Bank Mutual Corporation Reports Higher Net Income For The Three And Six Months Ended June 30, 2012

MILWAUKEE, July 19, 2012 /PRNewswire/ -- Bank Mutual Corporation (NASDAQ: BKMU) reported net income of $1.3 million or $0.03 per diluted share in the second quarter of 2012 compared to a net loss of $51.4 million or $1.12 per diluted share in the same quarter of 2011.  Year-to-date, Bank Mutual Corporation ("Bank Mutual") reported net income of $2.5 million or $0.05 per diluted share in 2012 compared to a net loss of $50.3 million or $1.10 per diluted share in the same period in 2011.  The losses in the 2011 periods were caused by a $52.6 million non-cash goodwill impairment in the second quarter of that year.  Excluding this impairment, Bank Mutual's earnings during the three- and six-month periods in 2011 were $1.2 million or $0.03 per diluted share and $2.2 million or $0.05 per diluted share, respectively.   Bank Mutual also announced that its non-performing loans declined for the fifth consecutive quarter, to $50.4 million or 3.74% of loans receivable at June 30, 2012.

Michael T. Crowley, Jr., Chairman and Chief Executive Officer of Bank Mutual noted, "We are very pleased that our mortgage banking operations were able to keep up with increased customer demand for residential loans during the quarter and continue to make a significant contribution to our bottom line."  David A. Baumgarten, President of Bank Mutual, added, "We are also pleased that loans we originate for our portfolio continued to grow, which generated a meaningful increase in our loan portfolio during the quarter.  We believe this success is due in large part to the enhancements we have made in our commercial line of business over the past year or so."  Mr. Baumgarten continued, "We are also pleased that we continued to make progress reducing the bank's level of non-performing loans.  We remain optimistic that problem loans will continue to trend lower in the near term."       

Bank Mutual's net interest income decreased by $1.3 million or 7.8% and by $2.2 million or 6.8% during the three and six months ended June 30, 2012, compared to the same periods in 2011. These decreases were primarily attributable to a decline in Bank Mutual's net interest margin, which was 2.47% and 2.56% during the three- and six-month periods of 2012, respectively, compared to 2.82% in each of the 2011 periods.  These declines were primarily the result of a lower interest rate environment during the first six months of 2012 compared to the same period in 2011, which reduced the return on Bank Mutual's earning assets more than the cost of its funding sources.  This development was partially offset by the favorable impact of higher earning assets in the 2012 periods compared to the same periods of 2011.  During the first six months of 2012 Bank Mutual completed the purchase of $158.9 million in mortgage-related securities that were funded by $158.9 million in term advances from the Federal Home Loan Bank ("FHLB") of Chicago.  These investments consisted of mortgage-backed securities issued and guaranteed by the Federal National Mortgage Association ("Fannie Mae") and secured by multi-family residential loans.  The securities have a weighted-average life of 7.7 years, a yield of 2.31%, and yield-maintenance fees that discourage the underlying borrowers from prepaying the loans.  The term advances from the FHLB of Chicago have a weighted-average life of 5.5 years and cost of 1.47%.  The purpose of this transaction was to supplement growth in Bank Mutual's earning assets.  Bank Mutual classified these securities as held-to-maturity because it has the ability and intent to hold them until they mature.

Bank Mutual's provision for loan losses was $1.7 million in the second quarter of 2012 compared to $805,000 in the same quarter last year.  The provision for the six months ended June 30, 2012, was $1.8 million compared to $4.0 million in the same period last year.  During the second quarter of 2012 Bank Mutual recorded additional loss provision of $1.2 million against a number of smaller multi-family, commercial real estate, and business loan relationships, as well as residential and consumer loans.  In addition, during the quarter Bank Mutual recorded $507,000 in additional loss provision related primarily to growth in its loan portfolio during the period.   

During the second quarter of 2011, Bank Mutual recorded $1.8 million in additional loss provision against two unrelated commercial real estate loan relationships that aggregated $6.7 million and recorded $1.5 million in loss provision against a number of smaller multi-family, commercial real estate, and business loan relationships, as well as residential and consumer loans.  During the second quarter of 2011 Bank Mutual also recorded $900,000 in additional loss provision that reflected management's concerns at the time related to continuing weaknesses in housing markets and increases in unemployment.  The impact of these developments was substantially offset by $3.4 million in loss recaptures related to loans that were paid off or were upgraded to performing status during the second quarter of 2011.

On a year-to-date basis in 2012 Bank Mutual recorded additional loss provision of $2.6 million against a number of smaller multi-family, commercial real estate, and business loan relationships, as well as residential and consumer loans.  This development was partially offset by $1.2 million in loss recaptures related to non-performing loans that paid off during the period and to recoveries of previously charged-off loans.  Finally, during the year-to-date period Bank Mutual also recorded $226,000 in loss provision related primarily to growth in its loan portfolio during the period. 

On a year-to-date basis in 2011 Bank Mutual recorded $7.4 million in loss provision against a number of multi-family, commercial real estate, and business loan relationships, as well as certain smaller residential and consumer loans.  This development was partially offset by $3.4 million in loss recaptures in the second quarter of 2011, as previously described. 

Although Bank Mutual's provision for loan losses was higher in the second quarter of 2012, its losses have generally been trending lower in recent periods.  This trend is directionally consistent with recent declines in Bank Mutual's non-performing loans and classified loans, as described below, and is consistent with trends in the banking industry.   It should be noted, however, that Bank Mutual's loan portfolio continues to be impacted by slow economic growth, persistent unemployment, and low real estate values.  These conditions are particularly challenging for borrowers whose loans are secured by commercial real estate, multi-family real estate, and land.  Although Bank Mutual's level of non-performing loans and credit-related losses have generally trended lower in recent periods, it remains elevated and could continue to remain elevated for the foreseeable future.

Service charges on deposits increased by $105,000 or 6.7% during the three months ended June 30, 2012, compared to the same period in 2011.  During the first six months of 2012, service charges on deposits increased by $196,000 or 6.5% compared to the same six-month period in 2011.  Management attributes these improvements to an increase in Bank Mutual's average checking accounts, which increased by $36.7 million or 12.1% during the six months ended June 30, 2012, compared to the same period in the previous year.  In addition, enhancements in recent periods to Bank Mutual's commercial deposit products and services generated increased fee revenue in the 2012 periods, particularly related to treasury management services.

Brokerage and insurance commissions were $1.0 million during the second quarter of 2012, a $132,000 or 15.9% increase from the same period in the previous year.  On a year-to-date basis, this source of revenue was $1.5 million in 2012, a $99,000 or 6.9% increase from the same period in 2011.  Management attributes these increases to improved sales efforts in this line of business, as well as a low interest rate environment, which encourages customers to purchase tax-deferred annuities due to higher rates of return on such products compared to deposit-related products.

Net loan-related fees and servicing revenue was a loss of $1.4 million during the three months ended June 30, 2012, compared to income of $333,000 in the same period of the previous year.  Net loan-related fees and servicing revenue was a loss of $1.3 million during the six months ended June 30, 2012, compared to income of $584,000 in the same period of 2011.  The following table presents the components of this income statement line item for the periods indicated: 


Three Months

Ended June 30


Six Months

Ended June 30


2012

2011


2012

2011


(Dollars in thousands)

Gross servicing fees

$747

$678


$1,440

$1,360

Mortgage servicing rights amortization

(979)

(477)


(2,022)

(993)

Mortgage servicing rights valuation (loss) recovery

(1,296)


(975)

6

    Loan servicing revenue, net

(1,528)

201


(1,557)

373

Other loan fee income

133

132


300

211

    Loan-related fees and servicing revenue, net

$(1,395)

$333


$(1,257)

$584

Amortization of mortgage servicing rights ("MSRs") increased in the 2012 periods compared to the same periods in the prior year due to lower market interest rates for one- to four-family mortgage loans, which resulted in increased loan prepayments and faster amortization of the MSRs relative to the 2011 periods.   Net loan-related fees and servicing revenue is also impacted by changes in the valuation allowance that is established against MSRs.   The change in this allowance is recorded as a recovery or loss, as the case may be, in the period in which the change occurs.   Lower market interest in 2012 resulted in higher prepayment expectations during the period, which caused increases in the MSR valuation allowance during the three- and six-month periods ended June 30, 2012.  As of June 30, 2012, Bank Mutual had a valuation allowance of $1.8 million against MSRs with a gross book value of $9.1 million.  As of the same date Bank Mutual serviced $1.1 billion in loans for third-party investors compared to a similar amount one year ago. 

Gains on sales of loans were $3.6 million in the second quarter of 2012 compared to $520,000 in the same quarter last year. Year-to-date, gains on sales of loans were $6.5 million in 2012 compared to $1.1 million in 2011.  Bank Mutual generally sells most of the fixed-rate, one- to four-family mortgage loans that it originates in the secondary market.  During the three and six months ended June 30, 2012, sales of these loans were $110.5 million or 489% higher and $175.9 million or 219% higher than they were during the same periods of 2011, respectively.  Management attributes these increases to lower market interest rates for one- to four-family mortgage loans, which encouraged borrowers to refinance higher-rate loans into lower-rate loans during the 2012 periods.  Although market interest rates for one- to four-family mortgage loans remain historically low, management is not certain that gains on sales of loans can be sustained during the last half of 2012 at the levels experienced during the first half of the year. 

Bank Mutual recorded $543,000 in gains on sales of investments in the second quarter of 2012.  During this period Bank Mutual sold $20.4 million in mortgage-related securities to provide additional liquidity in anticipation of the maturity in July of a $100.0 million term advance from the FHLB of Chicago.  In 2011 Bank Mutual recorded $1.1 million in net gains on sales of investments.  In that period Bank Mutual sold a $20.8 million investment in a mutual fund that management did not expect would perform well in future periods. 

In the second quarter of 2012 and 2011 Bank Mutual recorded $336,000 and $389,000 in net other-than-temporary impairment ("OTTI") losses, respectively.  These losses consisted of the credit portion of the total OTTI loss related to Bank Mutual's investment in certain private-label collateralized mortgage obligations ("CMOs") rated less than investment grade. Management attributes the net OTTI losses in these periods to low real estate values for residential properties on a nationwide basis.  None of Bank Mutual's remaining private-label CMOs were deemed to be other-than-temporarily impaired as of June 30, 2012.  However, the collection of the amounts due on private-label CMOs is subject to numerous factors outside of Bank Mutual's control and a future determination of OTTI could result in additional losses being recorded through earnings in future periods.   As of June 30, 2012, Bank Mutual's total investment in private-label CMOs was $55.0 million, of which $34.2 million was rated less than investment grade. 

Other non-interest income was $1.4 million and $3.0 million during the three months and six months ended June 30, 2012, respectively, compared to $1.4 million and $2.6 million during the same periods in 2011, respectively.  The increase in the 2012 year-to-date period was due primarily to an increase in the fair value of assets held in trust for certain non-qualifying employee benefit plans, due to the effects of lower interest rates and improved equity markets.     

Compensation-related expenses increased by $1.1 million or 11.4% and by $2.3 million or 12.0% during the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011, respectively.  These increases were due primarily to the hiring of additional commercial relationship managers and other key personnel in recent periods, as well as normal annual merit increases.  Also contributing was an increase in expenses related to stock-based compensation, certain non-qualifying employee benefit plans, and the defined-benefit pension plan.  The latter development was principally caused by a decline in the interest rate used to determine the present value of the pension obligation. 

Federal deposit insurance premiums increased by $125,000 or 16.8% during the second quarter of 2012 compared to the same quarter in 2011.  Year-to-date, federal deposit insurance premiums decreased by $66,000 or 3.7% in 2012 compared to the same period in the prior year.  The year-to-date decrease was caused by a change in how deposit insurance premiums are assessed to insured institutions.  Beginning in the second quarter of 2011 the Federal Deposit Insurance Corporation ("FDIC") implemented a new rule that changed the deposit insurance assessment base from an insured institution's domestic deposits (minus certain allowable exclusions) to an insured institution's average consolidated assets (minus certain adjustments).   The change in the assessment methodology benefited Bank Mutual and resulted in lower deposit insurance costs in the year-to-date comparison.  However, deposit insurance costs were higher in the quarterly comparison because Bank Mutual's average total assets were higher in the second quarter of 2012 compared to the same quarter in 2011, for reasons noted elsewhere in this report. 

Advertising and marketing-related expenses increased by $71,000 or 17.8% during the three months ended June 30, 2012, compared to the same period in the prior year.  On a year-to-date basis, advertising and marketing-related expenses increased by $425,000 or 65.9% in 2012 compared to the same period in 2011.  These changes were primarily caused by differences in the timing of Bank Mutual's advertising and marketing efforts between the 2012 and 2011 periods.  At this time management does not expect advertising and marketing-related expenses during the whole of 2012 to substantially different than prior years.  However, this will depend on future management decisions and there can be no assurances.

Net losses and expenses on foreclosed properties were $970,000 and $3.7 million during the three and six months ended June 30, 2012, respectively, compared to $2.7 million and $3.7 million in the same periods of the prior year, respectively.  Net losses and expenses on foreclosed properties declined in the 2012 quarterly period due primarily to a lower level of foreclosed properties.  However, despite recent declines, Bank Mutual's losses and expenses on foreclosed real estate remain elevated due to lower real estate values and slow economic growth in recent years.   If these conditions persist, losses on foreclosed real estate could remain elevated in the near term.

Other non-interest expense increased by $33,000 or 1.4% and $459,000 or 9.8% during the three and six months ended June 30, 2012, compared to the same period in 2011.  The year-to-date increase was primarily the result of legal, consulting, and accounting fees related to loan workout efforts and related professional services.  These expenses have declined in recent months as Bank Mutual has reduced its level of non-performing loans. 

Income tax expense was $601,000 and $266,000 during the three months ended June 30, 2012 and 2011, respectively, and was $1.1 million and $626,000 during the six months ended as of the same dates, respectively.   Excluding the 2011 goodwill impairment from income (loss) before taxes, which is not deductible for income tax purposes, Bank Mutual's effective tax rate ("ETR") for the three months ended June 30, 2012 and 2011, was 31.3% and 18.4%, respectively.  Bank Mutual's ETR for the six-month periods in these years was 30.2% and 22.1%, respectively (again, excluding the goodwill impairment).   Bank Mutual's ETR increased in the 2012 periods because non-taxable revenue, which consists primarily of earnings from bank-owned life insurance ("BOLI"), comprised a smaller portion of pre-tax earnings in 2012 than it did in 2011. 

Bank Mutual's total assets increased by $136.5 million or 5.5% during the six months ended June 30, 2012.  During the period Bank Mutual's held-to-maturity securities increased by $158.6 million, its interest-earning deposits, which consist principally of overnight investments, increased by $102.8 million, and its loan portfolio increased by $28.9 million.  These developments were partially offset by a $94.2 million decrease in Bank Mutual's available-for-sale securities and a $21.7 million decrease in its investment in the common stock of the FHLB of Chicago.  As previously noted, the increase in Bank Mutual's held-to-maturity securities was due to the purchase of $158.9 million in mortgage-backed securities issued and guaranteed by Fannie Mae and backed by multi-family residential loans.  Bank Mutual funded the purchase of these securities with $158.9 million in term advances from the FHLB of Chicago.  The increase in Bank Mutual's holdings of overnight investments was due in part to the anticipated repayment of a $100.0 million term advance from the FHLB of Chicago that matures later in July and has an interest rate of 4.52%.  The decrease in Bank Mutual's available-for-sale securities was due primarily to periodic repayments and security sales that exceeded the Company's purchase of new securities.

During the six months ended June 30, 2012, loans receivable increased by $28.9 million or 2.2%.   Total loans originated for portfolio increased by $76.1 million or 49.4% during the first six months of 2012 compared to the same period in 2011.   A portion of this improvement came from increased originations of commercial business loans, which increased by $22.6 million or 77.9% during the first six months of 2012 compared to the same period in 2011.  Management attributes this increase to recent efforts to improve Bank Mutual's share of the mid-tier commercial banking market (defined as business entities with sales revenues of $5 to $100 million), which was a new market segment for Bank Mutual in 2011.  In the past year-and-a-half Bank Mutual has added experienced leaders to its senior management team and hired a number of commercial relationship managers and support personnel experienced in managing and selling financial services to the mid-tier commercial banking market. In the near term Bank Mutual expects to add additional professionals capable of serving this market segment, although there can be no assurances as to the extent or timing of such staff additions or the impact on operating results.

Originations of consumer loans, which consist principally of home equity lines of credit, increased by $20.6 million or 56.6% during the period due to more competitive pricing and increased marketing efforts for these types of loans.  Finally, originations of multi-family mortgage loans, both permanent and construction, also increased substantially during the period, which management believes reflects a general decline in the level of home ownership in recent periods.

During the first six months of 2012 Bank Mutual's investment in the common stock of the FHLB of Chicago, which is included as a component of other assets, declined from $46.1 million at December 31, 2011, to $24.4 million at June 30, 2012.  During this period the FHLB of Chicago redeemed $21.7 million of excess common stock held by Bank Mutual in accordance with a redemption plan it announced in December 2011.  Under this plan, the FHLB of Chicago has stated that it intends to redeem additional excess common stock in quarterly increments through the end of 2013.  However, the amount and timing of these redemptions, if any, depend on many factors outside the control of Bank Mutual or the FHLB of Chicago.  As of June 30, 2012, Bank Mutual owned approximately $8.8 million more in FHLB of Chicago common stock than it would otherwise be required to own under minimum guidelines established by the FHLB of Chicago. 

Bank Mutual's deposit liabilities decreased by $38.5 million or 1.9% during the six months ended June 30, 2012.  Core deposits, consisting of checking, savings and money market accounts, increased by $31.5 million or 3.2% during the period whereas certificates of deposits declined by $70.0 million or 6.7%.  Bank Mutual continues to closely manage the rates it offers on certificates of deposit to control is overall liquidity position, which has resulted in a decline in certificates of deposit in recent periods.

Bank Mutual's shareholders' equity increased from $265.8 million at December 31, 2011, to $269.5 million at June 30, 2012.  This increase was caused by net income during the period, as well as lower accumulated other comprehensive loss due to an increase in the fair value of available-for-sale securities.   These developments were partially offset by the payment of regular cash dividends to shareholders of $0.01 per share during each of the first and second the quarters of the year.  The book value of Bank Mutual's common stock was $5.82 per share at June 30, 2012, compared to $5.75 per share at December 31, 2011.   

Bank Mutual's ratio of shareholders' equity to total assets was 10.23% at June 30, 2012, compared to 10.64% at December 31, 2011.  The decline in this ratio was caused by growth in Bank Mutual's total assets, as previously described.  Bank Mutual's subsidiary bank is "well capitalized" for regulatory capital purposes.  As of March 31, 2012 (the latest information available), the subsidiary bank had a total risk-based capital ratio of 18.31% and a Tier 1 capital ratio of 9.29%.  The minimum ratios to be considered "well capitalized" under current supervisory regulations are 10% for total risk-based capital and 6% for Tier 1 capital.  The minimum ratios to be considered "adequately capitalized" are 8% and 4%, respectively.   

Bank Mutual's capital measures remain strong as of June 30, 2012.  However, federal banking regulators have continued to focus on the capital levels of financial institutions such as Bank Mutual's bank subsidiary.   In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") will eventually impose specific capital requirements on savings and loan holding companies such as Bank Mutual.  These developments, and other requirements imposed by regulators (including the existing memoranda of understanding Bank Mutual has with its regulators), as well as proposed rules in response to the new Basel III international capital standards, may impact the ability of Bank Mutual and/or its subsidiary bank to pay dividends or, in the case of Bank Mutual, repurchase stock.

Bank Mutual's non-performing loans declined by $24.7 million or 32.9% during the six months ended June 30, 2012.  Non-performing assets, which include non-performing loans, declined by $33.0 million or 33.0% during this same period.   Finally, loans classified by Bank Mutual as "special mention" and "substandard," which includes all non-performing loans, declined by $30.9 million or 19.9% in the aggregate during the six months ended June 30, 2012.  Despite these recent declines, Bank Mutual's level of non-performing loans and assets, as well as classified loans, remain elevated due to slow economic growth, low real estate values, and high unemployment.  These conditions have resulted in increased stress on borrowers and higher loan delinquencies.   As of June 30, 2012, non-performing loans included $18.0 million in loans that were current on all contractual principal and interest payments, but which management determined should be classified as non-performing in light of underlying difficulties with the properties that secure the loans, as well as an increasingly strict regulatory environment.  The decline in Bank Mutual's non-performing and classified loans during the six months ended June 30, 2012, was due to loans that were paid off or upgraded during the period, as well as loans that were partially charged off because Bank Mutual had commenced and/or completed foreclosure proceedings during the period.   In addition, foreclosed properties and repossessed assets declined by $8.3 million or 33.4% during the six months ended June 30, 2012, due to sales of foreclosed real estate, as well as continued charge-offs on foreclosed properties.  These developments were partially offset by foreclosures related to a number of smaller commercial real estate mortgage loans and, to a lesser extent, one- to four-family mortgage loans. 

Management believes non-performing loans and assets may continue to trend lower in the near-term.  However, this trend is subject to many factors that are outside of Bank Mutual's control, such as economic and market conditions.  As such, there can be no assurances that Bank Mutual's non-performing loans and assets will trend lower in future periods or that its provision for loan losses will not increase or otherwise continue to be volatile.

Bank Mutual's allowance for loan losses was $26.0 million or 1.93% of loans receivable at June 30, 2012, compared to $27.9 million or 2.12% at December 31, 2011.  As a percent of non-performing loans, Bank Mutual's allowance for loan losses was 51.6% at June 30, 2012, compared to 37.2% at December 31, 2011.  The decrease in the dollar amount of the allowance for loan loss was principally due to $3.7 million in net charge-offs during the period partially offset by $1.8 million in provision for loan losses, as previously described. 

Management believes the allowance for loan losses at June 30, 2012, was adequate to cover probable and estimable losses in Bank Mutual's loan portfolio as of that date.  However, future increases to the allowance may be necessary and results of operations could be adversely affected if future conditions differ from the assumptions used by management to determine the allowance for loan losses as of the end of the period. 

Bank Mutual Corporation is the fourth largest financial institution holding company headquartered in the state of Wisconsin and its stock is quoted on the NASDAQ Global Select Market under the symbol "BKMU".  Its subsidiary bank, Bank Mutual, operates 77 banking locations in the state of Wisconsin and one in Minnesota.

Cautionary Statements

The discussion in this earnings release contains or incorporates by reference various forward-looking statements concerning Bank Mutual's prospects that are based on the current expectations and beliefs of management.  Forward-looking statements may contain, and are intended to be identified by, words such as "anticipate," "believe," "estimate," "expect," "objective," "projection," "intend," and similar expressions or use of verbs in the future tense any discussions of periods after the date on which this report is filed are also forward-looking statements.  The statements contained herein and such future statements involve or may involve certain assumptions, risks, and uncertainties, many of which are beyond Bank Mutual's control, that could cause Bank Mutual's actual results and performance to differ materially from what is stated or expected.  In addition to the assumptions and other factors referenced specifically in connection with such statements, the following factors could impact the business and financial prospects of Bank Mutual:  general economic conditions, including instability in credit, lending, and financial markets; declines in the real estate market, which could further affect both collateral values and loan activity; continuing relatively high unemployment and other factors which could affect borrowers' ability to repay their loans; negative developments affecting particular borrowers, which could further adversely impact loan repayments and collection; legislative and regulatory initiatives and changes, including action taken, or that may be taken, in response to difficulties in financial markets and/or which could negatively affect the right of creditors; monetary and fiscal policies of the federal government; the effects of further regulation and consolidation within the financial services industry, including substantial changes under the Dodd-Frank Act and the transfer of regulatory authority from the Office of Thrift Supervision ("OTS") to the Office of the Comptroller of the Currency ("OCC") and the Federal Reserve Board ("FRB"); regulators' increasing expectations for financial institutions' capital levels and restrictions imposed on institutions, as to payments of dividends or otherwise, to maintain or achieve those levels, including the possible effect of the memoranda of understanding with regulators and potential new regulatory capital requirements under Basel III; pending and/or potential rulemaking or other actions by the Consumer Financial Protection Bureau ("CFPB"); potential regulatory or other actions affecting Bank Mutual or its subsidiary bank; potential adverse publicity relating to any such action or other developments affecting Bank Mutual or its subsidiary bank; potential changes in Fannie Mae and/or the Federal Home Loan Mortgage Corporation ("Freddie Mac"), which could impact the home mortgage market; increased competition and/or disintermediation within the financial services industry; changes in tax rates, deductions and/or policies; potential changes in FDIC premiums and other governmental assessments; changes in deposit flows; changes in the cost of funds; fluctuations in general market rates of interest and/or yields or rates on competing loans, investments, and sources of funds; demand for loan or deposit products; illiquidity of financial markets and other negative developments affecting particular investment and mortgage-related securities, which could adversely impact the fair value of and/or cash flows from such securities; changes in customers' demand for other financial services; Bank Mutual's potential inability to carry out business plans or strategies; changes in accounting policies or guidelines; natural disasters, acts of terrorism, or developments in the war on terrorism; the risk of failures in computer or other technology systems or data maintenance, or breaches of security relating to such systems; and the factors discussed in Bank Mutual's filings with the Securities and Exchange Commission, particularly under Part I, Item 1A, "Risk Factors," of Bank Mutual's 2011 Annual Report on Form 10-K.

 

 Bank Mutual Corporation and Subsidiaries 

 Unaudited Consolidated Statements of Financial Condition 

 (Dollars in thousands, except per share data) 



June 30


December 31


2012


2011

 ASSETS 




 Cash and due from banks 

$33,809


$52,306

 Interest-earning deposits 

171,424


68,629

   Cash and cash equivalents 

205,233


120,935

 Mortgage-related securities available-for-sale, at fair value 

687,619


781,770

 Mortgage-related securities held-to-maturity, at amortized cost 




     (fair value of $160,377 in 2012) 

158,556


-

 Loans held-for-sale, net 

11,072


19,192

 Loans receivable (net of allowance for loan losses of $26,029  




     in 2012 and $27,928 in 2011) 

1,348,573


1,319,636

 Foreclosed properties and repossessed assets 

16,460


24,724

 Mortgage servicing rights, net 

7,263


7,401

 Other assets 

200,176


224,826





     Total assets 

$2,634,952


$2,498,484





 LIABILITIES AND EQUITY 




 Liabilities: 




   Deposit liabilities 

$1,983,179


$2,021,663

   Borrowings 

311,414


153,091

   Advance payments by borrowers for taxes and insurance 

22,261


3,192

   Other liabilities 

45,741


51,842

     Total liabilities 

2,362,595


2,229,788

 Equity: 




   Preferred stock - $0.01 par value: 




     Authorized - 20,000,000 shares in 2012 and 2011 




     Issued and outstanding - none in 2012 and 2011 

-


-

   Common stock - $0.01 par value: 




     Authorized - 200,000,000 shares in 2012 and 2011 




     Issued - 78,783,849 shares in 2012 and 2011 




     Outstanding - 46,326,484 shares in 2012 and 46,228,984 in 2011 

788


788

   Additional paid-in capital 

489,186


490,159

   Retained earnings 

142,350


140,793

   Accumulated other comprehensive loss 

(3,454)


(5,379)

   Treasury stock - 32,457,365 shares in 2012 and 32,554,865 in 2011 

(359,409)


(360,590)

     Total shareholders' equity 

269,461


265,771

   Non-controlling interest in real estate partnership 

2,896


2,925

     Total equity including non-controlling interest 

272,357


268,696





     Total liabilities and equity 

$2,634,952


$2,498,484

    

 Bank Mutual Corporation and Subsidiaries 

 Unaudited Consolidated Statements of Income 

 (Dollars in thousands, except per share data) 










 Three Months Ended June 30 


 Six Months Ended June 30 


2012


2011


2012


2011

 Interest income: 








   Loans 

$16,205


$17,546


$32,629


$35,419

   Mortgage-related securities 

4,792


4,033


9,094


7,828

   Investment securities 

23


1,281


34


2,625

   Interest-earning deposits 

59


46


100


97

      Total interest income 

21,079


22,906


41,857


45,969

 Interest expense: 








   Deposits 

3,868


5,010


7,924


10,479

   Borrowings 

2,357


1,790


4,181


3,560

   Advance payment by borrowers for taxes and insurance 

1


1


1


2

      Total interest expense 

6,226


6,801


12,106


14,041

      Net interest income 

14,853


16,105


29,751


31,928

 Provision for loan losses 

1,730


805


1,781


3,985

      Net interest income after provision for loan losses 

13,123


15,300


27,970


27,943

 Non-interest income: 








   Service charges on deposits 

1,664


1,559


3,223


3,027

   Brokerage and insurance commissions 

964


832


1,545


1,446

   Loan-related fees and servicing revenue, net 

(1,395)


333


(1,257)


584

   Gain on loan sales activities, net 

3,551


520


6,455


1,116

   Gain on sales of investments, net 

543


-


543


1,113

   Other-than-temporary impairment ("OTTI") losses: 








      Total OTTI losses 

(909)


(1,299)


(909)


(1,299)

      Non-credit portion of OTTI losses 

573


910


573


910

         Net OTTI losses 

(336)


(389)


(336)


(389)

   Increase in cash surrender value of life insurance 

524


539


1,050


1,085

   Other non-interest income 

1,419


1,365


2,983


2,572

      Total non-interest income 

6,934


4,759


14,206


10,554

 Non-interest expense: 








   Compensation, payroll taxes, and other employee benefits 

10,697


9,602


21,272


19,001

   Occupancy and equipment 

2,778


2,850


5,732


5,849

   Federal insurance premiums  

871


746


1,702


1,768

   Advertising and marketing 

471


400


1,070


645

   Losses and expenses on foreclosed real estate, net 

970


2,696


3,748


3,726

   Other non-interest expense 

2,353


2,320


5,134


4,675

      Total non-interest expense before goodwill impairment 

18,140


18,614


38,658


35,664

   Goodwill impairment 

-


52,570


-


52,570

      Total non-interest expense 

18,140


71,184


38,658


88,234

      Income (loss) before income tax expense  

1,917


(51,125)


3,518


(49,737)

 Income tax expense  

601


266


1,063


626

      Net income (loss) before non-controlling interest 

1,316


(51,391)


2,455


(50,363)

 Net loss attributable to non-controlling interest 

13


14


29


27

      Net income (loss) 

$1,329


($51,377)


$2,484


($50,336)









 Per share data: 








   Earnings (loss) per share-basic  

$0.03


($1.12)


$0.05


($1.10)

   Earnings (loss) per share-diluted 

$0.03


($1.12)


$0.05


($1.10)

   Cash dividends paid 

$0.01


$0.01


$0.02


$0.04

    

 Bank Mutual Corporation and Subsidiaries 

 Unaudited Supplemental Financial Information 

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












 Three Months Ended June 30 


 Six Months Ended June 30 

Loan Originations and Sales


2012


2011


2012


2011

 Mortgage loans originated for portfolio: 









   One- to four-family 


$28,417


$24,251


$50,995


$45,309

   Multi-family 


5,870


2,146


26,965


7,710

   Commercial real estate 


10,351


13,384


16,372


22,398

   Construction and development 


25,033


5,955


27,220


13,247

     Total mortgage loans 


69,671


45,736


121,552


88,664

 Consumer loan originations 


32,100


19,696


57,156


36,507

 Commercial business loan originations 


38,129


23,865


51,596


29,009

      Total loans originated for portfolio 


$139,900


$89,297


$230,304


$154,180










 Mortgage loans originated for sale 


$121,250


$31,979


$248,148


$54,826










 Mortgage loan sales 


$133,073


$22,582


$256,109


$80,197






















June 30


December 31





Loan Portfolio Analysis


2012


2011





 Mortgage loans: 









   One- to four-family 


$492,221


$508,503





   Multi-family  


252,544


247,040





   Commercial real estate  


217,812


226,195





   Construction and development 


86,519


82,008





      Total mortgage loans 


1,049,096


1,063,746





 Consumer loans 


242,715


238,454





 Commercial business loans 


120,629


87,715





   Total loans receivable 


1,412,440


1,389,915





 Allowance for loan losses 


(26,029)


(27,928)





 Undisbursed loan proceeds and deferred fees and costs 

(37,838)


(42,351)





   Total loans receivable, net 


$1,348,573


$1,319,636














 Loans serviced for others 


$1,139,576


$1,102,126















Bank Mutual Corporation and Subsidiaries


Unaudited Supplemental Financial Information (continued)


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













June 30


December 31





Non-Performing Loans and Assets


2012


2011





 Non-accrual mortgage loans: 









     One- to four-family  


$11,473


$14,868





     Multi-family 


17,799


22,905





     Commercial real estate 


13,457


23,997





     Construction and development loans 


4,233


9,368





         Total non-accrual mortgage loans 


46,962


71,138





 Non-accrual consumer loans: 









     Secured by real estate 


1,303


1,457





     Other consumer loans 


183


207





         Total non-accrual consumer loans 


1,486


1,664





 Non-accrual commercial business loans 


1,235


1,642





         Total non-accrual loans 


49,683


74,444





 Accruing loans delinquent 90 days or more 


736


696





         Total non-performing loans 


50,419


75,140





 Foreclosed properties and repossessed assets 


16,460


24,724





         Total non-performing assets 


$66,879


$99,864





 Non-performing loans to loans receivable, net 


3.74%


5.69%





 Non-performing assets to total assets 


2.54%


4.00%
















June 30


December 31





Special Mention and Substandard Loans


2012


2011





(includes all non-performing loans, above)









 Mortgage loans: 









   One- to four-family 


$11,834


$16,216





   Multi-family  


21,977


32,465





   Commercial real estate  


66,889


79,692





   Construction and development 


17,152


20,259





      Total mortgage loans 


117,852


148,632





 Consumer loans 


1,546


1,695





 Commercial business loans 


4,972


4,920





   Total 


$124,370


$155,247
















 Six Months Ended June 30 





Activity in Allowance for Loan Losses


2012


2011





 Balance at the beginning of the period 


$27,928


$47,985





 Provision for loan losses 


1,781


3,985





 Charge-offs: 









   One- to four-family  


(560)


(2,266)





   Multi-family 


(371)


(2,981)





   Commercial real estate 


(3,225)


(5,419)





   Construction and development loans 


(102)


(2,472)





   Consumer loans 


(379)


(463)





   Commercial business loans 


(48)


(379)





     Total charge-offs 


(4,685)


(13,980)





    Total recoveries 


1,005


583





      Net charge-offs 


(3,680)


(13,397)





 Balance at the end of the period 


$26,029


$38,573





 Net charge-offs to average loans, annualized 


0.54%


1.96%
















June 30


December 31





Allowance Ratios


2012


2011





 Allowance for loan losses to non-performing loans 


51.63%


37.17%





 Allowance for loan losses to total loans 


1.93%


2.12%














Bank Mutual Corporation and Subsidiaries





Unaudited Supplemental Financial Information (continued)





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












June 30


December 31

 Deposit Liabilities Analysis


2012


2011

 Non-interest-bearing checking 


$130,785


$112,211

 Interest-bearing checking 


234,211


229,990

 Savings accounts 


221,621


204,263

 Money market accounts  


423,579


432,248

 Certificates of deposit 


972,983


1,042,951

    Total deposit liabilities 


$1,983,179


$2,021,663



 Three Months Ended June 30 


 Six Months Ended June 30 

Selected Operating Ratios


2012


2011


2012


2011

 Net interest margin (1) 


2.47%


2.82%


2.56%


2.82%

 Net interest rate spread 


2.38%


2.71%


2.46%


2.70%

 Return on average assets 


0.20%


-8.09%


0.20%


-3.88%

 Return on average shareholders' equity 


1.97%


-67.80%


1.85%


-32.72%

 Efficiency ratio (2) 


84.06%


87.58%


88.36%


85.41%

 Non-interest expense as a percent of average

 assets (3) 


2.76%


2.93%


1.52%


1.38%

 Shareholders' equity to total assets at end of

 period 


10.23%


10.55%


10.23%


10.55%

 Tangible common equity to adjusted total

 assets at end of period (4) 










10.23%


10.55%


10.23%


10.55%

    


(1)

Net interest margin is determined by dividing net interest income by average earning assets for the periods indicated.

(2)

Efficiency ratio is determined by dividing non-interest expense before goodwill impairment by the sum of net interest income and non-interest income (excluding investment gains and net OTTI) for the periods indicated.

(3)

Non-interest expense is defined as non-interest expense before goodwill impairment.

(4)

This is a non-GAAP disclosure. The ratio is computed as shareholders' equity less goodwill divided by total assets less goodwill.



 Three Months Ended June 30 


 Six Months Ended June 30 

Other Information


2012


2011


2012


2011

 Average earning assets 


$2,402,366


$2,283,240


$2,324,912


$2,261,974

 Average assets 


2,631,223


2,541,491


2,542,688


2,591,330

 Average interest bearing liabilities 


2,194,922


2,097,592


2,119,603


2,065,943

 Average shareholders' equity 


269,670


303,118


268,633


307,642

 Average tangible shareholders' equity (5) 


269,670


263,691


268,633


262,582

 Weighted average number of shares outstanding: 









    As used in basic earnings per share 


46,189,723


46,060,106


46,187,796


45,900,900

    As used in diluted earnings per share 


46,196,363


46,060,106


46,194,463


45,900,900

 (5) Average tangible shareholders' equity is average total shareholders' equity minus goodwill. 

   








June 30


December 31



2012


2011

 Number of shares outstanding (net of treasury shares) 

46,326,484


46,228,984

 Book value per share 


$5.82


$5.75














June 30


December 31

Weighted Average Net Interest Rate Spread


2012


2011

 Yield on loans 


4.63%


5.01%

 Yield on investments 


2.35%


2.39%

 Combined yield on loans and investments 


3.75%


4.03%

 Cost of deposits 


0.75%


0.83%

 Cost of borrowings 


3.08%


4.75%

 Total cost of funds 


1.06%


1.11%

 Interest rate spread 


2.69%


2.92%

SOURCE Bank Mutual Corporation



RELATED LINKS
http://www.bankmutualcorp.com

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