		69,271			90,265			73,630
Commercial real estate		102,014			101,198			37,444
Multi-family		133,216			87,328			101,260
Construction and development		232,071			263,030			154,940
Total commercial loans		536,572			541,821			367,274
Retail loans:
One- to four-family first mortgages (1)		108,630			100,876			75,402
Home equity		32,429			33,291			33,850
Other consumer		1,993			1,594			1,427
Total retail loans		143,052			135,761			110,679
Total loan originations		679,624			677,582			477,953
Principal payments and repayments:
Commercial loans		(313,147	)		(337,601	)		(204,737	)
Retail loans		(169,836	)		(157,515	)		(104,782	)
Total principal payments and repayments		(482,983	)		(495,116	)		(309,519	)
Transfers to foreclosed properties, real estate owned, and repossessed assets		(2,240	)		(2,336	)		(2,254	)
Net change in undisbursed loan proceeds, allowance for loan losses, and deferred fees and costs		8,488			(71,415	)		(43,873	)
Total loans receivable, net	$	1,942,907		$	1,740,018		$	1,631,303

(1)

Amounts do not include one- to four-family mortgage loans originated for sale.

The following table presents the contractual maturity of the Company’s commercial and industrial loans and construction and development loans at December 31, 2016. The table does not include the effect of prepayments or scheduled principal amortization.

	Commercial and Industrial		Construction and Development		Total
Amounts due:	(Dollars in thousands)
Within one year or less	$	93,957	$	14,211	$	108,168
After one year through five years		140,418		264,679		405,097
After five years		7,314		138,866		146,180
Total due after one year		147,732		403,545		551,277
Total commercial and construction loans	$	241,689	$	417,756	$	659,445

The following table presents, as of December 31, 2016, the dollar amount of the Company’s commercial and industrial loans and construction and development loans due after one year and whether these loans have fixed interest rates or adjustable interest rates.

	Due After One Year
	Fixed Rate		Adjustable Rate		Total
	(Dollars in thousands)
Commercial and industrial	$	58,062	$	89,670	$	147,732
Construction and development		1,134		402,411		403,545
Total loans due after one year	$	59,196	$	492,081	$	551,277

In recent periods banking regulatory agencies have publicly expressed increased concern about financial institutions whose holdings of non-owner-occupied commercial real estate and construction loans and whose growth in such loans exceed guidelines established in certain regulatory pronouncements. Specifically, these guidelines indicate that financial institutions whose holdings of such loans exceed 300% of total risk-based capital and whose growth in such loans exceeds 50% over the past three years will receive increased scrutiny from their primary regulator. As of December 31, 2016, the Bank’s holdings of and three-year growth in these types of loans exceeded these guidelines. As such, the Bank’s regulator has subjected its lending operations and credit risk management controls to increased scrutiny in recent months. In response, management has taken steps to implement certain enhancements in its lending operations and controls that it believes will be satisfactory to its regulator. However, there can be no assurances. Regardless of these enhancements, given the regulatory scrutiny and other factors management believes that growth in multi-family and construction loans will be slower in the future than it has been in recent periods. Specifically, management expects that the aggregate future growth rate for these loan types will be managed in the future to more closely approximate growth in the total risk-based capital of the Bank.

Mortgage Servicing Rights The carrying value of the Company’s MSRs was $6.6 million at December 31, 2016, compared to $7.2 million at December 31, 2015, net of valuation allowances of zero at both dates. As of December 31, 2016 and 2015, the Company serviced $997.0 million and $1.04 billion in loans for third-party investors, respectively. For additional information refer to “Results of Operations—Non-Interest Income” and “Item 1. Business—Lending Activities,” above.

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

	December 31
	2016		2015		2014
Accrued interest receivable:	(Dollars in thousands)
Loans receivable	$	5,357	$	4,894	$	4,748
Mortgage-related securities		1,015		1,141		1,027
Total accrued interest receivable		6,372		6,035		5,775
Foreclosed properties and repossessed assets:
Commercial real estate		1,559		1,685		2,566
Land and land development		598		747		1,693
One- to four- family first mortgages		787		874		409
Total foreclosed and repossessed assets		2,944		3,306		4,668
Bank-owned life insurance		63,494		61,656		59,830
Premises and equipment		47,343		49,218		52,594
Federal Home Loan Bank stock, at cost		20,261		17,591		14,209
Deferred tax asset, net		14,543		16,485		25,595
Other assets		22,938		24,037		22,183
Total other assets	$	177,895	$	178,328	$	184,854

BOLI is long-term life insurance on the lives of certain current and past employees where the insurance policy benefits and ownership are retained by the Company. The cash surrender value of the related policies is an asset that the Company uses to partially offset the future cost of employee benefits. The cash value accumulation on BOLI is permanently tax deferred if the policy is held to the insured person’s death and certain other conditions are met.

As of December 31, 2016, the Company and its subsidiaries conducted their business through an executive office and 65 banking offices. The Company owned the building and land for 57 of its office locations and leased the space for eight. However, refer to “Results of Operations—Non-Interest Expense,” above, for discussion related to the Company’s consolidation of certain banking office locations in March 2016.

The Company’s net deferred tax asset has decreased in recent years due primarily to the utilization of net operating loss carryforwards and alternative minimum tax (“AMT”) credits. Management evaluates this asset on an on-going basis to determine if a valuation allowance is required. Management determined that no valuation allowance was required as of December 31, 2016. The evaluation of the net deferred tax asset requires significant management judgment based on positive and negative evidence. Such evidence includes the Company’s recent trend in earnings, expectations for the Company’s future earnings, the duration of federal and state net operating loss carryforward periods, and other factors. There can be no assurance that future events, such as adverse operating results, court decisions, regulatory actions or interpretations, changes in tax rates and laws, or changes in positions of federal and state taxing authorities will not differ from management’s current assessments. The impact of these matters could be significant to the consolidated financial conditions, results of operations, and capital of the Company.

The FHLB of Chicago requires its members to own its common stock as a condition of membership, which is redeemable at par. As of December 31, 2016, the Company’s ownership of FHLB of Chicago common stock exceeded the amount required under the FHLB of Chicago’s minimum guidelines. For additional discussion refer to the section entitled “Federal Home Loan Bank System” in “Item 1. Business—Regulation and Supervision.”

Deposit Liabilities The Company’s deposit liabilities increased by $69.1 million or 3.9% during the twelve months ended December 31, 2016. Transaction deposits, which consist of checking, savings, and money market accounts, increased by $89.2 million or 7.1% during the period and certificates of deposit decreased by $20.1 million or 3.7%. Management believes that the increase in transaction deposits in recent periods, particularly the increase in non-interest-bearing checking accounts, is due in part to improved marketing and sales efforts. However, management also believes that the low interest rate environment that has persisted for the past few years 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 continue to 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 also have an adverse impact on its net interest margin.

The following table presents the distribution of the Company’s deposit accounts at the dates indicated by dollar amount and percent of portfolio, and the weighted-average rate.

	December 31
	2016								2015								2014
			Percent			Weighted-					Percent			Weighted-					Percent			Weighted-
			of Total			Average					of Total			Average					of Total			Average
			Deposit			Nominal					Deposit			Nominal					Deposit			Nominal
	Amount		Liabilities			Rate			Amount		Liabilities			Rate			Amount		Liabilities			Rate
	(Dollars in thousands)
Non-interest-bearing demand	$	309,137		16.58	%		0.00	%	$	213,761		11.90	%		0.00	%	$	187,852		10.93	%		0.00	%
Interest-bearing demand		238,142		12.77			0.01			277,606		15.46			0.01			253,595		14.76			0.01
Money market savings		558,905		29.97			0.16			542,020		30.19			0.12			532,705		30.99			0.14
Savings accounts		234,038		12.55			0.02			217,6331		12.12			0.01			220,557		12.83			0.03
Total transaction accounts		1,340,222		71.87			0.07			1,251,020		69.67			0.06			1,194,709		69.51			0.07
Certificates of deposit:
With original maturities of:
Three months or less		3,632		0.19			0.38			4,559		0.25			0.32			6,081		0.35			0.25
Over three to 12 months		107,341		5.77			0.39			136,547		7.60			0.36			177,748		10.34			0.44
Over 12 to 24 months		255,910		13.72			0.96			260,143		14.50			0.93			204,499		11.90			0.53
Over 24 to 36 months		120,117		6.44			1.48			101,571		5.66			1.09			84,507		4.92			0.58
Over 36 to 48 months		3,729		0.20			1.35			2,388		0.13			1.44			–		–			–
Over 48 to 60 months		33,779		1.81			1.07			39,363		2.19			1.14			51,212		2.98			1.37
Total certificates of deposit		524,508		28.13			0.96			544,571		30.33			0.82			524,047		30.49			0.58
Total deposit liabilities	$	1,864,730		100.00	%		0.32	%	$	1,795,591		100.00	%		0.29	%	$	1,718,756		100.00	%		0.23	%

At December 31, 2016, the Company had certificates of deposit with balances of $100,000 and over maturing as follows:

	Amount
Maturing in:	(In thousands)
Three months or less	$	33,658
Over three months through six months		25,969
Over six months through 12 months		43,176
Over 12 months through 24 months		53,260
Over 24 months through 36 months		11,120
Over 36 months		2,109
Total certificates of deposit greater than $100,000	$	169,292

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

	Year Ended December 31
	2016		2015		2014
	(Dollars in thousands)
Total deposit liabilities at beginning of period	$	1,795,591	$	1,718,756	$	1,762,682
Net deposits (withdrawals)		63,759		72,746		(48,358	)
Interest credited, net of penalties		5,380		4,090		4,432
Total deposit liabilities at end of period	$	1,864,730	$	1,795,591	$	1,718,756

Borrowings Borrowings, which consist of advances from the FHLB of Chicago, increased by $66.8 million or 17.9% during the twelve months ended December 31, 2016. This increase was used to fund growth in loans receivable, as previously described.

The following table sets forth certain information regarding the Company’s borrowings at the end of and during the periods indicated:

	At or For the Year Ended December 31
	2016			2015			2014			2013			2012
Balance outstanding at end of year:	(Dollars in thousands)
FHLB term advances	$	154,150		$	242,375		$	213,669		$	204,900		$	210,786
Overnight borrowings from FHLB		285,000			130,000			42,800			40,000			–
Weighted-average interest rate at end of year:
FHLB term advances		2.24	%		1.86	%		2.01	%		2.26	%		2.34	%
Overnight borrowings from FHLB		0.70	%		0.16	%		0.13	%		0.13	%		–
Maximum amount outstanding during the year:
FHLB term advances	$	242,375		$	252,920		$	234,085		$	210,786		$	311,419
Overnight borrowings from FHLB		295,000			130,000			80,000			40,000			5,000
Average amount outstanding during the year:
FHLB term advances	$	203,711		$	228,346		$	213,566		$	206,828		$	227,573
Overnight borrowings from FHLB		186,180			85,309			38,562			207			14
Weighted-average interest rate during the year:
FHLB term advances		2.11	%		2.01	%		2.19	%		2.31	%		3.07	%
Overnight borrowings from FHLB		0.39	%		0.13	%		0.13	%		0.13	%		0.30	%

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

Shareholders’ Equity The Company’s shareholders’ equity was $286.6 million at December 31, 2016, compared to $279.4 million at December 31, 2015. This increase was primarily due to $17.0 million in net income that was only partially offset by $9.8 million in regular cash dividends. Bank Mutual did not repurchase a significant amount of its common stock during the year ended December 31, 2016. The book value of the Company’s common stock was $6.27 at December 31, 2016, compared to $6.15 at December 31, 2015.

The Company’s ratio of shareholders’ equity to total assets was 10.82% at December 31, 2016, compared to 11.17% at December 31, 2015. The Company is required to maintain specified amounts of regulatory capital pursuant to regulations promulgated by the FRB. The Company is “well capitalized” for regulatory capital purposes. As of December 31, 2016, the Company had a total risk-based capital ratio of 15.50% and a Tier 1 leverage capital ratio of 11.11%. The minimum ratios to be considered “well capitalized” under current supervisory regulations are 10% for total risk-based capital and 5% for Tier 1 capital. The minimum ratios to be considered “adequately capitalized” are 8% and 4%, respectively. For additional discussion refer to “Note 8. Shareholders’ Equity” in “Item 8. Financial Statements and Supplementary Data.”

On February 6, 2017, the Company’s board of directors declared a $0.055 per share dividend payable on February 27, 2017, to shareholders of record on February 17, 2017. On February 6, 2017, the Company’s board of directors also approved a plan to repurchase up to 500,000 shares of its common stock. This plan replaced a previous plan that was approved in February 2016, but expired on January 31, 2017. The Company did not purchase any shares of its common stock from January 1, 2017, to February 28, 2017.

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

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

	December 31
	2016			2015			2014			2013			2012
Non-accrual commercial loans:	(Dollars in thousands)
Commercial and industrial	$	989		$	4,915		$	201		$	284		$	693
Commercial real estate		2,839			3,968			4,309			4,401			6,994
Multi-family		274			–			1,402			1,783			6,824
Construction and development		148			766			803			728			865
Total commercial loans		4,250			9,649			6,715			7,196			15,376
Non-accrual retail loans:
One- to four-family first mortgages		3,191			2,703			4,148			4,556			8,264
Home equity		442			703			493			676			1,514
Other consumer		46			82			108			104			59
Total non-accrual retail loans		3,679			3,488			4,749			5,336			9,837
Total non-accrual loans		7,929			13,137			11,464			12,532			25,213
Accruing loans delinquent 90 days or more (1)		295			484			540			443			584
Total non-performing loans		8,224			13,621			12,004			12,975			25,797
Foreclosed real estate and repossessed assets		2,943			3,306			4,668			6,736			13,961
Total non-performing assets	$	11,167		$	16,927		$	16,672		$	19,711		$	39,758

Non-performing loans to total loans		0.42	%		0.78	%		0.74	%		0.86	%		1.84	%
Non-performing assets to total assets		0.42	%		0.68	%		0.72	%		0.84	%		1.64	%
Interest income that would have been recognized if non-accrual loans had been current	$	498		$	637		$	634		$	1,265		$	1,998

(1)

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

The Company’s non-performing loans were $8.2 million or 0.42% of loans receivable as of December 31, 2016, compared to $13.6 million or 0.78% of loans receivable as of December 31, 2015. Non-performing assets, which include non-performing loans, were $11.2 million or 0.42% of total assets and $16.9 million or 0.68% of total assets as of these same dates, respectively. The general decline in non-performing loans and non-performing assets in recent years has been caused by repayments of the related loans or disposition of the foreclosed properties. Also contributing are upgrades of loans to performing status due to improvements in the financial condition or performance of the borrowers and/or the underlying collateral, as permitted by the Company’s credit policies.

Non-performing assets are classified as “substandard” in accordance with the Company’s internal risk rating policy. In addition to these non-performing assets, at December 31, 2016, management was closely monitoring $68.6 million in additional loans that were classified as either “special mention” or “substandard” in accordance with the Company’s internal risk rating policy. This amount compared to $55.9 million at December 31, 2015. As of December 31, 2016, most of these additional classified loans 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 December 31, 2016, although there can be no assurances that the loans will not become impaired in future periods. The increase in additional classified loans during the year ended December 31, 2016, was primarily the result of management’s assessment that the credit condition of a number of commercial loan relationships, most of which were manufacturing related, had deteriorated in recent months.

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

Loans considered to be impaired by the Company at December 31, 2016, were $10.7 million compared to $13.6 million at December 31, 2015, $12.0 million at December 31, 2014, $13.0 million at December 31, 2013, and $25.8 million at December 31, 2012. The average annual balance of loans impaired as of December 31, 2016, was $9.8 million and the interest received and recognized on these loans while they were impaired was $370,000.

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

	At or For the Year Ended December 31
	2016			2015			2014			2013			2012
	(Dollars in thousands)
Balance at beginning of period	$	17,641		$	22,289		$	23,565		$	21,577		$	27,928
Provision for loan losses		2,998			(3,655	)		233			4,506			4,545
Charge-offs:
Commercial and industrial		(107	)		(74	)		(59	)		(199	)		(136	)
Commercial real estate		(179	)		(149	)		(561	)		(514	)		(4,894	)
Multi-family		–			–			(241	)		(536	)		(857	)
Construction and development		–			–			(34	)		(148	)		(2,693	)
One- to four-family first mortgages		(133	)		(346	)		(871	)		(1,205	)		(3,182	)
Home equity		(101	)		(147	)		(103	)		(1,000	)		(327	)
Other consumer		(396	)		(544	)		(431	)		(389	)		(485	)
Total charge-offs		(916	)		(1,260	)		(2,300	)		(3,991	)		(12,574	)
Recoveries:
Commercial and industrial		6			7			64			5			26
Commercial real estate		33			120			169			666			956
Multi-family		30			–			15			102			568
Construction and development		–			–			142			109			1
One- to four-family first mortgages		47			73			344			492			86
Home equity		35			29			27			68			1
Other consumer		66			48			30			31			40
Total recoveries		217			277			791			1,473			1,678
Net charge-offs		(699	)		(983	)		(1,509	)		(2,518	)		(10,896	)
Balance at end of period	$	19,940		$	17,641		$	22,289		$	23,565		$	21,577

Net charge-offs to average loans		0.04	%		0.06	%		0.10	%		0.18	%		0.78	%
Allowance for loan losses to total loans		1.03	%		1.01	%		1.37	%		1.56	%		1.54	%
Allowance for loan losses to non-performing loans		242.46	%		129.51	%		185.68	%		181.62	%		83.64	%

The reasons for the increase in the dollar amount of the Company’s allowance for loan losses during the year ended December 31, 2016, were described earlier in this report (refer to “Operating Results—Provision for Loan Losses,” above). Prior to 2016 the changes in the Company’s allowance for loan losses was generally consistent with overall changes in the Company’s level of non-performing loans and changes in loan charge-off activity. The changes in all periods are also consistent with changes in management’s assessment of overall economic conditions, unemployment, real estate values, and industry trends during the periods.

The Company’s ratio of allowance for loan losses as a percent of non-performing loans increased from 83.64% at December 31, 2012, to 242.46% at December 31, 2016. The general increase in this ratio over this period was primarily caused by a substantial decline in non-performing loans relative to the allowance for loan losses. Such increase is to be expected when non-performing loans (which are generally evaluated for impairment on an individual basis) decline and, as a result, a larger portion of the allowance for loan losses relates to loans that are evaluated for impairment on a collective basis (refer to “Note 3. Loans Receivable” in “Item 8. Financial Statements and Supplementary Data”).

Although management believes the Company’s allowance for loan losses at December 31, 2016, was adequate, there can be no assurances that future adjustments to the allowance will not be necessary, which could adversely affect the Company’s results of operations. For additional discussion, refer to “Item 1. Business—Asset Quality,” above, and “Critical Accounting Policies—Allowance for Loan Losses,” below.

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

	December 31
	2016					2015					2014					2013					2012
	Amount		Percent to Total			Amount		Percent to Total			Amount		Percent to Total			Amount		Percent to Total			Amount		Percent to Total
Loan category:	(Dollars in thousands)
Commercial and industrial	$	3,840		19.26	%	$	3,658		20.73	%	$	2,349		10.54	%	$	2,603		11.05	%	$	1,686		7.81	%
Commercial real estate		4,630		23.22			4,796		27.19			6,880		30.86			6,377		27.06			7,354		34.08
Multi-family		5,307		26.61			3,337		18.92			6,078		27.27			5,931		25.17			5,195		24.08
Construction and development		2,680		13.44			2,835		16.07			2,801		12.57			4,160		17.65			2,617		12.13
One- to four-family first mortgages		2,518		12.63			1,835		10.40			3,004		13.48			3,220		13.66			3,267		15.14
Home equity and other consumer		965		4.84			1,180		6.69			1,177		5.28			1,274		5.41			1,458		6.76
Total allowance for loan losses	$	19,940		100.00	%	$	17,641		100.00	%	$	22,289		100.00	%	$	23,565		100.00	%	$	21,577		100.00	%

Critical Accounting Policies

There are a number of accounting policies that the Company has established which require a significant amount of management judgment. A number of the more significant policies are discussed in the following paragraphs.

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

Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on loans, the fair value of underlying collateral (if any), estimated losses on pools of homogeneous loans based on historical loss experience, changes in risk characteristics of the loan portfolio, and consideration of current economic trends, all of which may be susceptible to significant change. Higher rates of loan defaults than anticipated would likely result in a need to increase provisions in future years. Loan losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for loan losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors. Evaluations are conducted at least quarterly and more often if deemed necessary. If management misjudges a major component of the allowance and the Company experiences an unanticipated loss, it will likely affect earnings. Developments affecting loans can also cause the allowance to vary significantly between quarters. Management consistently challenges itself in the review of the risk components to identify any changes in trends and their causes.

Other-Than-Temporary Impairment Generally accepted accounting principles require enterprises to determine whether a decline in the fair value of an individual debt security below its amortized cost is other than temporary. If the decline is deemed to be other than temporary, the cost basis of the security must be written down through a charge to earnings. Determination of OTTI requires significant management judgment relating to the probability of future cash flows, the financial condition and near-term prospects of the issuer of the security, and/or the collateral for the security, the duration and extent of the decline in fair value, and the ability and intent of the Company to retain the security, among other things. Future changes in management’s assessment of OTTI on its securities could result in significant charges to earnings in future periods.

Income Taxes The assessment of the Company’s tax assets and liabilities involves the use of estimates, forecasts, assumptions, interpretations, and judgment concerning the Company’s estimated future results of operations, as well as certain accounting pronouncements and federal and state tax codes. Management evaluates the Company’s net deferred tax asset on an on-going basis to determine if a valuation allowance is required. This evaluation requires significant management judgment based on positive and negative evidence. Such evidence includes the Company’s recent trends in earnings, the duration of federal and state net operating loss carryforward periods, and other factors. There can be no assurance that future events, such as adverse operating results, court decisions, regulatory actions or interpretations, changes in tax rates and laws, or changes in positions of federal and state taxing authorities will not differ from management’s current assessments. The impact of these matters could be significant to the consolidated financial conditions and results of operations.

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

Contractual Obligations, Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements

The Company has various financial obligations, including contractual obligations and commitments, that may require future cash payments.

The following table presents, as of December 31, 2016, significant fixed and determinable contractual obligations to third parties by payment date. All amounts in the table exclude interest costs to be paid in the periods indicated, if applicable.

	Payments Due In
			One to		Three to		Over
	One Year		Three		Five		Five
	Or Less		Years		Years		Years		Total
	(Dollars in thousands)
Deposit liabilities without a stated maturity	$	1,340,222		–		–		–	$	1,340,222
Certificates of deposit		325,408	$	194,076	$	5,024		–		524,508
Borrowed funds		328,397		59,385		39,012	$	12,356		439,150
Purchase obligations		2,640		4,620		–		–		7,260
Operating leases		983		1,527		1,211		2,803		6,524
Deferred retirement plans and deferred compensation plans		797		1,632		1,113		4,248		7,790

The Company’s operating lease obligations represent short- and long-term lease and rental payments for facilities, certain software and data processing and other equipment. Purchase obligations represent obligations under agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The purchase obligation amounts presented above primarily relate to certain contractual payments for services provided for information technology.

The Company also has obligations under its deferred retirement plan for directors as described in “Note 10. Employee Benefit Plans” in “Item 8. Financial Statements and Supplementary Data.”

The following table details the amounts and expected maturities of significant off-balance sheet commitments to extend credit as of December 31, 2016.

Payments Due In

One to

Three to

Over

One Year

Three

Five

Or Less

Years

Total

(Dollars in thousands)

Commercial lines of credit

177,672

–

177,672

Commercial loans

3,659

–

3,709

Standby letters of credit

7,261

278

282

–

7,821

Multi-family and commercial real estate

303,239

–

303,239

Residential real estate

34,381

–

34,381

Revolving home equity and credit card lines

160,898

–

160,898

Net commitments to sell residential loans

11,861

–

11,861

Commitments to extend credit, including loan commitments, standby letters of credit, unused lines of credit and commercial letters of credit do not necessarily represent future cash requirements, since these commitments often expire without being drawn upon.

Quarterly Financial Information

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

	2016 Quarter Ended
	March 31			June 30		September 30		December 31
	(Dollars in thousands, except per share amounts)
Interest income	$	20,307		$	20,211	$	21,470	$	21,160
Interest expense		2,659			2,693		2,758		2,691
Net interest income		17,648			17,518		18,712		18,469
Provision for (recovery of) loan losses		(573	)		1,164		1,395		1,012
Total non-interest income		6,245			7,009		6,867		6,723
Total non-interest expense		17,417			17,069		17,246		17,395
Income before taxes		7,049			6,294		6,938		6,785
Income tax expense		2,576			2,345		2,484		2,707
Net income	$	4,473		$	3,949	$	4,454	$	4,078

Earnings per share-basic	$	0.10		$	0.09	$	0.10	$	0.09
Earnings per share-diluted		0.10			0.09		0.10		0.09
Cash dividend paid per share		0.050			0.055		0.055		0.055

	2015 Quarter Ended
	March 31			June 30			September 30			December 31
	(Dollars in thousands, except per share amounts)
Interest income	$	19,410		$	19,271		$	19,441		$	19,778
Interest expense		2,246			2,309			2,449			2,561
Net interest income		17,164			16,962			16,992			17,217
Provision for (recovery of) loan losses		(964	)		(752	)		(930	)		(1,019	)
Total non-interest income		5,546			5,907			5,996			5,789
Total non-interest expense		18,057			17,942			18,470			18,258
Income before taxes		5,617			5,679			5,448			5,767
Income tax expense		2,064			2,090			2,103			2,077
Net income	$	3,553		$	3,589		$	3,345		$	3,690

Earnings per share-basic	$	0.08		$	0.08		$	0.07		$	0.08
Earnings per share-diluted		0.08			0.08			0.07			0.08
Cash dividend paid per share		0.04			0.05			0.05			0.05

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company’s ability to maintain net interest income depends upon earning a higher yield on assets than the rates it pays on deposits and borrowings. Fluctuations in market interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Company’s assets and liabilities. Fluctuations in interest rates will also affect the market value of all interest-earning assets and interest-bearing liabilities, other than those with a very short term to maturity.

Interest rate sensitivity is a measure of the difference between amounts of interest-earning assets and interest-bearing liabilities which either reprice or mature during a given period of time. The difference, or the interest rate sensitivity “gap,” provides an indication of the extent to which the Company’s interest rate spread will be affected by changes in interest rates. Refer to “Gap Analysis,” below. Interest rate sensitivity is also measured through analysis of changes in the present value of the Company’s equity. Refer to “Present Value of Equity,” below.

To achieve the objectives of managing interest rate risk, the Company’s executive management meets periodically to discuss and monitor the market interest rate environment and provides reports to the board of directors. Management seeks to coordinate asset and liability decisions so that, under changing interest rate scenarios, the Company’s earnings will remain within an acceptable range. The primary objectives of the Company’s interest rate management strategy are to:

maintain earnings and capital within self-imposed parameters over a range of possible interest rate environments;

coordinate interest rate risk policies and procedures with other elements of the Company’s business plan, all within the context of the current business environment and regulatory capital and liquidity requirements; and

manage interest rate risk in a manner consistent with the approved guidelines and policies set by the board of directors.

The Company has employed certain strategies to manage the interest rate risk inherent in the asset/liability mix, including:

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

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

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

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

managing deposits and borrowings to provide stable funding.

Management believes these strategies reduce the Company’s interest rate risk exposure to acceptable levels.

Gap Analysis Repricing characteristics of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring a financial institution's interest rate sensitivity “gap.” An asset or liability is said to be “interest rate sensitive” within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period.

A gap is considered positive when the amount of interest-earning assets maturing or repricing within a specific time period exceeds the amount of interest-bearing liabilities maturing or repricing within that specific time period. A gap is considered negative when the amount of interest-bearing liabilities maturing or repricing within a specific time period exceeds the amount of interest-earning assets maturing or repricing within the same period. During a period of rising interest rates, a financial institution with a negative gap position would be expected, absent the effects of other factors, to experience a greater increase in the costs of its liabilities relative to the yields of its assets and thus a decrease in the institution's net interest income. An institution with a positive gap position would be expected, absent the effect of other factors, to experience the opposite result. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to reduce net interest income.

The following table presents the amounts of the Company’s interest-earning assets and interest-bearing liabilities outstanding at December 31, 2016, which management anticipates to reprice or mature in each of the future time periods shown. The information presented in the following table is based on the following assumptions:

Loans—based upon contractual maturities, repricing date, if applicable, scheduled repayments of principal, and projected prepayments of principal based upon the Company’s historical experience or anticipated prepayments. Actual cash flows may differ substantially from these assumptions.

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

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

Borrowings—based upon final maturity.

	December 31, 2016
	Within			Three to			More than			More than
	Three			Twelve			1 Year to			3 Years -			Over 5
	Months			Months			3 Years			5 Years			Years			Total
Loans receivable:	(Dollars in thousands)
Commercial loans:
Fixed	$	22,143		$	78,168		$	144,167		$	84,705		$	16,060		$	345,243
Adjustable		819,282			47,694			79,539			17,097			109			963,721
Retail loans:
Fixed		20,464			37,001			70,380			41,920			55,400			225,165
Adjustable		101,549			125,954			85,189			70,731			45,977			429,400
Interest-earning deposits		18,798			–			–			–			–			18,798
Mortgage-related securities:
Fixed		22,310			67,294			172,864			81,416			108,338			452,222
Adjustable		13,418			–			–			–			–			13,418
Other interest-earning assets		20,261			–			–			–			–			20,261
Total interest-earning assets		1,038,225			356,111			552,139			295,869			225,884			2,468,228

Deposit liabilities:
Non-interest-bearing demand accounts		–			–			–			–			309,231			309,231
Interest-bearing demand accounts		–			–			–			–			237,758			237,758
Money market accounts		559,194			–			–			–			–			559,194
Savings accounts		–			–			–			–			234,038			234,038
Certificates of deposit		106,731			221,182			191,572			5,024			–			524,509
Borrowings		285,292			44,292			61,307			37,789			10,470			439,150
Advance payments by borrowers for taxes and insurance		4,770			–			–			–			–			4,770
Total non-interest- and interest-bearing liabilities		955,987			265,474			252,879			42,813			791,497			2,308,650
Interest rate sensitivity gap	$	82,238		$	90,637		$	299,260		$	253,056		$	(565,613	)	$	159,578
Cumulative interest rate sensitivity gap	$	82,238		$	172,875		$	472,135		$	725,191		$	159,578
Cumulative interest rate sensitivity gap as a percent of total assets		3.11	%		6.53	%		17.83	%		27.38	%		6.03	%
Cumulative interest-earning assets as a percentage of non-interest- and interest-bearing liabilities		108.60	%		114.15	%		132.02	%		147.80	%		106.91	%

Based on the above gap analysis, at December 31, 2016, the Company’s interest-bearing assets maturing or repricing within one year exceeds its interest-earning liabilities maturing or repricing within the same period. Based on this information, over the course of the next year net interest income could be favorably impacted by an increase in market interest rates. Alternatively, net interest income could be unfavorably impacted by a decrease in market interest rates. However, it should be noted that the Company’s future net interest income is affected by more than just future market interest rates. Net interest income is also affected by absolute and relative levels of earning assets and interest-bearing liabilities, the level of non-performing loans and other investments, and by other factors outlined in “Item 1. Business—Cautionary Statement,” “Item 1A. Risk Factors,” and “Item 7. Management Discussion of Financial Condition and Results of Operations.”

In addition to not anticipating all of the factors that could impact future net interest income, gap analysis has certain shortcomings. For example, although certain assets and liabilities may mature or reprice in similar periods, the interest rates on such react by different degrees to changes in market interest rates, especially in instances where changes in rates are limited by contractual caps or floors or instances where rates are influenced by competitive forces. Interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. For example, it is the Company’s past experience that rate changes on most of its deposit liabilities generally lag changes in market interest rates. Certain assets, such as adjustable-rate loans, have features which limit changes in interest rates on a short term basis and over the life of the loan. If interest rates change, prepayment, and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of borrowers to make payments on their adjustable-rate loans may decrease if interest rates increase. Because of these shortcomings, management of the Company believes that gap analysis is a better indicator of the relative change in the Company’s interest rate risk exposure from period to period than it is an indicator of the direction or amount of future change in net interest income.

Present Value of Equity In addition to the gap analysis table, management also uses simulation models to monitor interest rate risk. The models report the present value of equity (“PVE”) in different interest rate environments, assuming an instantaneous and permanent interest rate shock to all interest rate sensitive assets and liabilities. The PVE is the difference between the present value of expected cash flows of interest rate sensitive assets and liabilities. The changes in market value of assets and liabilities due to changes in interest rates reflect the interest rate sensitivity of those assets and liabilities as their values are derived from the characteristics of the asset or liability (i.e., fixed rate, adjustable rate, caps, and floors) relative to the current interest rate environment. For example, in a rising interest rate environment, the fair market value of a fixed-rate asset will decline whereas the fair market value of an adjustable-rate asset, depending on its repricing characteristics, may not decline. Increases in the market value of assets will increase the PVE whereas decreases in market value of assets will decrease the PVE. Conversely, increases in the market value of liabilities will decrease the PVE whereas decreases in the market value of liabilities will increase the PVE.

The following table presents the estimated PVE over a range of interest rate change scenarios at December 31, 2016. The present value ratio shown in the table is the PVE as a percent of the present value of total assets in each of the different rate environments. For purposes of this table, management has made assumptions such as prepayment rates and decay rates similar to those used for the gap analysis table.

									Present Value of Equity
									as a Percent of the
Change in	Present Value of Equity								Present Value of Assets
Interest Rates	Dollar		Dollar			Percent			Present Value			Percent
(Basis Points)	Amount		Change			Change			Ratio			Change
	(Dollars in thousands)
+400	$	352,690	$	19,480			5.8	%		14.08	%		12.4	%
+300		350,913		17,703			5.3			13.81			10.2
+200		347,287		14,077			4.2			13.46			7.4
+100		337,303		4,093			1.2			12.88			2.8
0		333,210		–			–			12.53			–
-100		329,476		(3,734	)		(1.1	)		12.19			(2.8	)

Based on the above analysis, the Company’s PVE 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 “Item 1. Business—Cautionary Statement,” “Item 1A. Risk Factors,” and “Item 7. Management Discussion of Financial Condition and Results of Operations.”

As is the case with gap analysis, PVE analysis also has certain shortcomings. PVE modeling requires management to make assumptions about future changes in market interest rates that are unlikely to occur, such as immediate, sustained, and parallel (or equal) changes in all market rates across all maturity terms. PVE modeling also requires that management make assumptions which may not reflect the manner in which actual yields and costs respond to changes in market interest rates. For example, it is the Company’s past experience that rate changes on most of its deposit liabilities generally lag changes in market interest rates. In addition, management makes assumptions regarding the changes in prepayment speeds of mortgage loans and securities. Prepayments will accelerate in a falling rate environment and the reverse will occur in a rising rate environment. Management also assumes that decay rates on core deposits will accelerate in a rising rate environment and the reverse in a falling rate environment. The model assumes that the Company will take no action in response to the changes in interest rates, when in practice rate changes on most deposit liabilities lag behind market changes and/or may be limited by competition. In addition, prepayment estimates and other assumptions within the model are subjective in nature, involve uncertainties, and therefore cannot be determined with precision. Accordingly, although the PVE model may provide an estimate of the Company’s interest rate risk at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in interest rates on the Company’s PVE. Because of these shortcomings, management of the Company believes that PVE analysis is a better indicator of the relative change in the Company’s interest rate risk exposure from period to period than it is an indicator of the direction or amount of future change in net interest income.

Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

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

We have audited the accompanying consolidated statements of financial condition of Bank Mutual Corporation and subsidiaries (the "Company") as of December 31, 2016 and 2015, and the related consolidated statements of income, total comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2016. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Bank Mutual Corporation and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 6, 2017, expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ Deloitte & Touche LLP

Milwaukee, Wisconsin
March 6, 2017

Bank Mutual Corporation and Subsidiaries

Consolidated Statements of Financial Condition

	December 31
	2016			2015
	(Dollars in thousands)
Assets

Cash and due from banks	$	31,284		$	27,971
Interest-earning deposits in banks		18,803			16,530
Cash and cash equivalents		50,087			44,501
Mortgage-related securities available-for-sale, at fair value		371,880			407,874
Mortgage-related securities held-to-maturity, at amortized cost (fair value of $94,266 in 2016 and $121,641 in 2015)		93,234			120,891
Loans held-for-sale		5,952			3,350
Loans receivable (net of allowance for loan losses of $19,940 in 2016 and $17,641 in 2015)		1,942,907			1,740,018
Mortgage servicing rights, net		6,569			7,205
Other assets		177,895			178,328

Total assets	$	2,648,524		$	2,502,167

Liabilities and equity

Liabilities:
Deposit liabilities	$	1,864,730		$	1,795,591
Borrowings		439,150			372,375
Advance payments by borrowers for taxes and insurance		4,770			3,382
Other liabilities		53,233			51,425
Total liabilities		2,361,883			2,222,773
Equity:
Preferred stock–$0.01 par value:
Authorized–20,000,000 shares in 2016 and 2015
Issued and outstanding–none in 2016 and 2015		–			–
Common stock–$0.01 par value:
Authorized–200,000,000 shares in 2016 and 2015
Issued–78,783,849 shares in 2016 and 2015
Outstanding–45,691,790 shares in 2016 and 45,443,548 in 2015		788			788
Additional paid-in capital		484,940			486,273
Retained earnings		171,633			164,482
Accumulated other comprehensive loss		(11,139	)		(9,365	)
Treasury stock–33,092,059 shares in 2016 and 33,340,301 in 2015		(359,581	)		(362,784	)
Total shareholders' equity		286,641			279,394

Total liabilities and equity	$	2,648,524		$	2,502,167

Refer to Notes to Consolidated Financial Statements

Bank Mutual Corporation and Subsidiaries

Consolidated Statements of Income

	Year Ended December 31
	2016		2015			2014
	(Dollars in thousands, except per share data)
Interest income:
Loans	$	70,782	$	65,954		$	66,261
Mortgage-related securities		11,867		11,684			12,850
Investment securities		467		244			139
Interest-earning deposits		32		19			15
Total interest income		83,148		77,901			79,265
Interest expense:
Deposit liabilities		5,761		4,771			4,684
Borrowings		5,039		4,794			4,731
Advance payments by borrowers for taxes and insurance		1		1			1
Total interest expense		10,801		9,566			9,416
Net interest income		72,347		68,335			69,849
Provision for (recovery of) loan losses		2,998		(3,665	)		233
Net interest income after provision for loan losses		69,349		72,000			69,616
Non-interest income:
Deposit-related fees and charges		11,525		11,572			11,985
Brokerage and insurance commissions		3,175		3,577			2,574
Mortgage banking revenue, net		4,248		3,462			2,990
Loan-related fees		5,774		2,300			1,624
Income from bank-owned life insurance (“BOLI”)		1,817		1,870			2,790
Gain on real estate held for investment		12		218			–
Gain on sales of investments		–		–			102
Other non-interest income		293		240			284
Total non-interest income		26,844		23,239			22,349
Non-interest expense:
Compensation, payroll taxes, and other employee benefits		41,829		44,824			41,299
Occupancy, equipment, and data processing costs		13,692		14,298			12,787
Advertising and marketing		2,392		1,910			1,801
Federal insurance premiums		1,415		1,508			1,489
Losses and expenses on foreclosed real estate, net		222		801			986
Other non-interest expense		9,577		9,386			10,099
Total non-interest expense		69,127		72,727			68,461
Income before income taxes		27,066		22,512			23,504
Income tax expense		10,112		8,335			8,850
Net income before non-controlling interest		16,954		14,177			14,654
Net loss attributable to non-controlling interests		–		–			11
Net income	$	16,954	$	14,177		$	14,665

Per share data:
Earnings per share–basic	$	0.37	$	0.31		$	0.32
Earnings per share–diluted		0.37		0.31			0.31
Cash dividends per share paid		0.215		0.190			0.150

Refer to Notes to Consolidated Financial Statements

Bank Mutual Corporation and Subsidiaries

Consolidated Statements of Total Comprehensive Income

	Year Ended December 31
	2016			2015			2014
	(Dollars in thousands)

Net income before non-controlling interest	$	16,954		$	14,177		$	14,654
Other comprehensive income (loss), net of income taxes:
Defined benefit pension plans:
Unrecognized gain (loss) and net prior service costs, net of deferred income taxes of $(503) in 2016, $2,576 in 2015, and $(5,328) in 2014		(754	)		3,863			(7,992	)
Curtailment gain on plan amendment, net of deferred income taxes of $409		–			614			–
		(754	)		4,477			(7,992	)
Unrealized holding losses:
Change in net unrealized gains and losses on securities available-for-sale, net of deferred income taxes of $(695) in 2016, $(1,815) in 2015, and $(512) in 2014		(1,037	)		(2,706	)		(764	)
Reclassification adjustment for gain on securities included in income, net of income taxes of $(41)		–			–			(61	)
		(1,037	)		(2,706	)		(825	)
Interest rate swaps:
Change in net unrealized gain on interest rate swaps, net of deferred income taxes of $11		17			–			–
Total other comprehensive income (loss), net of income taxes		(1,774	)		1,771			(8,817	)
Total comprehensive income before non-controlling interest		15,180			15,948			5,837
Comprehensive loss attributable to non-controlling interest		–			–			11

Total comprehensive income	$	15,180		$	15,948		$	5,848

Refer to Notes to Consolidated Financial Statements

Bank Mutual Corporation and Subsidiaries

Consolidated Statements of Equity

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

Balance at December 31, 2013	$	788	$	489,238		$	151,384		$	(2,319	)	$	(358,054	)	$	2,885		$	283,922
Net income		–		–			14,665			–			–			–			14,665
Net loss attributable to non-controlling interest		–		–			–			–			–			(11	)		(11	)
Other comprehensive loss		–		–			–			(8,817	)		–			–			(8,817	)
Equity contribution by non-controlling interest		–		–			–			–			–			900			900
Issuance of restricted stock		–		(1,538	)		–			–			1,538			–			–
Exercise of stock options		–		(29	)		–			–			49			–			20
Share based payments		–		796			–			–			–			–			796
Cash dividends ($0.15 per share)		–		–			(6,984	)		–			–			–			(6,984	)
Balance at December 31, 2014	$	788	$	488,467		$	159,065		$	(11,136	)	$	(356,467	)	$	3,774		$	284,491
Net income		–		–			14,177			–			–			–			14,177
Decrease in non-controlling interest		–		–			–			–			–			(3,774	)		(3,774	)
Other comprehensive income		–		–			–			1,771			–			–			1,771
Purchase of treasury stock		–		–			–			–			(10,545	)		–			(10,545	)
Issuance of restricted stock		–		(2,526	)		–			–			2,526			–			–
Exercise of stock options		–		(1,323	)		–			–			2,053			–			730
Share based payments		–		1,655			–			–			(351	)		–			1,304
Cash dividends ($0.19 per share)		–		–			(8,760	)		–			–			–			(8,760	)
Balance at December 31, 2015	$	788	$	486,273		$	164,482		$	(9,365	)	$	(362,784	)		–		$	279,394
Net income		–		–			16,954			–			–			–			16,954
Other comprehensive loss		–		–			–			(1,774	)		–			–			(1,774	)
Purchase of treasury stock		–		–			–			–			(221	)		–			(221	)
Issuance of restricted stock		–		(1,531	)		–			–			1,531			–			–
Exercise of stock options		–		(1,173	)		–			–			1,893			–			720
Share based payments		–		1,371			–			–			–			–			1,371
Cash dividends ($0.215 per share)		–		–			(9,803	)		–			–			–			(9,803	)
Balance at December 31, 2016	$	788	$	484,940		$	171,633		$	(11,139	)	$	(359,581	)		–		$	286,641

Refer to Notes to Consolidated Financial Statements

Bank Mutual Corporation and Subsidiaries

Consolidated Statements of Cash Flows

	Year Ended December 31
	2016			2015			2014
	(Dollars in thousands)
Operating activities:
Net income	$	16,954		$	14,177		$	14,665
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium amortization on securities		2,564			2,374			2,216
Provision for (recovery of) loan losses		2,998			(3,665	)		233
Amortization of mortgage servicing rights		2,158			1,907			1,772
Loans originated for sale		(153,863	)		(111,012	)		(79,714	)
Proceeds from loan sales		153,604			112,962			78,739
Gain on loan sales activities, net		(3,866	)		(2,708	)		(1,965	)
Gain on sales of investments		–			–			(102	)
Gain on real estate held for investment		(12	)		(218	)		–
Qualified defined benefit pension plan contribution		(650	)		(10,000	)		–
Loss (gain) on foreclosed real estate, net		(173	)		321			763
Provision for depreciation		3,456			3,253			2,917
Deferred income tax expense		3,125			8,128			7,550
Other, net		1,466			732			(3,095	)
Net cash provided by operating activities		27,761			16,251			23,979
Investing activities:
Purchases of mortgage-related securities available-for-sale		(85,040	)		(203,729	)		–
Principal payments on mortgage-related securities available-for-sale		117,329			111,492			104,430
Proceeds from sale of investment securities available-for-sale		–			–			17,794
Principal payments on mortgage-related securities held-to-maturity		27,066			10,985			21,977
Net increase in loans receivable		(208,127	)		(107,386	)		(124,794	)
Purchases of FHLB stock		(2,670	)		(3,382	)		(1,964	)
Proceeds from sale of foreclosed properties		2,775			3,378			3,558
Proceeds from sale of real estate held for investment		75			1,356			–
Net purchases of premises and equipment		(1,581	)		(3,568	)		(4,133	)
Net cash (used) provided by investing activities		(150,173	)		(190,854	)		16,868

(continued)

Bank Mutual Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued)

	Year Ended December 31
	2016			2015			2014
	(Dollars in thousands)
Financing activities:
Net increase (decrease) in deposit liabilities	$	69,139		$	76,801		$	(43,926	)
Net increase in short-term borrowings		155,000			107,200			2,800
Proceeds from long-term borrowings		–			20,000			30,000
Repayments of long-term borrowings		(88,225	)		(11,294	)		(21,231	)
Net increase (decrease) in advance payments by borrowers for taxes and insurance		1,388			(1,360	)		1,311
Purchases of treasury stock		(221	)		(10,545	)		–
Cash dividends		(9,803	)		(8,760	)		(6,984	)
Other, net		720			885			904
Net cash provided (used) by financing activities		127,998			172,927			(37,126	)
Increase (decrease) in cash and cash equivalents		5,586			(1,676	)		3,721
Cash and cash equivalents at beginning of year		44,501			46,177			42,456
Cash and cash equivalents at end of year	$	50,087		$	44,501		$	46,177

Supplemental information:
Cash paid in period for:
Interest on deposits and borrowings	$	10,729		$	9,070		$	9,431
Income taxes		5,594			2,438			1,055
Non-cash transactions:
Loans transferred to foreclosed properties and repossessed assets		2,240			2,336			2,254

Refer to Notes to Consolidated Financial Statements

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

1. Summary of Significant Accounting Policies

Business Bank Mutual Corporation (the “Company”), a Wisconsin corporation, is a federal unitary savings and loan holding company which holds all of the outstanding shares of Bank Mutual (the “Bank”). The Bank is a federal savings bank offering a full range of financial services to customers who are primarily located in the state of Wisconsin. The Bank is principally engaged in the business of attracting deposits from the general public, including businesses and government entities, and using such deposits to originate secured and unsecured loans to commercial and retail borrowers.

Principles of Consolidation The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The consolidated financial statements include the accounts and transactions of the Company and its wholly-owned subsidiaries. The Bank has two active wholly-owned subsidiaries, BancMutual Financial & Investment Services, Inc., and MC Development Ltd., which are consolidated into the financial statements. All intercompany accounts and transactions have been eliminated in consolidation.

In 2015 the Company determined that it was no longer necessary under GAAP to consolidate a partial interest it has in a real estate partnership. Effective with this change, the Company determined that the equity method of accounting was appropriate for its ownership interest in this partnership. As such, its $5 and $8 interest in the loss of the partnership during the twelve months ended December 31, 2016 and 2015, respectively, were included as a component of other non-interest income.

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of financial condition and revenues and expenses for the period. Actual results could differ from those estimates.

Cash and Cash Equivalents The Company considers interest-bearing deposits in banks and federal funds sold that have original maturities of three months or less to be cash equivalents. Under Regulation D, the Bank is required to maintain cash and reserve balances with the Federal Reserve Bank of Chicago. The average amount of required reserve balances for the years ended December 31, 2016 and 2015, was $4,153 and $16,373, respectively.

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

Securities Available-for-Sale and Held-to-Maturity Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of accumulated other comprehensive income in shareholders’ equity. Held-to-maturity securities are stated at amortized cost.

The amortized cost of securities classified as available-for-sale or held-to-maturity is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-related securities, over the estimated life of the securities. Such accretion or amortization is included in interest income from investments. Interest and dividends are included in interest income from investments. Realized gains and losses and declines in value judged to be other-than-temporary are included in net gain or loss on sales of securities and are based on the specific identification method.

Impairment of available-for-sale and held-to-maturity securities is evaluated considering numerous factors, and their relative significance varies case-by-case. Factors considered include the length of time and extent to which the market value has been less than cost, the financial condition and near-term prospects of the issuer of a security, and the Company’s intent and/or likely need to sell the security before its anticipated recovery in fair value. Further, if the Company does not expect to recover the entire amortized cost of the security (i.e., a credit loss is expected), the Company will be unable to assert that it will recover its cost basis even if it does not intend to sell the security. If, based upon an analysis of each of these factors, it is determined that the impairment is other-than-temporary, the carrying value of the security is written down through earnings by the amount of the expected credit loss.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

1. Summary of Significant Accounting Policies (continued)

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

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

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

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

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

The allowance for loan losses for each segment is determined using a combined approach. Individual loans in the segments that have been identified as impaired are analyzed individually to determine an appropriate allowance for loan loss. In addition, the allowance for loan losses for each segment is augmented using a homogenous pool approach for loans in each segment that are current and/or have not been individually identified as impaired loans.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

1. Summary of Significant Accounting Policies (continued)

The homogenous approach utilizes loss rates that are developed by management using the qualitative factors and other considerations outlined in the previous paragraph.

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

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

Mortgage Servicing Rights Mortgage servicing rights are recorded as an asset when loans are sold with servicing rights retained. The total cost of loans sold is allocated between the loan balance and their servicing asset based on their relative fair values. The capitalized value of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net future servicing revenue. Mortgage servicing rights are carried at the lower of the initial carrying value, adjusted for amortization, or estimated fair value. The carrying values are periodically evaluated for impairment. For purposes of measuring impairment, the servicing rights are stratified into pools based on term and interest rate. Impairment represents the excess of the remaining capitalized cost of a stratified pool over its fair value, and is recorded through a valuation allowance. The fair value of each servicing rights pool is calculated based on the present value of estimated future cash flows using a discount rate, given current market conditions. Estimates of fair value include assumptions about prepayment speeds, interest rates and other factors which are subject to change over time. Changes in these underlying assumptions could cause the fair value of mortgage servicing rights, and the related valuation allowance, if any, to change significantly in the future.

Derivative Financial Instruments Derivative financial instruments, including derivative instruments embedded in other contracts, are carried at fair value on the consolidated balance sheets with changes in the fair value recorded to earnings or other comprehensive income, as specified in GAAP. On the date derivative contracts are entered into, the Company designates such as either (i) a fair value hedge (i.e., a hedge of the fair value of a recognized asset or liability), (ii) a cash flow hedge (i.e., a hedge of the variability of cash flows to be received or paid related to a recognized asset or liability), or (iii) a free-standing derivative instrument. The Company has no derivatives designated as fair value hedges. For derivatives designated as cash flow hedges, the effective portion of the change in the fair value of the derivative instrument is recorded in other comprehensive income and the ineffective portion is recognized in current period earnings as an adjustment to the related income statement account. Amounts within accumulated other comprehensive income are reclassified into earnings in the period the hedged item affects earnings. If a derivative is designated as a free-standing derivative instrument, changes in fair value are reported in current period earnings.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

1. Summary of Significant Accounting Policies (continued)

In connection with its mortgage banking activities, the Company enters into interest rate lock commitments (“IRLCs”) to fund residential mortgage loans at specified interest rates and within specified periods of time, generally up to 60 days from the time of rate lock. IRLCs that are related to loans that will be sold in the secondary market are designated as free-standing derivative instruments by management. In addition, the forward commitments to sell loans are also designated as free-standing derivatives by management. IRLCs related to loans that will be sold, as well as the forward commitments to sell loans, are carried at fair value on the consolidated balance sheet in other assets or other liabilities, as the case may be, and changes in fair value are recorded in income from mortgage banking operations.

The Company enters into interest rate swap arrangements to manage the interest rate risk exposure associated with specific commercial loan relationships at the time such loans are originated. These interest rate swaps, as well as the embedded derivatives associated with certain of the Company’s commercial loan relationships, are designated as free-standing derivative instruments by management. As such, the fair market value of these interest rate swaps and embedded derivatives are included in the Company’s other assets or other liabilities, as the case may be, and periodic changes in fair value are recorded in other non-interest income.

The Company also enters into interest rate swap arrangements to manage the interest rate risk exposure associated with certain forecasted borrowings from the FHLB of Chicago. These interest rate swaps are designated as forecasted transaction cash flow hedges by management. The effective portion of the change in the fair value of these derivatives is recorded in other comprehensive income and the ineffective portion is recorded in interest expense.

To qualify for and maintain hedge accounting, the Company must meet formal documentation and effectiveness evaluation requirements both at the hedge’s inception and on an ongoing basis. The application of the hedge accounting policy requires adherence to documentation and effectiveness testing requirements, judgment in the assessment of hedge effectiveness, and measurement of changes in the fair value of hedged items. The Company reviews the effectiveness of derivatives that is has designated as hedges on a quarterly basis. If it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively. When hedge accounting is discontinued on a cash flow hedge because it is determined that the derivative no longer qualifies as an effective hedge, the Company records the changes in the fair value of the derivative in earnings rather than through other comprehensive income and when the cash flows associated with the hedged item are realized, the gain or loss is reclassified out of accumulated other comprehensive income and is included in the same income statement account of the item being hedged. The Company measures the effectiveness of its hedges, where applicable, at inception and each quarter on an ongoing basis.

The Company’s use of interest rate swaps to manage risk exposes it to the additional risk that a counterparty could default on the contract. In instances where the counterparty is a commercial borrower, the Company considers the potential value and impact of the interest rate swap contract in the underwriting decision process. The Company also insures the borrower is qualified to participate in the interest rate swap in accordance with applicable federal regulations. In all other instances, the Company’s counterparties to its interest rate swaps are profitable, well-capitalized commercial banks or government-sponsored entities with significant experience with such derivative instruments. In these cases the Company manages its exposure to counterparty risk by requiring specific minimum credit standards for its counterparties.

Foreclosed Properties and Repossessed Assets Foreclosed properties acquired through, or in lieu of, loan foreclosure are recorded at the lower of cost or fair value less estimated costs to sell. Costs related to the development and improvement of property are capitalized provided such costs do not result in a carrying value in excess of the property’s fair value less estimated costs to sell, in which case such costs are expensed. Costs related to holding the property are expensed. Gains and losses on sales are recognized based on the carrying value upon closing of the sale.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

1. Summary of Significant Accounting Policies (continued)

Premises and Equipment Land, buildings, leasehold improvements and equipment are carried at amortized cost. Buildings and equipment are depreciated over their estimated useful lives (office buildings 30 to 45 years and furniture and equipment 3 to 10 years) using the straight-line method. Leasehold improvements are amortized over the shorter of their useful lives or expected lease terms. The Company reviews buildings, leasehold improvements and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment exists when the estimated undiscounted cash flows for the property are less than its carrying value. If identified, an impairment loss is recognized through a charge to earnings based on the fair value of the property.

Life Insurance Policies Investments in life insurance policies owned by the Company are carried at the amount that could be realized under the insurance contract if the Company cashed them in on the respective dates.

Income Taxes The Company files consolidated federal and combined state income tax returns. A deferred tax asset or liability is determined based on the enacted tax rates that will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company’s income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date of the change. A valuation allowance is provided for any deferred tax asset for which it is more likely than not that the asset will not be realized. Changes in valuation allowances are recorded as a component of income taxes.

Earnings Per Share Basic and diluted earnings per share (“EPS”) are computed by dividing net income by the weighted-average number of common shares outstanding for the period. Vested shares of restricted stock which have been awarded under provisions of the Company's 2004 and 2014 Stock Incentive Plans are also considered outstanding for basic EPS. Non-vested restricted stock and stock option shares are considered dilutive potential common shares and are included in the weighted-average number of shares outstanding for diluted EPS.

Pension Costs The Company has a qualifying defined benefit plan and a supplemental defined benefit plan. As appropriate, the net periodic pension cost of these plans consists of the expected cost of benefits earned by employees during the period and an interest cost on the projected benefit obligation, reduced by the expected earnings on assets held by the plans, amortization of prior service cost, and amortization of recognized actuarial gains and losses over the estimated future service period of existing plan participants. In 2013 the Company froze the benefits of participants in the qualified defined benefit pension plan that had less than 20 years of service. This change also resulted in the future benefits under the Company’s supplemental defined benefit pension plan being effectively frozen. In 2015 the Company froze the benefits of all remaining employees in the qualified defined benefit pension plan.

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

Segment Information The Company has determined that it has one reportable segment—community banking. The Company offers a range of financial products and services to external customers, including: accepting deposits from the general public, originating secured and unsecured loans to commercial and retail borrowers, and marketing annuities and other insurance products.

Recent Accounting Changes In 2014 the FASB issued new accounting guidance related to the classification and measurement of certain government-guaranteed mortgages upon foreclosure. The guidance was 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.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

1. Summary of Significant Accounting Policies (continued)

In 2014 the FASB issued new accounting guidance related to the recognition of revenue from contracts with customers. In 2015 the FASB deferred the effective date one year from the date in the original guidance. The guidance is effective for fiscal years and interim periods beginning after December 15, 2018, which will be the first quarter of 2019 for the Company. The Company’s adoption of this item is not expected to have a material impact on its results of operations or financial condition.

In 2015 the FASB issued new accounting guidance related 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 was the first quarter of 2016 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 2016 the FASB issued new accounting guidance related to certain aspects of the recognition and measurement of financial assets and liabilities. For public companies the guidance is effective for periods beginning after December 15, 2017, which will be the first quarter of 2018 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 2016 the FASB issued new accounting guidance related to the accounting for lease assets and liabilities. For public companies the guidance is effective for periods beginning after December 15, 2018, which will be the first quarter of 2019 for the Company. The Company’s adoption of this item is not expected to have a material impact on its results of operations or financial condition.

In 2016 the FASB issued new accounting guidance related to the accounting for employee share-based compensation. For public companies the guidance is effective for periods beginning after December 15, 2016, although early adoption was permitted. The Company adopted this guidance in the first quarter of 2016. The Company’s adoption of this item did not have a material impact on its results of operations or financial condition.

In 2016 the FASB issued new accounting guidance related to the measurement of credit losses on financial instruments. The new guidance replaces the current methodology of measuring credit losses based on incurred losses at the balance sheet date with a methodology that measures credit losses based on the current estimate of expected credit losses. For the Company this guidance is effective for periods beginning after December 15, 2019, which will be the first quarter of 2020. Management has not completed the complex analysis required to determine the impact that adoption of this new guidance could have on the Company’s results of operations or financial condition.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

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

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

	December 31, 2016
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Securities available-for-sale:
Federal Home Loan Mortgage Corporation	$	187,958	$	929	$	(1,049	)	$	187,838
Federal National Mortgage Association		162,936		759		(1,085	)		162,610
Government National Mortgage Association		5,279		3		(80	)		5,202
Private-label CMOs		16,233		220		(223	)		16,230
Total available-for-sale	$	372,406	$	1,911	$	(2,437	)	$	371,880
Securities held-to-maturity:
Federal National Mortgage Association	$	93,234	$	1,032		–		$	94,266
Total held-to-maturity	$	93,234	$	1,032		–		$	94,266

	December 31, 2015
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Securities available-for-sale:
Federal Home Loan Mortgage Corporation	$	215,255	$	1,823	$	(800	)	$	216,278
Federal National Mortgage Association		169,792		853		(874	)		169,771
Government National Mortgage Association		21		3		–			24
Private-label CMOs		21,600		446		(245	)		21,801
Total available-for-sale	$	406,668	$	3,125	$	(1,919	)	$	407,874
Securities held-to-maturity:
Federal National Mortgage Association	$	120,891	$	750		–		$	121,641
Total held-to-maturity	$	120,891	$	750		–		$	121,641

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

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

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

	December 31, 2016
	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	$	459		14	$	35,938	$	590		17	$	75,151	$	1,049	$	111,089
Federal National Mortgage Association		345		11		33,559		740		17		58,366		1,085		91,925
Government National Mortgage Association		80		2		5,182		–		–		–		80		5,182
Private-label CMOs		18		2		2,398		205		11		9,286		223		11,684

Total available-for-sale	$	902		29	$	77,077	$	1,535		45	$	142,803	$	2,437	$	219,880

	December 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	$	777		17	$	107,807	$	23		3	$	7,937	$	800	$	115,744
Federal National Mortgage Association		634		16		79,273		240		4		10,679		874		89,952
Private-label CMOs		1		1		1,357		244		10		10,574		245		11,931

Total available-for-sale	$	1,412		34	$	188,437	$	507		17	$	29,190	$	1,919	$	217,627

None of the Company’s mortgage-related securities held-to-maturity at December 31, 2016 and 2015, had an unrealized loss.

The Company determined that the unrealized losses on its mortgage-related securities were temporary as of December 31, 2016 and 2015. The Company does not intend to sell these securities and it is unlikely that it will be required to sell these securities before the recovery of their amortized cost. The Company believes it is probable that it will receive all future contractual cash flows related to these securities. This determination was based on management’s judgment regarding the nature of the loan collateral that supports the securities, a review of the current ratings issued on the securities by various credit rating agencies, recent trends in the fair market values of the securities and, in the case of private-label CMOs, a review of the actual delinquency and/or default performance of the loan collateral that supports the securities.

As of December 31, 2016 and 2015, the Company had private-label CMOs with a fair value of $11,625 and $15,725 respectively, and unrealized gains of $37 and $237, respectively that were rated less than investment grade. These private-label CMOs were analyzed using modeling techniques that considered the priority of cash flows in the CMO structure and various default and loss rate scenarios that management considered appropriate given the nature of the loan collateral.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

(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 OTTI related to credit losses that have been recognized in earnings as of the December 31 for the years indicated, as well as the end of period values for securities that have experienced such losses:

	Year Ended December 31
	2016			2015			2014
Beginning balance of unrealized OTTI related to credit losses	$	592		$	789		$	789
Reductions for increase in cash flows expected to be received		(132	)		(197	)		–
Ending balance of unrealized OTTI related to credit losses	$	460		$	592		$	789
Adjusted cost at end of period	$	3,431		$	4,260		$	5,504
Estimated fair value at end of period	$	3,620		$	4,664		$	6,065

Results of operations included gross realized gains on the sale of securities available-for-sale of $102 in 2014. There were no gross realized losses on the sale of such securities in that year. In addition, there were no gross realized gains or losses on the sale of securities available-for-sale in 2016 or 2015.

Mortgage-related securities with a fair value of approximately $44,155 and $67,923 at December 31, 2016 and 2015, respectively, were pledged to secure deposits, FHLB advances, or for other purposes as permitted or required by law.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

3. Loans Receivable

Loans receivable is summarized as follows:	December 31
	2016			2015
Commercial loans:
Commercial and industrial	$	241,689		$	235,313
Commercial real estate		375,459			299,550
Multi-family real estate		506,136			409,674
Construction and development loans:
Commercial real estate		34,125			28,156
Multi-family real estate		328,186			291,380
Land and land development		12,484			11,143
Total construction and development		374,795			330,679
Total commercial loans		1,498,079			1,275,216
Retail loans:
One- to four-family first mortgages:
Permanent		457,014			461,797
Construction		42,961			42,357
Total one- to four-family first mortgages		499,975			504,154
Home equity loans:
Fixed term home equity		105,544			122,985
Home equity lines of credit		70,043			75,261
Total home equity loans		175,587			198,246
Other consumer loans:
Student		6,810			8,129
Other		11,373			11,678
Total other consumer loans		18,183			19,807
Total retail loans		693,745			722,207
Gross loans receivable		2,191,824			1,997,423
Undisbursed loan proceeds		(227,537	)		(238,124	)
Allowance for loan losses		(19,940	)		(17,641	)
Deferred fees and costs, net		(1,440	)		(1,640	)
Total loans receivable, net	$	1,942,907		$	1,740,018

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

At December 31, 2016 and 2015, certain one- to four-family mortgage loans and home equity loans, as well as certain multi-family mortgage loans, with aggregate carrying values of approximately $586,000 and $496,000, respectively, were pledged to secure FHLB advances.

The unpaid principal balance of loans serviced for third-party investors was $996,985 and $1,038,588 at December 31, 2016 and 2015, respectively. These loans are not reflected in the consolidated financial statements.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

3. Loans Receivable (continued)

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

	December 31, 2016
Allowance for loan losses:	Commercial and Industrial			Commercial Real Estate			Multi- Family Real Estate		Construction and Development			One- to Four- Family			Home Equity and Other Consumer			Total
Beginning balance	$	3,658		$	4,796		$	3,337	$	2,835		$	1,835		$	1,180		$	17,641
Provision (recovery)		283			(20	)		1,940		(155	)		769			181			2,998
Charge-offs		(107	)		(179	)		–		–			(133	)		(497	)		(916	)
Recoveries		6			33			30		–			47			101			217
Ending balance	$	3,840		$	4,630		$	5,307	$	2,680		$	2,518		$	965		$	19,940
Loss allowance individually evaluated for impairment	$	96			–			–	$	1		$	17		$	44		$	158
Loss allowance collectively evaluated for impairment	$	3,744		$	4,630		$	5,307	$	2,679		$	2,501		$	921		$	19,782

Loan receivable balances at December 31, 2016:
Loans individually evaluated for impairment	$	4,847		$	7,192		$	3,916	$	1,355		$	4,668		$	488		$	22,466
Loans collectively evaluated for impairment		236,842			368,267			502,220		172,655			468,555			193,282			1,941,821
Total loans receivable	$	241,689		$	375,459		$	506,136	$	174,010		$	473,223		$	193,770		$	1,964,287

	December 31, 2015
Allowance for loan losses:	Commercial and Industrial			Commercial Real Estate			Multi- Family Real Estate			Construction and Development		One- to Four- Family			Home Equity and Other Consumer			Total
Beginning balance	$	2,349		$	6,880		$	6,078		$	2,801	$	3,004		$	1,177		$	22,289
Provision (recovery)		1,376			(2,055	)		(2,741	)		34		(896	)		617			(3,665	)
Charge-offs		(74	)		(149	)		–			–		(346	)		(691	)		(1,260	)
Recoveries		7			120			–			–		73			77			277
Ending balance	$	3,658		$	4,796		$	3,337		$	2,835	$	1,835		$	1,180		$	17,641
Loss allowance individually evaluated for impairment	$	535			–			–			–		–			–		$	535
Loss allowance collectively evaluated for impairment	$	3,123		$	4,796		$	3,337		$	2,835	$	1,835		$	1,180		$	17,106

Loan receivable balances at December 31, 2015:
Loans individually evaluated for impairment	$	12,237		$	10,334		$	8,239		$	2,114	$	3,410		$	785		$	37,119
Loans collectively evaluated
for impairment		223,076			289,216			401,435			117,043		474,142			217,268			1,722,180
Total loans receivable	$	235,313		$	299,550		$	409,674		$	119,157	$	477,552		$	218,053		$	1,759,299

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

3. Loans Receivable (continued)

	December 31, 2014
Allowance for loan losses:	Commercial and Industrial			Commercial Real Estate			Multi- Family Real Estate			Construction and Development			One- to Four- Family			Home Equity and Other Consumer			Total
Beginning balance	$	2,603		$	6,377		$	5,931		$	4,160		$	3,220		$	1,274		$	23,565
Provision (recovery)		(259	)		895			373			(1,467	)		311			380			233
Charge-offs		(59	)		(561	)		(241	)		(34	)		(871	)		(534	)		(2,300	)
Recoveries		64			169			15			142			344			57			791
Ending balance	$	2,349		$	6,880		$	6,078		$	2,801		$	3,004		$	1,177		$	22,289
Loss allowance individually evaluated for impairment		–		$	262		$	642			–			–			–		$	904
Loss allowance collectively evaluated for impairment	$	2,349		$	6,618		$	5,436		$	2,801		$	3,004		$	1,177		$	21,385

Loan receivable balances at December 31, 2014:
Loans individually evaluated for impairment	$	12,343		$	14,822		$	10,654		$	2,166		$	4,839		$	601		$	45,425
Loans collectively evaluated for impairment		214,194			248,690			311,759			110,453			482,791			241,510			1,609,397
Total loans receivable	$	226,537		$	263,512		$	322,413		$	112,619		$	487,630		$	242,111		$	1,654,822

The Company adjusts certain factors used to determine the allowance for loan losses on loans that are collectively evaluated for impairment. Management considered these adjustments necessary and prudent in light of general uncertainties related to trends in real estate values, economic conditions, unemployment, and other key performance indicators identified by management. The Company estimates that these changes, as well as overall changes in the balance of loans to which the various factors were applied, resulted in an increase of $2,676 in 2016, a decrease of $4,279 in 2015, and a decrease of $1,180 in 2014, in the total allowance for loan losses.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

3. Loans Receivable (continued)

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

	December 31, 2016
Impaired loans with an allowance recorded:	Loans Receivable Balance, Net		Unpaid Principal Balance		Related Allowance for Loss		Average Loan Receivable Balance, Net		Interest Income Recognized
Commercial and industrial:
Term loans	$	354	$	360	$	96	$	144	$	20
Lines of credit		–		–		–		–		–
Total commercial and industrial		354		360		96		144		20
Commercial real estate:
Office		–		–		–		–		–
Retail/wholesale/mixed		–		–		–		–		–
Industrial/warehouse		–		–		–		–		–
Other		–		–		–		–		–
Total commercial real estate		–		–		–		–		–
Multi-family real estate		–		–		–		–		–
Construction and development:
Commercial real estate		–		–		–		–		–
Multi-family		–		–		–		–		–
Land and land development		119		119		1		48		–
Total construction and development		119		119		1		48		–
One- to four-family		2,214		2,214		17		889		–
Home equity and other consumer:
Home equity		152		148		44		46		–
Student		–		–		–		–		–
Other		–		–		–		–		–
Total home equity and other consumer		152		148		44		46		–
Total with an allowance recorded	$	2,839	$	2,841	$	158	$	1,127		–

Impaired loans with no allowance recorded:
Commercial and industrial:
Term loans	$	67	$	103		–	$	94	$	3
Lines of credit		567		578		–		983		28
Total commercial and industrial		634		681		–		1,077		31
Commercial real estate:
Office		1,967		2,413		–		2,044		146
Retail/wholesale/mixed		691		1,381		–		1,348		96
Industrial/warehouse		181		265		–		188		14
Other		–		151		–		4		14
Total commercial real estate		2,839		4,210		–		3,584		270
Multi-family real estate		274		292		–		226		24
Construction and development:
Commercial real estate		–		–		–		–		–
Multi-family real estate		–		–		–		–		–
Land and land development		260		322		–		203		16
Total construction and development		260		322		–		203		16
One- to four-family		3,054		3,316		–		2,739		20
Home equity and other consumer:
Home equity		798		835		–		805		9
Student		–		–		–		–		–
Other		46		62		–		75		–
Total home equity and other consumer		844		897		–		880		9
Total with no allowance recorded	$	7,905	$	9,718		–	$	8,709	$	370

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

3. Loans Receivable (continued)

December 31, 2015

Impaired loans with an allowance recorded:

Loans
Receivable
Balance, Net

Unpaid
Principal
Balance

Related
Allowance
for Loss

Average Loan
Receivable
Balance, Net

Interest
Income
Recognized

Commercial and industrial:

Term loans

–

Lines of credit

2,783

2,795

535

557

142

Total commercial and industrial

2,783

2,795

535

557

142

Commercial real estate:

Office

–

Retail/wholesale/mixed

–

1,538

–

Industrial/warehouse

–

Other

–

Total commercial real estate

–

1,538

–

Multi-family real estate

–

1,112

–

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

2,783

2,795

535

3,207

142

Impaired loans with no allowance recorded:

Commercial and industrial:

Term loans

116

133

–

129

Lines of credit

2,016

2,032

–

422

117

Total commercial and industrial

2,132

2,165

–

551

120

Commercial real estate:

Office

2,126

2,426

–

833

148

Retail/wholesale/mixed

1,637

2,348

–

1,672

Industrial/warehouse

194

265

–

204

Other

155

–

Total commercial real estate

3,968

5,194

–

2,731

259

Multi-family real estate

–

Construction and development:

Commercial real estate

597

–

597

–

Multi-family real estate

–

Land and land development

169

220

–

187

Total construction and development

766

817

784

One- to four-family

2,703

3,168

–

3,744

Home equity and other consumer:

Home equity

703

805

–

509

Student

–

Other

184

–

Total home equity and other consumer

785

989

–

596

Total with no allowance recorded

10,354

12,333

–

8,406

488

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

3. Loans Receivable (continued)

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

	December 31, 2016
	Pass		Watch		Special Mention		Substandard		Total
Commercial and industrial:
Term loans	$	59,774	$	3,215	$	174	$	733	$	63,896
Lines of credit		139,517		22,806		11,356		4,114		177,793
Total commercial and industrial		199,291		26,021		11,530		4,847		241,689
Commercial real estate:
Office		119,792		4,549		14,379		2,703		141,423
Retail/wholesale/mixed use		141,223		11,639		14,847		3,913		171,622
Industrial/warehouse		42,921		7,242		4,976		576		55,715
Other		6,699		–		–		–		6,699
Total commercial real estate		310,635		23,430		34,202		7,192		375,459
Multi-family real estate		494,437		–		7,783		3,916		506,136
Construction and development:
Commercial real estate		15,232		1,200		–		–		16,432
Multi-family real estate		145,097		–		–		–		145,097
Land and land development		10,945		181		–		1,355		12,481
Total construction/development		171,274		1,381		–		1,355		174,010
One- to four-family		467,237		437		881		4,668		473,223
Home equity and other consumer:
Home equity		175,145		–		–		442		175,587
Student		6,810		–		–		–		6,810
Other		11,309		18		–		46		11,373
Total home equity and other consumer		193,264		18		–		488		193,770
Total	$	1,836,138	$	51,287	$	54,396	$	22,466	$	1,964,287

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

3. Loans Receivable (continued)

	December 31, 2015
	Pass		Watch		Special Mention		Substandard		Total
Commercial and industrial:
Term loans	$	53,785	$	5,536	$	252	$	2,605	$	62,178
Lines of credit		145,118		17,086		1,299		9,632		173,135
Total commercial and industrial		198,903		22,622		1,551		12,237		235,313
Commercial real estate:
Office		69,223		5,567		15,063		2,126		91,979
Retail/wholesale/mixed use		103,634		28,091		14,510		6,599		152,834
Industrial/warehouse		46,545		1,326		588		1,598		50,057
Other		4,669		–		–		11		4,680
Total commercial real estate		224,071		34,984		30,161		10,334		299,550
Multi-family real estate		394,097		7,338		–		8,239		409,674
Construction and development:
Commercial real estate		13,928		–		–		597		14,525
Multi-family real estate		93,635		–		–		–		93,635
Land and land development		9,411		69		–		1,517		10,997
Total construction/development		116,974		69		–		2,114		119,157
One- to four-family		471,412		2,059		671		3,410		477,552
Home equity and other consumer:
Home equity		197,543		–		–		703		198,246
Student		8,129		–		–		–		8,129
Other		11,596		–		–		82		11,678
Total home equity and other consumer		217,268		–		–		785		218,053
Total	$	1,622,725	$	67,072	$	32,383	$	37,119	$	1,759,299

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

Loans rated “substandard” involve a distinct possibility that the Company could sustain some loss if deficiencies associated with the loan are not corrected. Loans rated “doubtful” indicate that full collection is highly questionable or improbable. The Company did not have any loans that were rated doubtful at December 31, 2016 and 2015. Loans rated substandard or doubtful that are also considered in management’s judgment to be impaired are generally analyzed individually to determine an appropriate allowance for loan loss. A loan rated “loss” is considered uncollectible, even if a partial recovery could be expected in the future. The Company generally charges off loans that are rated as a loss. As such, the Company did not have any loans that were rated loss at December 31, 2016 and 2015.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

3. Loans Receivable (continued)

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

	December 31, 2016
	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		–		–	$	48	$	48	$	63,848	$	63,896	$	422
Lines of credit		–		–		–		–		177,793		177,793		567
Total commercial and industrial		–		–		48		48		241,641		241,689		989
Commercial real estate:
Office		–		–		1,667		1,667		139,756		141,423		1,967
Retail/wholesale/mixed	$	852	$	235		–		1,087		170,535		171,622		691
Industrial/warehouse		–		–		181		181		55,534		55,715		181
Other		–		–		–		–		6,699		6,699		–
Total commercial real estate		852		235		1,848		2,935		372,524		375,459		2,839
Multi-family real estate		438		–		–		438		505,698		506,136		274
Construction and development:
Commercial real estate		–		–		–		–		16,432		16,432		–
Multi-family real estate		–		–		–		–		145,097		145,097		–
Land and land development		–		–		–		–		12,481		12,481		148
Total construction		–		–		–		–		174,010		174,010		148
One- to four-family		5,803		2,195		3,082		11,080		462,143		473,223		3,191
Home equity and other consumer:
Home equity		330		237		442		1,009		174,578		175,587		442
Student		168		98		295		561		6,249		6,810		–
Other		61		40		46		147		11,226		11,373		46
Total home equity and other consumer		559		375		783		1,717		192,053		193,770		488
Total	$	7,652	$	2,805	$	5,761	$	16,218	$	1,948,069	$	1,964,287	$	7,929

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

3. Loans Receivable (continued)

	December 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		–		–	$	61	$	61	$	62,117	$	62,178	$	116
Lines of credit	$	8,901		–		–		8,901		164,234		173,135		4,799
Total commercial and industrial		8,901		–		61		8,962		226,351		235,313		4,915
Commercial real estate:
Office		–		–		–		–		91,979		91,979		2,126
Retail/wholesale/mixed		768	$	2		684		1,454		151,380		152,834		1,637
Industrial/warehouse		–		–		–		–		50,057		50,057		194
Other		–		–		–		–		4,680		4,680		11
Total commercial real estate		768		2		684		1,454		298,096		299,550		3,968
Multi-family real estate		721		–		–		721		408,953		409,674		–
Construction and development:
Commercial real estate		–		–		597		597		13,928		14,525		597
Multi-family real estate		–		–		–		–		93,635		93,635		–
Land and land development		–		–		–		–		10,997		10,997		169
Total construction		–		–		597		597		118,560		119,157		766
One- to four-family		6,490		2,959		2,634		12,083		465,469		477,552		2,703
Home equity and other consumer:
Home equity		1,214		217		703		2,134		196,112		198,246		703
Student		178		62		484		724		7,405		8,129		–
Other		38		49		82		169		11,509		11,678		82
Total home equity and other consumer		1,430		328		1,269		3,027		215,026		218,053		785
Total	$	18,310	$	3,289	$	5,245	$	26,844	$	1,732,455	$	1,759,299	$	13,137

As of December 31, 2016 and 2015, $295 and $484 in student loans, respectively, were 90-days past due, but remained on accrual status. No other loans 90-days past due were in accrual status as of these dates.

The Company classifies a loan modification as a troubled debt restructuring (“TDR”) when it has granted a borrower experiencing financial difficulties a concession that it would otherwise not consider. Loan modifications that result in insignificant delays in the receipt of payments (generally six months or less) are not considered TDRs under the Company’s TDR policy. TDRs are relatively insignificant and/or infrequent in the Company and generally consist of loans placed in interest-only status for a short period of time or payment forbearance for greater than six months. As of December 31, 2016 and 2015, TDRs were $5,772 and $8,704, respectively, and consisted primarily of commercial and industrial loans, Commercial real estate loans, and one- to four-family mortgage loans. TDRs in accrual status as of those same dates were $2,815 and $2,558, respectively. Additions to TDRs during the twelve months ended December 31, 2016 and 2015, were $2,242 and $5,256, respectively. In 2016 additions to TDRs consisted of $1,667 in commercial real estate, $46 in commercial and industrial loans, and $529 in one- to four-family residential loans. In 2015 additions to TDRs consisted of $4,768 in commercial and industrial loans and $488 in one- to four-family residential loans. TDRs that experienced a payment default within one year of their

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

3. Loans Receivable (continued)

restructuring were immaterial during the twelve month periods ended December 31, 2016 and 2015. TDRs are evaluated for impairment and appropriate credit losses are recorded in accordance with the Company’s accounting policies.

4. Mortgage Servicing Rights

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

	2016			2015			2014
Mortgage servicing rights, net, at beginning of year	$	7,205		$	7,867		$	8,737
Additions		1,522			1,245			901
Amortization		(2,158	)		(1,907	)		(1,772	)
Decrease in valuation allowance during the year		–			–			1
Mortgage servicing rights, net, at end of year	$	6,569		$	7,205		$	7,867

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

2017	$	963
2018		842
2019		731
2020		631
2021		543
Thereafter		2,859
Total	$	6,569

The projection of amortization for mortgage servicing rights is based on future contractual principal cash flows expected as of December 31, 2016. Future amortization expense may be significantly different depending on the actual future mortgage servicing portfolio, mortgage interest rates, loan prepayments, and market conditions.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

5. Other Assets

Other assets are summarized as follow:

	December 31
	2016		2015
Accrued interest:
Loans receivable	$	5,357	$	4,894
Mortgage-related securities		1,015		1,141
Total accrued interest		6,372		6,035
Foreclosed properties and repossessed assets:
Commercial real estate		1,559		1,685
Land and land development		598		747
One-to four-family first mortgages		787		874
Total foreclosed properties and repossessed assets		2,944		3,306
Bank-owned life insurance		63,494		61,656
Premises and equipment, net		47,343		49,218
Federal Home Loan Bank stock, at cost		20,261		17,591
Deferred tax asset, net		14,543		16,485
Other assets		22,938		24,037
Total other assets	$	177,895	$	178,328

Residential one-to four-family mortgage loans that were in the process of foreclosure were $2,424 and $2,576 at December 31, 2016 and 2015, respectively.

Premises and equipment are summarized as follows:	December 31
	2016			2015
Land and land improvements	$	16,979		$	16,500
Office buildings		54,225			54,168
Furniture and equipment		19,873			19,317
Leasehold improvements		1,083			1,145
Total cost		92,160			91,130
Accumulated depreciation and amortization		(44,817	)		(41,912	)
Total premises and equipment, net	$	47,343		$	49,218

Depreciation expense for 2016, 2015, and 2014, was $3,456, $3,253 and $2,917 respectively. The Company leases various branch offices, office facilities and equipment under non-cancelable operating leases which expire on various dates through 2032. Future minimum payments under non-cancelable operating leases with initial or remaining terms of one year or more for the years indicated are as follows at December 31, 2015:

	Amount
2017	$	983
2018		768
2019		759
2020		709
2021		503
Thereafter		2,802
Total	$	6,524

Rent expense was $943, $996, and $927, in 2016, 2015, and 2014, respectively.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

6. Deposits Liabilities

Deposit liabilities are summarized as follows:

	December 31
	2016		2015
Checking accounts:
Non-interest-bearing	$	309,137	$	213,761
Interest-bearing		238,142		277,606
Total checking accounts		547,279		491,367
Money market accounts		558,905		542,020
Savings accounts		234,038		217,633
Certificate of deposits:
Due within one year		325,408		282,584
After one but within two years		162,138		182,599
After two but within three years		31,938		61,806
After three but within four years		2,246		15,373
After four but within five years		2,778		2,209
Total certificates of deposit		524,508		544,571
Total deposit liabilities	$	1,864,730	$	1,795,591

The aggregate amount of certificate accounts with balances of $250 or more was $28,677 and $31,224 at December 31, 2016 and 2015, respectively.

Interest expense on deposits was as follows:

	Year Ended December 31
	2016		2015		2014
Interest-bearing checking accounts	$	45	$	30	$	30
Money market accounts		839		702		735
Savings accounts		30		46		55
Certificate of deposits		4,847		3,993		3,864
Total interest expense on deposit liabilities	$	5,761	$	4,771	$	4,684

7. Borrowings

Borrowings consist of the following:

	December 31, 2016					December 31, 2015
			Weighted-					Weighted-
			Average					Average
	Balance		Rate			Balance		Rate
FHLB overnight advances	$	285,000		0.70	%	$	130,000		0.16	%
FHLB term advances maturing in:
2016		–		–			75,950		0.63
2017		63,397		0.89			56,183		1.20
2018		22,547		1.60			34,607		2.18
2019		16,838		3.09			19,127		2.98
2020		24,338		3.72			26,853		3.62
2021		14,674		3.03			16,971		2.97
2022 and thereafter		12,356		4.55			12,684		4.55
Total borrowings	$	439,150		1.22	%	$	372,375		1.27	%

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

7. Borrowings (continued)

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

As discussed in Note 13, “Financial Instruments with Off-Balance Sheet Risk and Derivative Financial Instruments,” the Company has entered into cash flow hedges using interest rate swaps to manage the interest rate risk exposure associated with certain forecasted borrowings from the FHLB of Chicago. Two advances maturing in January 2017 of $10,000 each have corresponding pay-fixed interest rate swaps that mature in 2018 and 2019, respectively. Although these advances both have stated interest rates of 0.48%, they have effective interest rates including the impact of the interest rate swaps of 0.86% and 1.12%, respectively. However, these advances have been included in the table, above, at their contractual rates and maturities. If they had been included in the table at their hedge-adjusted rates and maturities, the advances reported as maturing in 2018 and 2019 would have each been $10,000 higher and the weighted average rates for those maturity years would have been 1.37% and 2.35% as of December 31, 2016, respectively. Furthermore, the weighted average rate reported for total borrowings would have been 1.24% as of the same date. Finally, these borrowings were included in the amount reported as net increase in short-term borrowings in the Company’s Audited Consolidated Statement of Cash Flows for the year ended December 31, 2015.

The Company is required to pledge certain unencumbered mortgage loans and mortgage-related securities as collateral against its outstanding advances from the FHLB of Chicago. Advances are also collateralized by the shares of capital stock of the FHLB of Chicago that are owned by the Company. The Company’s borrowings at the FHLB of Chicago are limited to the lesser of: (i) 35% of total assets; (ii) 22.2 times the FHLB of Chicago capital stock owned by the Company; or (iii) the total of 73% of the book value of one- to four-family mortgage loans, 73% of the book value of certain multi-family mortgage loans, 51% of the book value of certain home equity loans, and 98% of the fair value of certain mortgage-related securities.

8. Shareholders’ Equity

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 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 December 31, 2016, that the Company and the Bank met or exceeded all regulatory capital adequacy requirements to which it is subject.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

8. Shareholders’ Equity (continued)

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

	Actual					Required to be Adequately Capitalized					Required to be Well Capitalized
As of December 31, 2016:	Amount		Ratio			Amount		Ratio			Amount		Ratio
At the Company:
Total risk-weighted capital	$	312,503		15.50	%	$	161,329		8.00	%	$	201,661		10.00	%
Tier 1 risk-weighted capital		292,563		14.51			120,997		6.00			161,329		8.00
CET1 risk-weighted capital		292,563		14.51			90,747		4.50			131,080		6.50
Tier 1 leverage capital		292,563		11.11			105,333		4.00			131,666		5.00
At the Bank:
Total risk-weighted capital	$	285,016		14.14	%	$	161,247		8.00	%		201,559		10.00	%
Tier 1 risk-weighted capital		265,076		13.15			120,936		6.00			161,247		8.00
CET1 risk-weighted capital		265,076		13.15			90,702		4.50			131,014		6.50
Tier 1 leverage capital		265,076		10.09			105,108		4.00			131,385		5.00

As of December 31, 2015:	Amount		Ratio			Amount		Ratio			Amount		Ratio
At the Company:
Total risk-weighted capital	$	296,709		15.83	%	$	149,922		8.00	%	$	187,402		10.00	%
Tier 1 risk-weighted capital		279,068		14.89			112,441		6.00			149,922		8.00
CET1 risk-weighted capital		279,068		14.89			84,331		4.50			121,811		6.50
Tier 1 leverage capital		279,068		11.37			98,197		4.00			122,747		5.00
At the Bank:
Total risk-weighted capital	$	272,568		14.55	%	$	149,900		8.00	%	$	187,375		10.00	%
Tier 1 risk-weighted capital		254,927		13.61			112,425		6.00			149,900		8.00
CET1 risk-weighted capital		254,927		13.61			84,319		4.50			121,794		6.50
Tier 1 leverage capital		254,927		10.48			97,328		4.00			121,660		5.00

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

8. Shareholders’ Equity (continued)

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

	December 31, 2016						December 31, 2015
	Total Risk- Weighted			Tier 1 and CET1			Total Risk- Weighted			Tier 1
Total shareholder’s equity at the Bank	$	258,956		$	258,956		$	254,200		$	254,200
Allowance for loan losses		19,940			–			17,641			–
Net unrealized loss and net prior service costs for defined pension plans, net of taxes		10,843			10,843			10,089			10,089
Investment in “non-includable” subsidiaries		(3,143	)		(3,143	)		(3,023	)		(3,023	)
Disallowed deferred tax assets		(1,876	)		(1,876	)		(5,615	)		(5,615	)
Net unrealized loss on securities available for sale, net of taxes		313			313			(724	)		(724	)
Net unrealized gain on interest rate swaps		(17	)		(17	)		–			–
Regulatory capital at the Bank		285,016			265,076			272,568			254,927
Additional retained earnings at the Company		27,566			27,566			25,194			25,194
Additional disallowed deferred tax asset at the Company		(79	)		(79	)		(1,053	)		(1,053	)
Regulatory capital at the Company	$	312,503		$	292,563		$	296,709		$	279,068

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

	December 31
	2016			2015
Qualified and supplemental defined benefit plans	$	(10,772	)	$	(10,011	)
Net unrealized gain (loss) on securities available-for-sale		(313	)		724
Other post-retirement benefit plans		(71	)		(78	)
Interest rate swaps		17			–
Accumulated other comprehensive loss	$	(11,139	)	$	(9,365	)

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

9. Earnings Per Share

The computation of the Company’s basic and diluted earnings per share is presented in the following table.

	Year Ended December 31
	2016		2015		2014
Basic earnings per share:
Net income	$	16,954	$	14,177	$	14,665
Weighted-average shares outstanding		45,104,642		45,614,877		46,123,884
Vested restricted shares during the period		114,931		63,707		40,146
Basic shares outstanding		45,219,573		45,678,584		46,164,030
Basic earnings per share	$	0.37	$	0.31	$	0.32

Diluted earnings per share:
Net income	$	16,954	$	14,177	$	14,665
Weighted-average shares outstanding used in basic earnings per share		45,219,573		45,678,584		46,164,030
Net dilutive effect of:
Stock option shares		400,551		352,645		251,949
Non-vested restricted shares		55,881		32,580		29,319
Diluted shares outstanding		45,676,005		46,063,809		46,445,298
Diluted earnings per share	$	0.37	$	0.31	$	0.31

The Company had stock options for 183,300, 309,700, and 438,000 shares outstanding at December 31, 2016, 2015, and 2014, respectively, which were not included in the computation of diluted earnings per share because they were anti-dilutive. These shares had weighted-average exercise prices of $9.23, $8.32, and $7.81, as of those same dates, respectively.

10. Employee Benefit Plans

The Company has a discretionary, defined contribution savings plan (the “Savings Plan”). The Savings Plan is qualified under Sections 401 and 401(k) of the Internal Revenue Code and provides employees meeting certain minimum age and service requirements the ability to make contributions to the Savings Plan on a pretax basis. The Company then matches a percentage of the employee’s contributions. Matching contributions expensed by the Company were $926 in 2016, $807 in 2015, and $930 in 2014.

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

In 2013 the Company froze the benefits of participants in the qualified defined benefit pension plan that had less than 20 years of service. This change also resulted in the future benefits under the Company’s supplemental defined benefit pension plan being effectively frozen. In addition, in 2015 the Company froze the benefits of the remaining participants in the qualified defined benefit pension plan. The latter action resulted in curtailment gains in the qualified plan in 2015 of $1,023. This amount was also recognized through accumulated other comprehensive income in 2015.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

10. Employee Benefit Plans (continued)

The changes in plan assets and benefit obligations at December 31, 2016 and 2015, are presented in the following table.

	Qualified						Supplemental
	Pension Plan						Pension Plan
	2016			2015			2016			2015
Change in plan assets:
Fair value of plan assets at beginning of year	$	58,649		$	50,161			–			–
Actual return on plan assets		2,970			663			–			–
Employer contributions		650			10,000		$	869		$	1,018
Benefits paid		(2,592	)		(2,175	)		(869	)		(1,018	)
Fair value of plan assets at end of year	$	59,677		$	58,649			–			–
Change in benefit obligation:
Benefit obligation at beginning of year		66,048			71,759			10,653			11,114
Service cost		–			966			–			–
Interest cost		2,676			2,640			373			398
Actuarial loss (gain)		1,263			(6,119	)		(137	)		159
Curtailment gain on plan amendment		–			(1,023	)		–			–
Benefits paid		(2,592	)		(2,175	)		(869	)		(1,018	)
Benefit obligation at end of year		67,395			66,048			10,020			10,653
Funded status at the end of the year	$	(7,718	)	$	(7,399	)	$	(10,020	)	$	(10,653	)

The underfunded status of the qualified and supplemental pension plans at December 31, 2016, are recognized in the Consolidated Statement of Financial Condition as accrued pension liability, which is included as a component of other liabilities.

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

	Qualified						Supplemental
	Pension Plan						Pension Plan
	2016			2015			2016			2015
Balance in accumulated other comprehensive loss at the beginning of year	$	(8,362	)	$	(12,856	)	$	(1,649	)	$	(1,602	)
Change in unrecognized loss recorded in other comprehensive income		(905	)		4,494			144			(47	)
Balance in accumulated other comprehensive loss at the end of year	$	(9,267	)	$	(8,362	)	$	(1,505	)	$	(1,649	)

All period-end balances in the table for the qualified pension plan and supplemental pension plan consisted of unrecognized loss.

The estimated net of tax costs that will be amortized from accumulated other comprehensive income into net periodic cost in 2017 is $168 for the qualified plan. The accumulated benefit obligations for the qualified defined benefit pension plan were $67,395 at December 31, 2016, and $66,047 at December 31, 2015.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

10. Employee Benefit Plans (continued)

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

	2016			2015
Discount rate qualified plan		3.92	%		4.13	%
Discount rate supplemental plan		3.54			3.66
Expected long-term rate of return on plan assets (qualified plan)		5.50			6.00

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

	2016			2015			2014
Discount rate pension plan		4.13	%		3.74	%		4.70	%
Discount rate supplemental plan		3.66			3.74			4.70
Rate of increase in compensation levels (both plans)		–			3.00			3.00
Expected long-term rate of return on plan assets (qualified plan)		6.00			6.00			6.00

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

Using an actuarial measurement date of December 31, 2016, 2015, and 2014, components of net periodic benefit cost follow:

	2016			2015			2014
Qualified pension plan:
Interest cost	$	2,676		$	2,640		$	2,668
Service cost		–			966			897
Expected return on plan assets		(3,443	)		(2,939	)		(2,891	)
Amortization of net loss		228			2,623			661
Net periodic cost	$	(539	)	$	3,290		$	1,335
Supplemental pension plan:
Interest cost	$	373		$	398		$	453
Service cost		–			–			–
Amortization of prior service cost		–			–			–
Amortization of net loss from earlier periods		104			91			6
Net periodic cost	$	477		$	489		$	459

At December 31, 2016, the projected benefit payments for each of the plans are as follows:

	Qualified Pension Plan		Supplemental Pension Plan		Total
2017	$	2,821	$	749	$	3,570
2018		3,011		750		3,761
2019		3,167		751		3,918
2020		3,337		751		4,088
2021		3,506		751		4,257
2022 – 2026		19,253		3,533		22,786
Total	$	35,095	$	7,285	$	42,380

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

10. Employee Benefit Plans (continued)

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

	December 31, 2016
			Fair Value Hierarchy
	Amount		Level 1		Level 2		Level 3
Asset category:
Money market funds	$	11,102		–	$	11,102		–
Equity security		1,059	$	1,059		–		–
Immediate participation guarantee contract		47,516		–		–	$	47,516
Total	$	59,677	$	1,059	$	11,102	$	47,516

	December 31, 2015
			Fair Value Hierarchy
	Amount		Level 1		Level 2		Level 3
Asset category:
Money market funds	$	10,406		–	$	10,406		–
Equity security		891	$	891		–		–
Immediate participation guarantee contract		47,352		–		–	$	47,352
Total	$	58,649	$	891	$	10,406	$	47,352

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

The equity securities are shares of stock issued by the life insurance company when it demutualized. This investment is valued at the closing price reported in the active market in which the security is traded. The money market funds, invest in short-term U.S. government securities. The funds are not traded in an active market.

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

	2016			2015
Fair value at the beginning of the period	$	47,352		$	48,641
Actual return on plan assets		2,756			886
Employer contribution		–			–
Benefits paid		(2,592	)		(2,175	)
Fair value at the end of the period	$	47,516		$	47,352

The Company has a deferred retirement plan for certain non-officer directors who have provided at least five years of service. In the event a director dies prior to completion of these payments, payments will go to the director’s heirs. The Company has funded these arrangements through “rabbi trust” arrangements and, based on actuarial analyses, believes these obligations are adequately funded. The Company also has supplemental retirement plans for certain executives of a financial institution it acquired in the past.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

10. Employee Benefit Plans (continued)

The liabilities related to these plans were $4,287 and $4,280 at December 31, 2016 and 2015, respectively. The net expense related to these plans for the years ended December 31, 2016, 2015, and 2014, was $232, $183, and $839, respectively.

11. Stock-Based Benefit Plans

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

In 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 may vest over a period of three or more years and, if applicable, have a maximum term of ten years. The number of shares of common stock of the Company that may be issued under the 2014 Plan is limited to 3,000,000 shares. As of December 31, 2016, 2,492,600 shares remain available 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 shares. The amount amortized to expense was $1,013, $737, and $376 in 2016, 2015, and 2014, respectively. Outstanding non-vested restricted stock grants had a fair value of $2,061 and an unamortized cost of $1,491 at December 31, 2016. The cost of these shares is expected to be recognized over a weighted-average period of 0.87 years.

The Company recorded stock option compensation expenses of $359, $412, and $465 for 2016, 2015, and 2014, respectively. As of December 31, 2016, there was $433 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 0.89 years.

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

	Year Ended December 31
	2016					2015					2014
	Stock Options			Weighted- Average Exercise		Stock Options			Weighted- Average Exercise		Stock Options			Weighted- Average Exercise
Outstanding at beginning of year		1,421,500		$	5.4378		1,631,000		$	5.3032		2,955,000		$	8.0742
Granted		56,300			7.2900		44,000			6.7780		276,000			6.9653
Exercised		(161,234	)		4.8672		(177,700	)		4.5579		(4,000	)		5.0500
Forfeited		(13,132	)		5.0412		(75,800	)		5.2706		(60,000	)		11.9737
Expired		–			–		–			–		(1,536,000	)		10.6730
Outstanding at end of year		1,303,434		$	5.5923		1,421,500		$	5.4378		1,631,000		$	5.3032

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

11. Stock-Based Benefit Plans (continued)

The following table provides additional information regarding the Company’s outstanding options as of December 31, 2016.

	Remaining		Non-Vested Options				Vested Options
	Contractual Life		Stock Options		Intrinsic Value		Stock Options		Intrinsic Value
Exercise price:	(in years)
$11.160		1.3		–		–		32,000		–
12.025		1.6		–		–		50,000		–
7.220		3.3		–		–		50,000	$	112
4.740		4.0		–		–		70,000		330
5.050		4.0		–		–		172,000		757
4.300		4.2		–		–		10,000		52
3.720		4.6		–		–		12,500		72
3.390		5.0		63,500	$	385		229,500		1,391
3.800		5.3		2,000		11		8,000		45
4.820		6.1		93,200		432		142,800		661
5.360		6.3		8,000		33		6,000		25
5.700		6.4		8,000		30		12,000		45
6.340		6.6		4,000		12		6,000		19
7.170		7.1		109,800		250		73,000		166
6.010		7.3		4,500		15		3,000		10
5.850		7.4		6,666		24		13,334		48
6.100		7.6		6,666		22		13,334		45
6.700		8.1		19,996		55		10,338		28
7.190		8.6		4,666		11		2,334		5
7.290		9.1		56,300		122		–		–
Total				387,294	$	1,402		916,140	$	3,811
Weighted-average remaining contractual life				6.8 years				4.8 years
Weighted-average exercise price			$	5.8298			$	5.4920

The total intrinsic value of options exercised was $481, $459, and $5 in 2016, 2015, and 2014, respectively. The weighted-average grant date fair value of non-vested options at December 31, 2016, was $1.76 per share. In 2016 13,132 non-vested options were forfeited.

The Company uses the Black-Scholes option-pricing model to estimate the fair value of granted options. This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. However, the Company's stock options have characteristics significantly different from traded options and changes in the subjective input assumptions can materially affect the fair value estimate. Option valuation models such as Black-Scholes require the input of highly subjective assumptions including the expected stock price volatility, which is computed using ten years of actual price activity in the Company’s stock. The Company uses historical data of employee behavior as a basis to estimate the expected life of the options, as well as forfeitures due to employee terminations. The Company also uses its actual dividend yield at the time of the grant, as well as actual U.S. Treasury yields in effect at the time of the grant to estimate the risk-free rate. The following weighted-average assumptions were used to value 56,300 options granted during 2016: risk free interest rate of 1.80%, dividend yield of 2.74%, expected stock volatility of 35%, and expected term to exercise of 7.5 years. The following weighted-average assumptions were used to value 44,000 options granted during 2015: risk free interest rate of 1.81%, dividend yield of 2.45%, expected stock volatility of 33.5%, and expected term to exercise of 7.5 years.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

11. Stock-Based Benefit Plans (continued)

The following weighted-average assumptions were used to value 276,000 options granted during 2014: risk free interest rate of 2.37%, dividend yield of 1.82%, expected stock volatility of 32%, and expected term to exercise of 7.5 years.

12. Income Taxes

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and Wisconsin and Minnesota. The Company is no longer subject to U.S. federal and state income tax examinations for years prior to 2013 and 2012, respectively. If any interest and/or penalties would be imposed by an appropriate taxing authority, the Company would report the interest component as a reduction of income before income taxes and would report penalties through income tax expense. The Company had no material uncertain tax positions and had not recorded a liability for unrecognized tax benefits as of or during the three years ended December 31, 2016.

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

	Year Ended December 31
	2016		2015		2014
Current income tax expense:
Federal	$	6,835	$	201	$	476
State		152		6		824
Current income tax expense		6,987		207		1,300
Deferred income tax expense:
Federal		1,253		6,450		5,888
State		1,872		1,678		1,662
Deferred income tax expense		3,125		8,128		7,550
Income tax expense	$	10,112	$	8,335	$	8,850

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

	Year Ended December 31
	2016			2015			2014
Income before income taxes	$	27,066		$	22,512		$	23,504
Tax expense at federal statutory rate	$	9,473		$	7,879		$	8,230
Increase (decrease) in taxes resulting from:
State income taxes, net of federal tax benefit		1,316			1,095			1,095
Bank-owned life insurance		(636	)		(654	)		(977	)
State income tax settlement, net of federal benefit		–			–			518
Other		(41	)		15			(16	)
Income tax expense	$	10,112		$	8,335		$	8,850

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

12. Income Taxes (continued)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company’s deferred tax assets and liabilities are summarized as follows:

	December 31
	2016		2015
Deferred tax assets:
Loan loss reserves	$	8,005	$	7,082
Pension		7,177		7,407
State net operating losses		2,073		3,532
Deferred compensation		1,719		1,766
Non-deductible losses on foreclosed real estate		1,008		1,431
Restricted stock amortization		589		458
Unrealized loss on investment securities		213		–
Other-than-temporary impairment of investment securities		185		237
Federal net operating losses and AMT credits		–		3,136
Other		1,489		1,317
Total deferred tax assets		22,458		26,366
Deferred tax liabilities:
Mortgage servicing rights		2,636		2,892
Purchase accounting adjustments		2,325		2,575
Property and equipment depreciation		1,332		2,395
FHLB stock dividends		1,200		1,200
Unrealized gain on investment securities		–		483
Other		422		336
Total deferred tax liabilities		7,915		9,881
Net deferred tax asset	$	14,543	$	16,485

As of December 31, 2016, the Company had $40,387 in net operating loss carryovers for state income tax purposes. The net operating loss carryovers expire in various years through 2031 if unused.

13. Financial Instruments with Off-Balance Sheet Risk and Derivative Financial Instruments

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist of commitments to extend credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the Consolidated Statements of Financial Condition. The contract amounts reflect the extent of involvement the Company has in particular classes of financial instruments and also represents the Company’s maximum exposure to credit loss.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and generally require payment of a fee. As some commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates the collateral needed and creditworthiness of each customer on a case by case basis. The Company generally extends credit only on a secured basis. Collateral obtained varies, but consists principally of one- to four-family residences.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

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

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

	December 31
	2016		2015
Unused commercial lines of credit	$	177,672	$	146,183
Commercial loans		3,709		6,772
Standby letters of credit		7,821		4,458
Real estate loan commitments:
Fixed rate		34,074		36,921
Adjustable rate		303,546		308,173
Unused consumer lines of credit		160,898		164,989

The Company sells substantially all of its long-term, fixed-rate, one- to four-family loan originations in the secondary market. The Company uses IRLCs and forward commitments to sell loans to manage interest rate risk associated with its loan sales activities, both of which are considered to be free-standing derivative financial instruments under GAAP. Changes in the fair value of these free-standing derivative instruments are recognized currently through earnings. During 2016, 2015, and 2014, net unrealized gains (losses) of $103, $10, and $(10), respectively, were recognized in net gain on loan sales activities on these derivative instruments. These amounts were exclusive of net unrealized gains (losses) of $77, $43, and $(101), recognized in 2016, 2015, and 2014, respectively, on loans held-for-sale, 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 free-standing derivative instruments under GAAP. As such, changes in the fair value of these free-standing derivative instruments are recognized currently through earnings. During the years ended December 31, 2016, 2015, and 2014, net unrealized gains of $6,217, $1,794, and $1,527, respectively, and net unrecognized losses of $6,217, $1,794, and $1,527, respectively, related to interest rate swaps and embedded derivatives were recorded in loan-related fees.

The Company has also entered into interest rate swap arrangements to manage the interest rate risk exposure associated with certain forecasted borrowings from the FHLB of Chicago. These interest rate swaps were designated as forecasted transaction cash flow hedges by management (refer to Note 7, “Borrowings”). As such, the effective portion of the change in the fair value of these derivatives is recorded in other comprehensive income and the ineffective portion was recorded in interest expense. During the year ended December 31, 2016, unrealized gain net of tax related to interest rate swaps of $17 was recorded in other comprehensive income. There was no amount recorded in other comprehensive income in 2015 or 2014. There was no ineffective portion of this hedge for any of the periods.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

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

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

	December 31, 2016					December 31 2015
	Notional Amount		Fair Value			Notional Amount		Fair Value
Interest rate lock commitments	$	6,806	$	145		$	7,961	$	166
Forward commitments to sell loans		11,861		52			9,543		(72	)
Embedded free-standing derivatives on commercial loans		8,765		258			23,559		705
Receive-fixed free-standing interest rate swaps		299,595		(3,122	)		82,780		2,648
Pay-fixed free-standing interest rate swaps		308,360		2,864			106,339		(3,353	)
Pay-fixed cash flow hedge interest rate swaps		20,000		28			20,000		–
Net unrealized gains			$	225				$	94

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

14. Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company primarily applies the market approach for recurring value measurements and endeavors to utilize the best available information. Accordingly, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company is able to classify fair value measurements based on the observability of those inputs. Accounting guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1), the next highest priority is given to prices based on models, methodologies, and/or management judgments that rely on direct or indirect observable inputs (Level 2), and the lowest priority to prices derived from models, methodologies, and/or management judgments that rely on significant unobservable inputs (Level 3). There were no transfers of assets or liabilities between categories of the fair value hierarchy during the years ended December 31, 2016 and 2015.

The following methods and assumptions are used by the Company in estimating its fair value disclosures of financial instruments:

Cash and Cash Equivalents The carrying amounts reported in the statements of financial condition for cash and cash equivalents approximate those assets’ fair values. The Company considers the fair value of cash and cash equivalents to be Level 1 in the fair value hierarchy.

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

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

14. Fair Value Measurements (continued)

Loans Held-for-Sale The fair value of loans held-for-sale is based on the current market price for securities collateralized by similar loans. The Company considers the fair value of loans held-for-sale to be Level 2 in the fair value hierarchy.

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

Mortgage Servicing Rights The Company has calculated the fair market value of mortgage servicing rights for those loans that are sold with servicing rights retained. For valuation purposes, loans are stratified by product type and, within product type, by interest rates. The fair value of mortgage servicing rights is based upon the present value of estimated future cash flows using current market assumptions for prepayments, servicing cost and other factors. The Company considers the fair value of mortgage servicing rights to be Level 3 in the fair value hierarchy.

The following table summarizes the significant inputs utilized by the Company to estimate the fair value of its MSRs as of December 31, 2016:

	Weighted- Average			Range
Loan size	$	115			$1-$413
Contractual interest rate		3.66	%		2.50%-7.10%
Constant prepayment rate (“CPR”)		7.69	%		1.41%-21.66%
Remaining maturity in months		215			2-480
Servicing fee		0.25	%		–
Annual servicing cost per loan (not in thousands)	$	60			–
Annual ancillary income per loan (not in thousands)	$	30			–
Discount rate		9.67	%		9.63%-11.38%

MSR pools with an amortized cost basis greater than fair value are carried at fair value in the Company’s financial statements. There were no pools determined to be impaired at December 31, 2016 or 2015, and as there was no valuation allowance as of either of those dates.

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

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

Deposit Liabilities and Advance Payments by Borrowers for Taxes and Insurance Fair value for demand deposits equal book value. The Company considers the fair value of demand deposits to be Level 2 in the fair value hierarchy. Fair values for certificate of deposits are estimated using a discounted cash flow calculation that applies

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

14. 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 payments by borrowers to be Level 2 in the fair value hierarchy.

Borrowings The fair value of long-term borrowings is estimated using discounted cash flow calculations with the discount rates equal to interest rates currently being offered for borrowings with similar terms and maturities. The carrying value on short-term borrowings approximates fair value. The Company considers the fair value of borrowings to be Level 2 in the fair value hierarchy.

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

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

	December 31, 2016						December 31, 2015
	Carrying Value			Fair Value			Carrying Value			Fair Value
Cash and cash equivalents	$	50,087		$	50,087		$	44,501		$	44,501
Mortgage related securities available-for-sale		371,880			371,880			407,874			407,874
Mortgage related securities held-to-maturity		93,234			94,266			120,891			121,641
Loans held-for-sale		5,952			5,952			3,350			3,350
Loans receivable, net		1,942,907			1,949,534			1,740,018			1,751,670
Mortgage servicing rights, net		6,569			9,329			7,205			9,455
Federal Home Loan Bank stock		20,261			20,261			17,591			17,591
Accrued interest receivable		6,372			6,372			6,035			6,035
Deposit liabilities		1,864,730			1,823,592			1,795,591			1,786,934
Borrowings		439,150			443,732			372,375			378,266
Advance payments by borrowers		4,770			4,770			3,382			3,382
Accrued interest payable		1,124			1,124			1,091			1,091
Unrealized gain (loss) on:
Interest rate lock commitments on loans		145			145			166			166
Forward commitments to sell loans		52			52			(72	)		(72	)
Embedded derivatives on commercial loans		258			258			705			705
Receive-fixed free-standing interest rate swaps		(3,122	)		(3,122	)		2,648			2,648
Pay-fixed free-standing interest rate swaps		2,864			2,864			(3,353	)		(3,353	)
Pay-fixed cash flow hedge interest rate swaps		28			28			–			–

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

14. Fair Value Measurements (continued)

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

	December 31, 2016
	Level 1		Level 2		Level 3		Total
Loans held-for-sale		–	$	5,952		–	$	5,952
Mortgage-related securities available-for-sale		–		371,880		–		371,880
Total		–	$	377,832		–	$	377,832

	December 31, 2015
	Level 1		Level 2		Level 3		Total
Loans held-for-sale		–	$	3,350		–	$	3,350
Mortgage-related securities available-for-sale		–		407,874		–		407,874
Total		–	$	411,224		–	$	411,224

Impaired Loans For non-accrual loans greater than an established threshold and individually evaluated for impairment and all renegotiated loans, impairment is measured based on: (i) the fair value of the loan or the fair value of the collateral less estimated selling costs (collectively the “collateral value method”) or (ii) the present value of the estimated cash flows discounted at the loan’s original effective interest rate (the “discounted cash flow method”). The resulting valuation allowance, if any, is a component of the allowance for loan losses. The discounted cash flow method is a fair value measure. For the collateral value method, the Company generally obtains appraisals on a periodic basis to support the fair value of collateral underlying the loans. Appraisals are performed by independent certified and/or licensed appraisers that have been reviewed by the Company and incorporate information such as recent sales prices for comparable properties, costs of construction, and net operating income of the property or business. Selling costs are generally estimated at 10%. Appraised values may be further discounted based on management judgment regarding changes in market conditions and other factors since the time of the appraisal. A significant unobservable input in using net operating income to estimate fair value

is the capitalization rate. At December 31, 2016, the range of capitalization rates utilized to determine the fair value of the underlying collateral on certain loans was 5.5% to 11.5%. 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 $158 was recorded for loans with a recorded investment of $22,466 at December 31, 2016. These amounts were $535 and $37,119 at December 31, 2015, respectively. Provision for loan losses related to these loans was $158, $535, and $316 in 2016, 2015, and 2014, respectively.

Foreclosed Properties Foreclosed properties acquired through, or in lieu of, loan foreclosure are recorded at the lower of cost or fair value less estimated costs to sell. In determining fair value, the Company generally obtains appraisals to support the fair value of foreclosed properties, as described in the previous paragraph. In certain instances, the Company may also use the selling list price, less estimated costs to sell, as the fair value of foreclosed properties. In such instances, the list price is generally less than the appraised value. The Company considers these fair values to be Level 3 in the fair value hierarchy. As of December 31, 2016, $1,882 in foreclosed properties were valued at collateral value compared to $2,794 at December 31, 2015. Losses of $197, $330, and $856 related to these foreclosed properties valued at collateral value were recorded during the twelve months ended December 31, 2016, 2015, and 2014, respectively.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

15. Condensed Parent Company Only Financial Statements

STATEMENT OF FINANCIAL CONDITION

	December 31
	2016			2015

Assets
Cash and cash equivalents	$	25,996		$	23,873
Investment in subsidiary		258,956			254,200
Other assets		1,689			1,321

Total assets	$	286,641		$	279,394

Liabilities and shareholders’ equity

Total liabilities		–			–
Shareholders’ equity:
Common stock–$0.01 par value:
Authorized–200,000,000 shares in 2016 and 2015 Issued–78,783,849 shares in 2016 and 2015 Outstanding–45,691,790 shares in 2016 and 45,443,548 shares in 2015	$	788		$	788
Additional paid-in capital		484,940			486,273
Retained earnings		171,633			164,482
Accumulated other comprehensive loss		(11,139	)		(9,365	)
Treasury stock–33,092,059 shares in 2016 and 33,340,301 shares in 2015		(359,581	)		(362,784	)
Total shareholders’ equity		286,641			279,394

Total liabilities and shareholders’ equity	$	286,641		$	279,394

STATEMENT OF INCOME

	Year Ended December 31
	2016			2015			2014
Total income	$	35		$	34		$	20
Total expenses		955			833			974
Loss before income taxes		(920	)		(799	)		(954	)
Income tax benefit		(367	)		(318	)		(377	)
Loss before equity in earnings of subsidiary		(553	)		(481	)		(577	)
Equity in earnings of subsidiary		17,507			14,658			15,242

Net income	$	16,954		$	14,177		$	14,665

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2016

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

15. Condensed Parent Company Only Financial Statements (continued)

STATEMENT OF TOTAL COMPREHENSIVE INCOME

	Year Ended December 31
	2016			2015			2014
Net income	$	16,954		$	14,177		$	14,665
Other comprehensive income (loss), net of income taxes:
Defined benefit pension plans:
Unrecognized gain (loss) and net prior service costs, net of deferred income taxes of $(503) in 2016, $2,576 in 2015, and $(5,328) in 2014		(754	)		3,863			(7,992	)
Curtailment gain on plan amendment, net of deferred income taxes of $409		–			614			–
		(754	)		4,477			(7,992	)
Unrealized holding gains:
Change in net unrealized gains and losses on securities available-for-sale, net of deferred income taxes of $(695) in 2016, $(1,815) in 2015,and $(512) in 2014		(1,037	)		(2,706	)		(764	)
Reclassification adjustment for gain on securities included in income, net of income taxes of $(41)		–			–			(61	)
		(1,037	)		(2,706	)		(825	)
Interest rate swaps:
Change in net unrealized gain on interest rate swaps, net of deferred income taxes of $11		17			–			–
Total other comprehensive income (loss), net of income taxes		(1,774	)		1,771			(8,817	)

Total comprehensive income	$	15,180		$	15,948		$	5,848

STATEMENT OF CASH FLOWS

	Year Ended December 31
	2016			2015			2014
Operating activities:
Net income	$	16,954		$	14,177		$	14,665
Adjustment to reconcile net income to net cash provided by operating activities:
Equity in earnings of subsidiary		(17,507	)		(14,658	)		(15,242	)
Stock-based compensation		144			130			163
Other operating activities		(368	)		(310	)		(434	)
Net cash used by operating activities		(777	)		(661	)		(848	)
Investing activities:
Dividends from Bank subsidiary		11,275			24,852			14,063
Net cash provided by investing activities		11,275			24,852			14,063
Financing activities:
Cash dividends		(9,803	)		(8,760	)		(6,984	)
Proceeds from exercise of stock options		720			730			20
Purchases of treasury stock		(221	)		(10,545	)		–
Other financing activities		929			704			376
Net cash used in financing activities		(8,375	)		(17,871	)		(6,588	)
Increase in cash and cash equivalents		2,123			6,320			6,627
Cash and cash equivalents at beginning of year		23,873			17,553			10,926

Cash and cash equivalents at end of year	$	25,996		$	23,873		$	17,553

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

Not applicable.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

The management of the Company, including its Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded as of December 31, 2016, that the disclosure controls and procedures were effective.

Change in Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the final fiscal quarter of the year to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

The internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. The Company’s management, including its Chief Executive Officer and Chief Financial Officer, has assessed the effectiveness of its internal control over financial reporting as of December 31, 2016, based on the criteria established in “Internal Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based upon its assessment and those criteria, management believes that as of December 31, 2016, the Company’s internal control over financial reporting was effective.

Deloitte & Touche LLP, the Company’s independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as a part of its audit, has audited the effectiveness of the Company’s internal control over financial reporting. That report can be found on the following page as part of this Item 9A.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Bank Mutual Corporation

Milwaukee, Wisconsin

We have audited the internal control over financial reporting of Bank Mutual Corporation and subsidiaries (the "Company") as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on that risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2016, of the Company and our report dated March 6, 2017, expressed an unqualified opinion on those consolidated financial statements.

/s/ Deloitte & Touche LLP

Milwaukee, Wisconsin

March 6, 2017

Item 9B. Other Information

Not applicable.

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Part III

Item 10. Directors, Executive Officers, and Corporate Governance

Information in response to this item is incorporated herein by reference to “Election of Directors and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive Proxy Statement for its Annual Meeting of Shareholders on May 1, 2017 (the “2017 Annual Meeting Proxy Statement”).

The following table lists the executive officers of the Company and the Bank as of March 6, 2017.

Name and Age	Officers and Positions with the Company and the Bank (1)	Executive Officer Since

David A. Baumgarten, 66	Chief Executive Officer since 2013 and President since 2010	2010

Michael W. Dosland, 57	Senior Vice President and Chief Financial Officer; Principal Financial Officer of the Company (2)	2008

James P. Carter, 59	Vice President and Secretary of the Company; Vice President Corporate Counsel of the Bank	2009

Richard L. Schroeder, 59	Vice President – Controller; Principal Accounting Officer of the Company,	2009

	Officers and Positions with the Bank (1)

Joseph W. Fikejs, 46	Senior Vice President and Chief Operating Officer since 2015; previously, Vice President of Finance and Operations of Bergstrom Corporation from 2010 to 2015	2015

Gregory A. Larson, 62	Senior Vice President – Director of Commercial Banking since 2010	2011

Patrick W. Lawton, 54	Senior Vice President – Investment Real Estate since 2013; formerly Senior Vice President – Real Estate of BMO Harris Bank (M&I Bank)	2014

Christopher L. Mayne, 52	Senior Vice President – Chief Credit Officer since 2011	2011

Terri M. Pfarr, 56	Senior Vice President – Human Resources since 2014, and its Vice President – Human Resources from 2013 to 2015; formerly Director of Human Resources for ACC Holding, Inc.	2014

Lawrence L. Turner, 55	Senior Vice President – Residential Lending since 2016; previously its Vice President – Residential Regional Sales Manager in 2015; formerly Vice President – Regional Residential Sales Manager for Johnson Bank (3)	2017

Kimberlie D. Weekley, 46	Senior Vice President, Director of Retail Banking and Sales since 2014; previously, Vice President – Market Manager of BMO Harris Bank (M&I Bank)	2014

(1)

Excluding directorships and executive positions with the Bank’s subsidiaries, which positions do not constitute a substantial part of the officers’ duties. Includes other positions held in the past five years, if the individuals have not held their current positions for that entire period.

(2)

Mr. Dosland was President and Chief Executive Officer of Vantus Bank and First Federal Bankshares from 2006 to August 2008. In September 2009, Vantus Bank was closed by the Office of Thrift Supervision, and the FDIC was appointed as Vantus’ receiver. Those events occurred more than one year after Mr. Dosland left his positions with Vantus Bank.

(3)

Mr. Turner was initially designated as an executive officer by the Bank’s board of directors in February 2017.

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Item 11. Executive Compensation

Information in response to this item is incorporated by reference to “Election of Directors—Board Meetings and Committees—Compensation Committee Interlocks and Insider Participation,” “Directors' Compensation,” “Compensation Discussion and Analysis,” “Compensation Committee Report on Executive Compensation,” “Executive Compensation,” and “Risk Management and Compensation” in the 2017 Annual Meeting Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information in response to this item is incorporated by reference to “Security Ownership of Certain Beneficial Owners” in the 2017 Annual Meeting Proxy Statement.

The following chart gives aggregate information regarding grants under all equity compensation plans of the Company through December 31, 2016.

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants, and rights		Weighted-average exercise price of outstanding options, warrants, and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in 1st column)

2004 Stock Incentive Plan approved by shareholders		1,162,300	$	5.4557		None
2014 Incentive Compensation Plan approved by shareholders		141,134		6.7175		2,492,600
Equity compensation plans not approved by security holders		None		None		None

Total		1,303,434	$	5.5923		2,492,600

Item 13. Certain Relationships and Related Transactions, and Director Independence

Information in response to this item is incorporated by reference to “Election of Directors—Board Meetings and Committees” and “Certain Transactions and Relationships with the Company” in the 2017 Annual Meeting Proxy Statement.

Item 14. Principal Accountant Fees and Services

Information in response to this item is incorporated by reference to “Independent Registered Public Accounting Firm” in the 2017 Annual Meeting Proxy Statement.

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Part IV

Item 15. Exhibits, Financial Statement Schedules

(a)

Documents filed as part of the Report:

1. and 2. Financial Statements and Financial Statement Schedules.

The following consolidated financial statements of the Company and subsidiaries are filed as part of this report under “Item 8. Financial Statements and Supplementary Data”:

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

Consolidated Statements of Financial Condition—As of December 31, 2016 and 2015.

Consolidated Statements of Income—Years Ended December 31, 2016, 2015, and 2014.

Consolidated Statements of Total Comprehensive Income—Years Ended December 31, 2016, 2015, and 2014.

Consolidated Statements of Equity—Years Ended December 31, 2016, 2015, and 2014.

Consolidated Statements of Cash Flows—Years Ended December 31, 2016, 2015, and 2014.

Notes to Consolidated Financial Statements.

All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.

(b) Exhibits. Refer to the Exhibit Index following the signature page of this report, which is incorporated herein by reference. Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this report is identified in the Exhibit Index by an asterisk following its exhibit number.

Item 16. Form 10-K Summary

None

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	BANK MUTUAL CORPORATION
March 6, 2017

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

_________________

POWER OF ATTORNEY

Each person whose signature appears below hereby authorizes David A. Baumgarten, Michael W. Dosland, Richard L. Schroeder or any of them, as attorneys-in-fact with full power of substitution, to execute in the name and on behalf of such person, individually, and in each capacity stated below or otherwise, and to file, any and all amendments to this report.

________________

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.*

Signature and Title

/s/ David A. Baumgarten		/s/ Thomas H. Buestrin
David A. Baumgarten, President, Chief Executive Officer, and Director (Principal Executive Officer)		Thomas H. Buestrin, Director

/s/ Michael W. Dosland		/s/ Mark C. Herr
Michael W. Dosland, Senior Vice President and Chief Financial Officer (Principal Financial Officer)		Mark C. Herr, Director

/s/ Richard L. Schroeder		/s/ Lisa A. Mauer
Richard L. Schroeder, Vice President and		Lisa A. Mauer, Director
Controller (Principal Accounting Officer)

/s/ Michael T. Crowley, Jr.		/s/ William J. Mielke
Michael T. Crowley, Jr., Chairman and Director		William J. Mielke, Director

/s/ David C. Boerke		/s/ Robert B. Olson
David C. Boerke, Director		Robert B. Olson, Director

/s/ Richard A. Brown		/s/ Michael I. Shafir
Richard A. Brown, Director		Michael I. Shafir, Director

Each of the above signatures is affixed as of March 6, 2017.

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BANK MUTUAL CORPORATION

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

Commission File No. 000-32107

EXHIBIT INDEX
TO
2016 REPORT ON FORM 10-K

The following exhibits are filed with, or incorporated by reference in, this Report on Form 10-K for the year ended December 31, 2016:

Exhibit	Description	Incorporated Herein by Reference To	Filed Herewith

3(i)	Restated Articles of Incorporation, as last amended May 29, 2003, of Bank Mutual Corporation (the “Articles”)	Exhibit 3(i) to the Company's Registration Statement on Form S-1, Registration No. 333-105685

3(ii)	Bylaws, as last amended May 7, 2007, of Bank Mutual Corporation	Exhibit 3.1 to the Company’s Report on Form 8-K dated May 7, 2007

4.1	The Articles	Exhibit 3(i) above

10.1*	Bank Mutual Corporation Savings Restoration Plan and Bank Mutual Corporation ESOP Restoration Plan (terminated, other than for accrued benefits)	Exhibit 10.1(b) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003

10.2*	Bank Mutual Corporation Outside Directors’ Retirement Plan	Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009

10.3*	Mutual Savings Bank Executive Excess Benefit Plan (benefits frozen) **	Exhibit 10.3 to Bank Mutual Corporation’s Registration Statement on Form S-1, Registration No. 333-39362 (“2000 S-1”)

10.4(a)*	Employment Agreement between Mutual Savings Bank and Michael T. Crowley Jr. dated December 21, 1993 (in effect only as to post-retirement matters)	Exhibit 10.5(a) to 2000 S-1

10.4(b)*	Amendment thereto dated February 17, 1998	Exhibit 10.5(b) to 2000 S-1

10.5*	Form of Employment Agreement (with Messrs. Dosland, Fikejs, Larson, Mayne, Lawton, and certain other executive officers; continuing through 2017)	Exhibit 10.6(c) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (“2010 10-K”)

10.6*	Employment Agreement of Mr. Baumgarten with Bank Mutual dated as of April 5, 2010 (continuing through 2018)	Exhibit 10.1 to the Company’s Report on Form 8-K dated April 5, 2010

105

Exhibit	Description	Incorporated Herein by Reference To	Filed Herewith

10.7(a)*	Non-Qualified Deferred Retirement Plan for Directors of First Northern Savings Bank	Exhibit 10.10(a) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000

10.7(b)*	Amendment No. 1 thereto	Exhibit 10.3.2 to First Northern Capital Corp.’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998

10.8(a)*	Bank Mutual Corporation 2004 Stock Incentive Plan (superseded)	Appendix A to Proxy Statement for 2004 Annual Meeting of Shareholders

10.8(b)*	Form of Bank Mutual Corporation Director Stock Option Agreement thereunder (superseded)	Exhibit 10.11(b)(ii) to the 2010 10-K

10.8(c)(i)*	Form of Option Agreement thereunder—Bank Mutual Corporation Incentive Stock Option Agreement (superseded)	Exhibit 10.1(c ) to the Company’s Report on Form 10-Q for the quarter ended June 30, 2004

10.8(c)(ii)*	2010 updated Form of Bank Mutual Corporation Incentive Stock Option Agreement (superseded)	Exhibit 10.11(c )(ii) to the 2010 10-K

10.8(c)(iii)*	2012 alternate Form of Bank Mutual Corporation Incentive Stock Option Agreement (superseded)	Exhibit 10.10(c)(iii) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011

10.9(a)*	Bank Mutual Corporation 2014 Incentive Compensation Plan (the “2014 Plan”)	Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014

	Forms of Award Agreements under the 2014 Plan:

10.9(b)*	Form of Incentive Stock Option Agreement (standard)	Exhibit 10.2(a) to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (“6/30/14 10-Q”)

10.9(c)*	Form of Incentive Stock Option Agreement (for Mr. Baumgarten)	Exhibit 10.2(b) to 6/30/14 10-Q

10.9(d)*	Form of Director Stock Option Agreement	Exhibit 10.2(c) to 6/30/14 10-Q

10.9(e)*	Form of Restricted Stock award (standard)	Exhibit 10.2(d) to 6/30/14 10-Q

10.9(f)*	Form of Restricted Stock Award (for Mr. Baumgarten)	Exhibit 10.2(e) to 6/30/14 10-Q

10.9(g)*	Form of Restricted Stock Award (for directors)	Exhibit 10.2(f) to 6/30/14 10-Q

106

Exhibit	Description	Incorporated Herein by Reference To	Filed Herewith

10.10*	Bank Mutual Corporation Management Incentive Compensation Plan	Exhibit 10.11(b) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015

10.11	Agreement dated February 22, 2016 among the Company and Clover Partners, L.P. MHC Mutual Conversion Fund, L.P., Clover Investment, L.L.C., and Johnny Guerry	Exhibit 10.1 to the Company’s Report on Form 8-K dated February 22, 2016

21.1	List of Subsidiaries		X

23.1	Consent of Deloitte & Touche LLP		X

24.1	Powers of Attorney	Signature Page of this Report

31.1	Sarbanes-Oxley Act Section 302 Certification signed by the Chairman and Chief Executive Officer of Bank Mutual Corporation		X

31.2	Sarbanes-Oxley Act Section 302 Certification signed by the Senior Vice President and Chief Financial Officer of Bank Mutual Corporation		X

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

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

101

The following materials are provided from Bank Mutual Corporation’s Annual Report on Form 10-K for the year ended December 31, 2016, formatted in Extensible Business Reporting Language (“XBRL”): (i) the Unaudited Condensed Consolidated Statements of Financial Condition, (ii) Unaudited Condensed Consolidated Statements of Income, (iii) Unaudited Condensed Consolidated Statements of Equity, (iv) Unaudited Condensed Consolidated Statements of Cash Flow, and (v) Notes to Unaudited Condensed Consolidated Financial Statements tagged as blocks of text.

101.INS	XBRL Instance Document	X

101.SCH	XBRL Taxonomy Extension Schema Document	X

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	X

107

Exhibit	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

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

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

108