Bank Mutual Corporation Reports Increase in Net Income for the Second Quarter of 2017

MILWAUKEE, July 20, 2017 (GLOBE NEWSWIRE) -- Bank Mutual Corporation BKMU reported net income of $4.2 million or $0.09 per diluted share in the second quarter of 2017 compared to $3.9 million or $0.09 per diluted share in the same quarter of last year.  Year-to-date in 2017, Bank Mutual Corporation ("Bank Mutual") reported net income of $7.8 million or $0.17 per diluted share compared to $8.4 million or $0.18 per diluted share in the same six-month period in 2016.  The 2017 periods were favorably impacted by higher net interest income, a gain on sale of real estate held for investment, lower advertising and marketing expenses, and a reduced level of other non-interest expenses.  In addition, the second quarter of 2017 benefited from a lower provision for loan losses compared to the same quarter in 2016.  These developments were partially offset by lower deposit-related fees, reduced mortgage banking revenue, and a decrease in loan-related fees in the 2017 periods compared to the same periods in 2016.  In addition, the 2017 periods were impacted by higher compensation and benefit expenses, increased occupancy and data processing costs, and increased losses and expenses related to foreclosed real estate.  Finally, the 2017 year-to-date period was also impacted by lower brokerage, advisory, and insurance revenue and a higher provision for loan losses compared to the same six-month period in 2016.

Bank Mutual also announced today that it has entered into a definitive merger agreement with Associated Banc-Corp ASB.  Please refer to the separate joint press release of Associated Banc-Corp and Bank Mutual for more information regarding this definitive merger agreement.

David A. Baumgarten, President and Chief Executive Officer of Bank Mutual, commented, "We are pleased with the continued improvement in our net interest income, which was led by a combination of loan growth and modest expansion of our net interest margin."  He added, "We are particularly gratified with the growth in our commercial and industrial loan portfolio, which has increased by 8.1% so far in 2017 and is up over 12% over the past twelve months."  Mr. Baumgarten continued, "However, the decline in our non-interest income in recent periods continues to pose a challenge for us, as do recent increases in our non-interest expenses."  He concluded, "We are committed to improving our performance in each of these important areas." 

Bank Mutual's net interest income increased by $1.5 million or 8.7% and $2.4 million or 6.9% during the three- and six-month periods ended June 30, 2017, respectively, compared to the same periods in 2016.  Included in the year-to-date period in 2016 was a $482,000 call premium that Bank Mutual received on a mortgage-related security that was called in the first quarter of that year.  Excluding this call premium, net interest income in the first six months of 2017 increased by $2.9 million or 8.4% compared to the same period in 2016.  Most of this increase was caused by an increase in Bank Mutual's average earning assets, which increased by $137.0 million or 5.9% during the six months ended June 30, 2017, compared to the same period in 2016.  This increase was primarily attributable to an increase in average loans receivable.  Also contributing to the increase in net interest income in the 2017 periods was an improvement in Bank Mutual's net interest margin, excluding the impact of the aforementioned call premium in the first quarter of 2016.  Finally, an increase in funding from non-interest bearing checking accounts also contributed to the increase in net interest income in the 2017 periods. 

Bank Mutual's net interest margin was 3.05% and 3.04% during the three- and six-month periods ended June 30, 2017, respectively, which compared to 2.95% and 2.97% during the same periods in 2016 (excluding four basis points of benefit related to the aforementioned call premium in the first quarter of 2016).  In recent periods management has noted that Bank Mutual's net interest margin has begun to improve modestly.  Specifically, the 3.05% net interest margin in the second quarter of 2017 compared to 3.02% in the first quarter of 2017 and 3.00% in the fourth quarter of 2016 (also excluding three basis points related to a call premium in that quarter).  Management has observed in recent periods that increases in the yield on Bank Mutual's earning assets have been slightly greater than the increases in its cost of funds.  This has occurred in an environment of rising interest rates, due in part to recent increases in the fed funds rate by the Federal Reserve.  Management attributes the modest increases in Bank Mutual's net interest margin to an overall interest rate risk exposure that it is slightly asset sensitive.  That is, management believes that the sensitivity of Bank Mutual's earning assets to changes in market interest rates is slightly greater than its interest-bearing liabilities.  As such, management anticipates that Bank Mutual's net interest margin may continue to show slight improvement in the immediate future, although there can be no assurances. 

Bank Mutual's net interest margin is subject to competitive pricing pressures for loans and deposits, changes in borrower and depositor preferences, and other economic and market factors that are outside of management's control.  Of particular concern to management are possible future changes in the competitive environment for interest rates on interest-bearing checking, savings, and money market deposit accounts.  If competitive or market pressures require Bank Mutual to increase the interest rates it pays on these deposit accounts, and such increases are not exceeded or matched by increases in the yield on its earning assets, Bank Mutual's net interest margin could be adversely impacted in future periods.  Also of concern to management are possible future changes in depositor preferences for certain types of deposit products.  Specifically, management believes that the relatively low interest rate environment that has persisted for the past few years has encouraged many deposit customers to switch to transaction deposits in an effort to retain flexibility in the event market interest rates increase.  If market interest rates continue to increase in the future, customers' preferences may shift from transaction deposits to certificates of deposit, which generally have a higher interest cost.  This development could also have an adverse impact on Bank Mutual's net interest margin in future periods.

Bank Mutual's provision for loan losses was $363,000 in the second quarter of 2017 compared to $1.2 million in the same quarter last year.  On a year-to-date basis, provision for loan losses was $1.1 million in 2017 compared to $591,000 in 2016.  During the second quarter of 2017 Bank Mutual's non-performing and other classified loans declined for reasons noted later in this release.  Primarily as a result of this improvement, Bank Mutual recorded a reduced provision for loan loss during the second quarter of 2017 compared to the same quarter in 2016.  On a year-to-date basis, the provision for loan losses was higher in 2017 compared to 2016 due principally to growth in total loans receivable, the impact of which was only partially offset by the beneficial impact of the aforementioned decrease in non-performing and other classified loans in the second quarter.

In general, management believes that overall economic, employment, and real estate conditions are relatively stable in Bank Mutual's local markets.  However, trends in the credit quality of Bank Mutual's loan portfolio are subject to many factors that are outside of Bank Mutual'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 Bank Mutual's non-performing loans, classified loans, and/or loan charge-off activity from period to period, which may result in significant variability in Bank Mutual's provision for loan losses. 

Deposit-related fees and charges declined by $85,000 or 2.9% and $136,000 or 2.4% during the three- and six-months ended June 30, 2017, respectively, compared to the same periods in the previous year.  Deposit-related fees and charges consist of overdraft fees, ATM and debit card fees, merchant processing fees, account service charges, and other revenue items related to services performed by Bank Mutual for its retail and commercial deposit customers.  Management attributes the decline in deposit-related fees and charges to changes in customer spending behavior in recent periods which has resulted in lower revenue from overdraft charges and ATM usage.  These developments have been partially offset by increased deposit account service charges and increased treasury management fees from commercial depositors. 

Mortgage banking revenue, net, was $893,000 and $1.6 million during three- and six-month periods ended June 30, 2017, respectively.  This compared to $1.1 million and $2.0 million during the same periods in 2016, respectively.  The following table presents the components of mortgage banking revenue, net, for the periods indicated:

Loan servicing revenue, net, increased during the three- and six-month periods in 2017 compared to the same periods in 2016.  These increases were primarily caused by a decline in amortization of mortgage servicing rights ("MSRs").  These declines were caused by generally higher market interest rates for one- to four-family loans in 2017, which has resulted in reduced loan prepayment activity and slower amortization of the related MSRs compared to the prior year.  The favorable impact of this development was partially offset by declines in gross servicing fees in the 2017 periods due to an overall decline in loans serviced for third-party investors.  As of June 30, 2017, Bank Mutual serviced $971.5 million in loans for third-party investors compared to $1.0 billion one year earlier.  

The change in valuation allowance that Bank Mutual establishes against its MSRs is recorded as a recovery or loss, as the case may be, in the period in which the change occurs.  As of June 30, 2017, Bank Mutual had no valuation allowance against its MSRs, which had a carrying value of $6.4 million as of that date.  MSR valuation allowances typically increase in periods of lower market interest rates, which results in a charge to earnings in the period of the increase.  During such periods loan refinance activity and expectations for future loan prepayments typically increase, which generally reduces the fair value of MSRs and could result in an increase in the MSR valuation allowance.  However, in recent periods market interest rates for one- to four-family loans have generally been higher.  As such, there was no requirement for an MSR valuation allowance as of June 30, 2017, and management does not expect one to be necessary in the near future.  In addition, management expects that amortization of MSRs may continue to be lower in the near term in response to reduced levels of loan refinance activity.  However, these developments cannot be assured, particularly if market interest rates for one- to four-family residential loans decline in the future.                 

Gain on loan sales activities, net, was $667,000 and $1.1 million during the three- and six-month periods ended June 30, 2017, respectively, compared to $1.1 million and $1.7 million during the same periods in 2016.   Bank Mutual typically sells most of the fixed-rate, one- to four-family mortgage loans that it originates.  Market interest rates for one- to four-family loans have been higher in recent periods, which is a development that typically results in lower originations and sales of such loans.  The origination and sale of residential loans is subject to variations in market interest rates and other factors outside of management's control.  Accordingly, there can be no assurances that such originations and sales will increase or will not vary considerably from period to period.

Brokerage, advisory, and insurance revenue was $886,000 during the second quarter of 2017, which was $40,000 or 4.7% higher than the same quarter in the previous year.  Year-to-date this source of revenue was $1.5 million, which was $176,000 or 10.3% lower than the same period in 2016.  This revenue item generally consists of commissions earned on sales of tax-deferred annuities, mutual funds, and certain other securities, fees earned for investment advisory services, and commissions earned on sales of personal and business insurance products.  Management attributes the recent fluctuations in this revenue line item to changes in commissions earned from sales of tax-deferred annuities and other sources of transaction-based income.  In recent periods management has begun to shift the mix of revenue in this line of business from commission income, which tends to be transaction-based, to advisory fee income, which is generally based on assets under management rather than execution of individual transactions.  Management believes that advisory-based fee income will be a more stable source of revenue in the future and expects that it will continue to grow due to new products, services, systems, and investment advisors that Bank Mutual has added in recent periods, although there can be no assurances. 

Loan-related fees were $251,000 and $1.1 million during the three and six months ended June 30, 2017, respectively.  These amounts compared to $1.6 million and $2.9 million during the same periods in 2016, respectively.  The largest source of fees in this revenue category has historically been interest rate swap fees related to commercial loan relationships.  Bank Mutual 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 decrease in loan-related fees in the 2017 periods was primarily due to reduced originations of multi-family, commercial real estate, and construction loans, which are the types of loans that generate most of Bank Mutual's interest rate swap fees. Management anticipates that originations of these types of loans in 2017 will continue to be lower than they were in 2016.

During the second quarter of 2017 Bank Mutual recorded a $268,000 gain on the disposition of  real estate that it held for investment purposes.  No real estate held for investment was sold in the 2016 periods.  Bank Mutual continues to actively market certain of the properties that it holds for investment purposes.  There can be no assurances that Bank Mutual will be able to sell such properties for gains or that gains or losses on such sales, if any, will not fluctuate considerably from period to period.

Compensation-related expenses increased by $437,000 or 4.3% and $1.2 million or 5.8% during the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016.  These increases were due in part to normal annual merit increases granted to most employees at the beginning of 2017.  Also contributing were certain signing bonuses and commission guarantees that Bank Mutual paid to a team of four experienced residential loan originators that it recruited from another financial institution earlier in the year.  Finally, contributing to a lesser degree to the increase in compensation-related expense in the 2017 quarter was higher share-based compensation and employer 401k contributions compared to the same quarter in the prior year. 

Occupancy, equipment, and data processing expenses increased by $204,000 or 6.2% and $413,000 or 6.1% during the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016.  These increases were primarily caused by increased data processing, software, and equipment costs associated with various initiatives undertaken by Bank Mutual in recent periods.  

Advertising and marketing-related expense was $743,000 and $1.3 million during the three and six months ended June 30, 2017, respectively, compared to $970,000 and $1.6 million during the same periods in 2016.  Management anticipates that spending on advertising and marketing-related expenses during the full year 2017 will be slightly lower than it was in 2016.  However, this outcome depends on future management decisions and there can be no assurances.

Federal deposit insurance premiums were $351,000 and $383,000 during the three months ended June 30, 2017 and 2016, respectively.  Year-to-date, these premiums were $679,000 and $805,000 in 2017 and 2016, respectively.  In 2016 the Federal Deposit Insurance Corporation ("FDIC") implemented a new rule that changed how insured financial institutions less than $10 billion in assets, such as Bank Mutual, are assessed for deposit insurance.  The new rule has resulted in a lower deposit insurance assessment rate for Bank Mutual.   

Net losses (gains) and expenses on foreclosed real estate were $217,000 and $(131,000) during the three-month periods ended June 30, 2017 and 2016, respectively.  Net losses (gains) and expenses during the six-month periods ended as of those same dates were $271,000 and $(89,000).   In general, Bank Mutual has experienced only modest gains, losses, and expenses on foreclosed real estate in recent periods due to relatively low levels of foreclosed properties and improved market conditions.   The net loss in the second quarter was primarily caused by the sale of a larger property, the sale of which reduced Bank Mutual's total foreclosed real estate to $1.5 million at June 30, 2017, compared to $2.9 million at December 31, 2016.

Other non-interest expense was $2.2 million in the second quarter of 2017 compared to $2.3 million in the same quarter of last year.  In a year-to-date comparison, these expenses were $4.2 million in 2017 compared to $4.7 million in 2016. Other non-interest expense declined in the 2017 periods due in part to lower ATM and card processing charges compared to the same periods in 2016.  The 2016 year-to-date period also included $207,000 in prepayment penalties related to the early retirement of certain fixed-rate advances from the FHLB of Chicago in the first quarter of that year.  

In the first quarter of 2017 Bank Mutual announced that it had entered into an agreement to sell five retail branch offices, including $52.6 million in deposits and $13.2 million in loans associated with the offices, to another financial institution.  This pending sale is expected to   close in the third quarter, subject to the filing of appropriate notices with and approvals of regulatory agencies.  At the same time Bank Mutual also announced that it would consolidate two retail branch offices into other nearby locations, which was completed in the second quarter.  Consistent with its past experience consolidating retail branch offices, management of Bank Mutual believes that it will retain the majority of the deposits and loans associated with the two consolidated locations, although there can be no assurances.  These two offices had aggregate deposits and loans of $19.1 million and $9.6 million, respectively.  Management anticipates that the decisions to sell and consolidate retail branch offices will provide approximately $1.3 million in aggregate net benefit to pre-tax earnings on an annualized basis.  Also related to these decisions, Bank Mutual expects to incur one-time costs of approximately $250,000, composed primarily of asset disposition costs, employment severance costs, data processing costs, and professional fees, most of which were recorded in the first six months of 2017.  The remainder is expected to be recorded in the third quarter.

Income tax expense was $2.5 million and $2.3 million during the second quarters of 2017 and 2016, respectively, and was $4.2 million and $4.9 million during the year-to-date periods in 2017 and 2016, respectively.  The effective tax rates ("ETRs") for the quarter periods were 37.7% and 37.3%, respectively, and for the year-to-date periods were 35.1% and 36.9%, respectively.  The ETR was lower in the 2017 year-to-date period because of certain tax deductions related to the vesting of restricted stock grants and exercise of certain stock options by employees and directors earlier in the year.  Bank Mutual's ETR will also vary from period to period due to the impact of non-taxable revenue items, such as earnings from BOLI and tax-exempt interest income. 

Bank Mutual's total assets increased by $62.1 million or 2.3% during the six months ended June 30, 2017.  During this period a $60.7 million increase in loans receivable was principally funded by a $30.5 million increase in borrowings and a $25.0 million increase in deposit liabilities.  Bank Mutual's total shareholders' equity was $290.6 million at June 30, 2017, compared to $286.6 million at December 31, 2016.
       
Bank Mutual's loans receivable increased by $60.7 million or 3.1% during the three months ended June 30, 2017.  During this period increases in multi-family loans, commercial and industrial loans, and construction loans (net of the undisbursed portion) were partially offset by a decline in home equity and other consumer loans.  Contributing to a lesser degree to the increase in loans receivable were slight increases in commercial real estate loans and one- to four-family permanent loans.  The loan portfolio is subject to economic, market, competitive, and regulatory factors outside of Bank Mutual's control and there can be no assurances that expected loan growth will continue or that total loans will not decrease in future periods.

Bank Mutual's deposit liabilities increased by $25.0 million or 1.3% during the six months ended June 30, 2017.  Transaction deposits, which consist of checking, savings, and money market accounts, increased by $9.0 million or 0.7% during the period and certificates of deposit increased by $16.0 million or 3.1%.  As previously noted in this release, if market interest rates continue to increase in the future, competitive or market pressures could require Bank Mutual to increase the interest rates it pays on its transaction deposit accounts.  In addition, customer preference may shift from transaction deposits to certificates of deposit, which typically offer a higher rate of interest to the customer.  These developments could increase Bank Mutual's cost of funds in the future, which will have an adverse impact on its net interest margin.  In recent periods management has noted that balances in customers' money market accounts have declined.  During the first six months of 2017 such balances declined by $16.2 million or 2.9%.  If this trend continues, Bank Mutual may be required to raise the rates it offers on such accounts, which will have an adverse impact on its net interest margin, as previously noted.

Bank Mutual's shareholders' equity was $290.6 million at June 30, 2017, compared to $286.6 million at December 31, 2016.  This increase was primarily due to $7.8 million in net income that was partially offset by $5.1 million in regular cash dividends.  Also contributing to the increase was periodic amortization related to share-based compensation and the issuance of treasury shares on stock option exercises.  The book value of Bank Mutual's common stock was $6.33 per share at June 30, 2017, compared to $6.27 at December 31, 2016.     

Bank Mutual's non-performing loans were $7.5 million or 0.38% of loans receivable as of June 30, 2017, compared to $8.2 million or 0.42% of loans receivable as of December 31, 2016.  Non-performing assets, which includes non-performing loans, were $9.0 million or 0.33% of total assets and $11.2 million or 0.42% of total assets as of these same dates, respectively.   Non-performing assets are classified as "substandard" in accordance with Bank Mutual's internal risk rating policy.  In addition to non-performing assets, at June 30, 2017, management was closely monitoring $57.9 million in additional loans that were classified as either "special mention" or "substandard" in accordance with Bank Mutual's internal risk rating policy.  This amount compared to $68.6 million at December 31, 2016.  As of June 30, 2017, most of Bank Mutual's 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 June 30, 2017, although there can be no assurances that the loans will not become impaired in future periods.  The decline in additional classified loans in 2017 was primarily caused by a larger commercial real estate loan relationship that Bank Mutual upgraded during the period due to the improved financial and operating condition of the borrower.

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

Bank Mutual's allowance for loan losses was $21.0 million or 1.05% of total loans at June 30, 2017, compared to $19.9 million or 1.03% of total loans at December 31, 2016.  As a percent of non-performing loans, Bank Mutual's allowance for loan losses was 278.2% at June 30, 2017, compared to 242.5% at December 31, 2016.  Management believes the allowance for loan losses at June 30, 2017, was adequate to cover probable and estimable losses in Bank Mutual's loan portfolio as of that date.  However, future increases to the allowance may be necessary and results of operations could be adversely affected if future conditions differ from the assumptions used by management to determine the allowance for loan losses as of the end of the period. 

Bank Mutual Corporation's stock is quoted on the NASDAQ Global Select Market under the ticker BKMU.  As of June 30, 2017, its subsidiary bank operated 62 banking locations in Wisconsin and one in Minnesota.  After the sale of five retail branch offices discussed in this release is completed, its subsidiary bank will operate 57 banking locations in Wisconsin and one in Minnesota.

Cautionary Statements        

This release contains or incorporates by reference various forward-looking statements concerning Bank Mutual'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," "optimistic," 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 Bank Mutual's control, that could cause Bank Mutual'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 Bank Mutual:  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; regulatory actions either generally or specifically related to Bank Mutual associated with safety and soundness, compliance, loan concentrations, or technology concerns that could restrict Bank Mutual's freedom of operations; 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 Bank Mutual or the Bank; increased competition and/or disintermediation within the financial services industry; changes in tax rates, deductions and/or policies; potential further changes in 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; Bank Mutual'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 Bank Mutual's filings with the Securities and Exchange Commission, particularly under Part I, Item 1A, "Risk Factors," of Bank Mutual's 2016 Annual Report on Form 10-K.

CONTACTS:  
Bank Mutual Corporation
David A. Baumgarten
President and Chief Executive Officer 
or 
Michael W. Dosland
Senior Vice President and Chief Financial Officer
(414) 354-1500