Bank Mutual : Report Net Income for the First Quarter of 2017

Bank Mutual Corporation (NASDAQ: BKMU) reported net income of $3.6 million or $0.08 per diluted share in the first quarter of 2017 compared to $4.5 million or $0.10 per diluted share in the same quarter of last year. This decrease was largely due to a $717,000 provision for loan loss in the 2017 quarter compared to a recovery of $573,000 in the same quarter of last year. Also contributing were lower loan-related fees, lower brokerage, advisory, and insurance revenue, lower mortgage banking revenue, and higher compensation- and occupancy-related expenses. These developments were largely offset by an improvement in net interest income, lower deposit insurance premiums, and lower other non-interest expense.

David A. Baumgarten, President and Chief Executive Officer of Bank Mutual, commented, "Absent the tax-effected change in our provision for loan loss, we believe our earnings in the first quarter would have been comparable to the prior year." He added, "We are certainly pleased with the improvement in our net interest income, which was driven by continued growth in our earning assets and modest expansion of our net interest margin, excluding the consideration of call premiums in prior periods." He continued, "However, we are less than satisfied with the decline in revenue from our mortgage banking and brokerage, advisory, and insurance lines of business." Baumgarten concluded, "We have recently taken actions to reverse the trend for these revenue sources and we remain optimistic about the future."

Bank Mutual's net interest income increased by $904,000 or 5.1% during the first quarter of 2017 compared to the same quarter in 2016. Included in the prior-year quarter was a $482,000 call premium that Bank Mutual received on a mortgage-related security that was called during that period. Excluding this call premium, net interest income in the first quarter of 2017 increased by $1.4 million or 8.1% compared to the same quarter in 2016. Most of this increase was due to an increase in Bank Mutual's average earning assets, which increased by $157.7 million or 6.9% during the three months ended March 31, 2017, compared to the same period in 2016. This increase was primarily attributable to an increase in average loans receivable. Contributing to a lesser degree to the increase in net interest income in the 2017 period was an improvement in Bank Mutual's net interest margin, excluding the impact of the aforementioned

call premium in the 2016 period. Finally, contributing to the increase in net interest income was an increase in funding from non-interest bearing checking accounts.

Bank Mutual's net interest margin was 3.02% during the first quarter of 2017 compared to 2.99% during the first quarter of 2016 (excluding eight basis points of benefit related to the aforementioned call premium). In recent months management has noted that Bank Mutual's net interest margin has begun to improve modestly. Specifically, the 3.02% net interest margin in the first quarter of 2017 compares to 3.00% in the fourth quarter of 2016 (also excluding three basis points related to a call premium in that quarter). Management has observed in recent months that increases in the yield on Bank Mutual's earning assets have been slightly greater than the increases in its cost of funds. This has occurred in an environment of rising interest rates, due in part to recent increases in the fed funds rate by the Federal Reserve. Management attributes the modest increases in Bank Mutual's net interest margin to an overall interest rate risk exposure that it is slightly asset sensitive. That is, management believes that the sensitivity of Bank Mutual's earning assets to changes in market interest rates is slightly greater than its interest-bearing liabilities. As such, management anticipates that Bank Mutual's net interest margin may continue to show slight improvement in the foreseeable future, although there can be no assurances.

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

Bank Mutual's provision for loan losses was $717,000 in the first quarter of 2017 compared to a recovery of $573,000 in the same quarter last year. Management believes that general economic, employment, and real estate conditions have remained relatively stable in Bank Mutual's local markets. However, Bank Mutual has experienced a modest increase in its non-performing and other classified loans in recent months, as noted later in this release. Management believes that this development could be an early indication of emerging difficulties in the lending environment. This consideration, along with growth in Bank Mutual's loan portfolio, has contributed to management's conclusion that increases in the allowance for loan losses are appropriate. As such, Bank Mutual's allowance for loan losses increased from $19.9 million at December 31, 2016, to $20.6 million at March 31, 2017. Management anticipates that Bank

Mutual's provision for loan losses will continue to consist of provisions rather than recoveries for the foreseeable future, particularly if Bank Mutual's loan portfolio continues to grow.

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

Deposit-related fees and charges declined by $51,000 or 1.8% during the three months ended March 31, 2017, compared to the same period in the previous year. Deposit-related fees and charges consist of overdraft fees, ATM and debit card fees, merchant processing fees, account service charges, and other revenue items related to services performed by Bank Mutual for its retail and commercial deposit customers. Management attributes the decline in deposit-related fees and charges to changes in customer spending behavior in recent periods which has resulted in lower revenue from overdraft charges and ATM usage. These developments have been partially offset by increased deposit account service charges and increased treasury management fees from commercial depositors.

Loan-related fees were $851,000 during the three months ended March 31, 2017, compared to

$1.3 million during the same period in 2016. The largest source of fees in this revenue category is interest rate swap fees related to commercial loan relationships. Bank Mutual mitigates the interest rate risk associated with certain of its loan relationships by executing interest rate swaps, the accounting for which results in the recognition of a certain amount of fee income at the time the swap contracts are executed. The decrease in loan-related fees was principally due to reduced originations of multi-family, commercial real estate, and construction loans, which are the types of loans that generate most of Bank Mutual's interest rate swap fees. Management anticipates that originations of these types of loans in 2017 will continue to be lower than they were in 2016 for the reason noted later in this release.

Brokerage, advisory, and insurance revenue was $652,000 during the first quarter of 2017, which was $215,000 or 24.8% lower than the same quarter in the previous year. This revenue item generally consists of commissions earned on sales of tax-deferred annuities, mutual funds, and certain other securities, fees earned for investment advisory services, and commissions earned on sales of personal and business insurance products. Management attributes the decrease in this revenue line item to reduced commissions from sales of tax-deferred annuities and other sources of transaction-based income. In recent periods management has begun to shift the mix of revenue in this line of business from commission income, which tends to be transaction-based, to advisory fee income, which is generally based on assets under management rather than execution of individual transactions. Management believes that advisory-based fee income will be a more stable source of revenue in the future and expects that it will continue to grow due to new products, services, systems, and investment advisors that Bank Mutual has added in recent periods, although there can be no assurances.

Mortgage banking revenue, net, was $721,000 and $825,000 during three-month periods ended March 31, 2017 and 2016, respectively. The following table presents the components of mortgage banking revenue, net, for the periods indicated:

Loan servicing revenue, net, was $288,000 in the first quarter of 2017 compared to $213,000 in the same period of 2016. This increase was primarily caused by a decline in amortization of mortgage servicing rights ("MSRs"). This decline was caused by generally higher market interest rates for one- to four-family loans in 2017, which has resulted in reduced loan prepayment activity and slower amortization of the related MSRs compared to the prior year. The favorable impact of this development was partially offset by a decline in gross servicing fees due to an overall decline in loans serviced for third-party investors. As of March 31, 2017, Bank Mutual serviced $985.4 million in loans for third-party investors compared to $1.03 billion one year earlier.

The change in valuation allowance that Bank Mutual establishes against its MSRs is recorded as a recovery or loss, as the case may be, in the period in which the change occurs. As of March 31, 2017, Bank Mutual had no valuation allowance against its MSRs, which had a carrying value of $6.5 million as of that date. MSR valuation allowances typically increase in periods of lower market interest rates, which results in a charge to earnings in the period of the increase. During such periods loan refinance activity and expectations for future loan prepayments typically increase, which generally reduces the fair value of MSRs and could result in an increase in the MSR valuation allowance. However, in recent months market interest rates for one- to four- family loans have increased. As such, there was no requirement for an MSR valuation allowance as of March 31, 2017, and management does not expect one to be necessary in the near future. In addition, management expects that amortization of MSRs may continue to be lower in the near term in response to reduced levels of loan refinance activity. However, these developments cannot be assured, particularly if market interest rates for one- to four-family residential loans decline in the future.

Gain on loan sales activities, net, was $433,000 and $612,000 during the three-month periods ended March 31, 2017 and 2016, respectively. Bank Mutual typically sells most of the fixed- rate, one- to four-family mortgage loans that it originates. The decrease in net gain on loan sales was primarily caused by an unfavorable mark-to-market adjustment on loans held for sale, which declined during the period. Market interest rates for one- to four-family loans have been higher in recent months, which is a development that typically has an adverse impact on the origination and sale of such loans. Despite this possibility, management believes that Bank Mutual's origination and sales of one- to four-family loans could improve in the near term due to