Item 1. Business
The discussion in this section should be read in conjunction with “Item 1A.
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.
Item 1B. Unresolved Staff Comments
None.
Item 2.
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.
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.
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.
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:
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.
Item 6.
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.
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.
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.
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.
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.
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
Refer to Notes to Consolidated Financial Statements
Bank Mutual Corporation and Subsidiaries
Consolidated Statements of Income
Refer to Notes to Consolidated Financial Statements
Bank Mutual Corporation and Subsidiaries
Consolidated Statements of Total Comprehensive Income
Refer to Notes to Consolidated Financial Statements
Bank Mutual Corporation and Subsidiaries
Consolidated Statements of Equity
Refer to Notes to Consolidated Financial Statements
Bank Mutual Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(continued)
Bank Mutual Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
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.
Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on loans, the fair value of underlying collateral (if any), estimated losses on pools of homogeneous loans based on historical loss experience, changes in risk characteristics of the loan portfolio, and consideration of current economic trends, all of which may be susceptible to significant change.
Mortgage Servicing Rights Mortgage servicing rights are recorded as an asset when loans are sold with servicing rights retained. The total cost of loans sold is allocated between the loan balance and their servicing asset based on their relative fair values. The capitalized value of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net future servicing revenue. Mortgage servicing rights are carried at the lower of the initial carrying value, adjusted for amortization, or estimated fair value. The carrying values are periodically evaluated for impairment. For purposes of measuring impairment, the servicing rights are stratified into pools based on term and interest rate. Impairment represents the excess of the remaining capitalized cost of a stratified pool over its fair value, and is recorded through a valuation allowance. The fair value of each servicing rights pool is calculated based on the present value of estimated future cash flows using a discount rate, given current market conditions. Estimates of fair value include assumptions about prepayment speeds, interest rates and other factors which are subject to change over time. Changes in these underlying assumptions could cause the fair value of mortgage servicing rights, and the related valuation allowance, if any, to change significantly in the future.
Derivative Financial Instruments 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:
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:
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:
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
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).
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 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):
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)
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):
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)
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):
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)
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.
The following table shows the estimated future amortization expense for mortgage servicing rights for the years ended December 31:
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:
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.
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:
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:
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:
7. Borrowings
Borrowings consist of the following:
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.
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:
The following table summarizes the components of accumulated other comprehensive loss, net of related income tax effects, as of the dates shown:
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.
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.
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:
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:
The assumptions used to determine the net cost for the years ended December 31 is as follows:
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:
At December 31, 2016, the projected benefit payments for each of the plans are as follows:
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:
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.
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.
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.
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:
Income tax expense differs from the provision computed at the federal statutory corporate rate as follows:
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:
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:
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.
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:
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.
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.
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
STATEMENT OF INCOME
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
STATEMENT OF CASH FLOWS
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A.
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.
Item 9B. Other Information
Not applicable.
Part III
Item 10.
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
Michael W. Dosland, 57
Senior Vice President and Chief Financial Officer; Principal Financial Officer of the Company (2)
James P. Carter, 59
Vice President and Secretary of the Company; Vice President Corporate Counsel of the Bank
Richard L. Schroeder, 59
Vice President - Controller; Principal Accounting Officer of the Company,
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
Gregory A. Larson, 62
Senior Vice President - Director of Commercial Banking since 2010
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)
Christopher L. Mayne, 52
Senior Vice President - Chief Credit Officer since 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.
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)
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)
(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.
Item 11.
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.
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.
Item 13.
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.
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.
Part IV
Item 15.
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
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.
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
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
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
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
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.”