MILWAUKEE, July 23 /PRNewswire-FirstCall/ --

Bank Mutual Corporation (Nasdaq: BKMU) reported net income in the second quarter of 2009 of $3.8 million or $0.08 per diluted share compared to $4.3 million or $0.09 per diluted share in the same quarter last year. Net income for the six month period ended June 30, 2009, was $11.0 million or $0.23 per diluted share compared to $9.3 million or $0.19 per diluted share in the same period last year. Results for 2009 were negatively impacted by a $1.6 million non-recurring special assessment from the Federal Deposit Insurance Corporation ("FDIC") in the second quarter. The after tax impact of this special assessment was approximately $930,000 or $0.02 per diluted share.

Reported net income during the second quarters of 2009 and 2008 represented a return on average assets ("ROA") of 0.44% and 0.48%, respectively, and a return on average equity ("ROE") of 3.78% and 4.13%, respectively. For the six month periods, reported net income represented an ROA of 0.63% and 0.53% in 2009 and 2008, respectively, and an ROE of 5.46% and 4.43% in the same periods, respectively.

Michael T. Crowley, Jr., Chairman, President, and Chief Executive Officer of Bank Mutual Corporation ("Bank Mutual") commented, "Our second quarter results of operations benefited from strong mortgage loan originations and sales activity, as well as additional gains on sales of certain long-term, fixed-rate securities. Recent increases in interest rates, however, may limit future earnings from both of these sources." Mr. Crowley added, "As we expected, though, our net interest income declined in the second quarter relative to both the previous quarter and the second quarter of last year. Our operating results continued to be impacted by high levels of liquidity, reduced loan demand, and lower yields on reinvested cash flows as we prepare Bank Mutual for what we believe will be higher rates in the future."

Net interest income for the three months ended June 30, 2009, declined by $231,000 or 1.3% compared to the same period in 2008. This decline was principally the result of a $49.9 million or 1.5% decrease in average earning assets that was only partially offset by a nine basis point improvement in interest rate spread. On a year-to-date basis, net interest income increased by $1.9 million or 5.5% in the current year relative to the same six months in 2008. This improvement was primarily attributable to a declining interest rate environment which resulted in a 25 basis points improvement in interest rate spread between the six month periods. The impact of this development was partially offset by a $43.6 million or 1.3% decrease in average earning assets in 2009 relative to 2008.

In recent periods Bank Mutual has experienced increased levels of liquidity due to reduced loan demand and increased repayment activity in its loan and securities portfolios. These developments were attributable to a general deterioration in economic conditions, as well as a historically low interest rate environment that has resulted in increased refinancing of adjustable-rate residential and home equity loans into fixed-rate residential loans, which Bank Mutual typically sells in the secondary market. In an effort to reduce its exposure to the negative effects of higher interest rates in the future, Bank Mutual has reinvested cash flows from these sources in variable-rate or medium-term securities. Such investments typically have lower yields than longer-term, fixed-rate loans and securities. As a result of these developments, Bank Mutual expects that its interest rate spread may decline modestly in the near term. Bank Mutual has also managed its liquidity position in recent periods by reducing the rates it offers on its certificates of deposits and certain other deposit accounts, which has resulted in a $57.6 million or 2.7% decrease in deposit liabilities during the six months ended June 30, 2009. Management expects this trend to continue in the near term.

Also affecting the comparison of net interest income between the 2009 and 2008 periods was a decline in the ratio of average earning assets to average interest-bearing liabilities. The decline in this ratio was principally the result of Bank Mutual's stock repurchases, which are funded by cash flows from increases in interest-bearing liabilities, decreases in earning assets, or a combination of the two. The comparison of diluted earnings per share between the 2009 and 2008 periods was positively affected by Bank Mutual's stock repurchase program. Due principally to such repurchases, the weighted average number of diluted shares outstanding declined by 2.4% and 2.6% during the three and six month periods ended June 30, 2009, compared to the same periods in 2008. Bank Mutual regularly reviews its capital position, market conditions, and the cost of funds to determine whether share repurchases are appropriate.

The provision for loan losses was $472,000 in the quarter just ended compared to $67,000 in the same period last year. Year-to-date, the provision was $3.6 million in 2009 compared to $223,000 in 2008. During the first quarter of 2009 Bank Mutual recorded a $1.3 million provision for loss against a $9.1 million loan secured by a completed condominium development project and a $576,000 loss on an apartment complex for which Bank Mutual accepted a deed in lieu of foreclosure during that period. Bank Mutual also established $466,000 in specific loss allowances on a number of smaller commercial real estate and commercial business loans in the first quarter and recorded nearly $600,000 in additional loss provision to reflect management's general concerns regarding continued deterioration in economic conditions and declines in real estate values. There were no increases in specific loss allowances in the most recent quarter. However, as a result of deteriorating economic conditions, Bank Mutual experienced an increase in loan charge-off activity in its portfolio of residential and consumer loans, which accounts for most of the increase in the loan loss provision for the second quarter of 2009 compared to the same period in 2008.

Gains on sales of loans increased by $2.4 million or approximately 440% during the three months ended June 30, 2009, compared to the same period in 2008. Year-to-date, gains on loan sales increased $5.4 million or approximately 400% in 2009 compared to the previous year. During the six months ended June 30, 2009, sales of one- to four-family mortgage loans were $415.1 million compared to $98.4 million during the same period of 2008. Sales increased substantially in 2009 as a result of a historically low interest rate environment that encouraged many borrowers to refinance higher-rate loans into loans at lower rates. In addition, adjustable-rate borrowers were incented to refinance their loans into fixed-rate loans. As a result of this behavior, Bank Mutual's one- to four-family mortgage loan originations were $457.5 million during the first six months of 2009, compared to $126.0 million during the same period in 2008. Most of these originations were fixed-rate mortgages. Bank Mutual's policy is to sell substantially all of its fixed-rate, one- to four-family mortgage loan originations in the secondary market. As a result of increases in market interest rates in recent weeks, management expects loan origination and sales activity to decline during the remainder of 2009, which is likely to result in lower gains on sales of loans in the near term.

Loan-related fees and servicing revenue was $16,000 and $333,000 for the three months ended June 30, 2009 and 2008, respectively. For the six-month periods, loan-related fees and servicing revenue was a negative $316,000 in 2009 compared to a positive $269,000 in 2008. Low interest rate environments typically cause an increase in actual mortgage loan prepayment activity, which generally results in an increase in the amortization of mortgage servicing rights ("MSRs"). During the six months ended June 30, 2009 and 2008, MSR amortization expense, which is netted against loan-related fees and servicing revenue, was $1.9 million and $906,000, respectively. The negative impact of this increase was partially offset by the positive impact of an increase in the value of Bank Mutual's MSRs due to a modest increase in mortgage interest rates near the end of the second quarter. Higher interest rates typically result in lower expectations for future loan prepayment activity, which has a positive impact on the value of MSRs. As of June 30, 2009, Bank Mutual had a valuation allowance of $369,000 against MSRs with a gross book value of $6.7 million. These amounts compared to a valuation allowance of $822,000 against a gross book value of $4.5 million as of December 31, 2008. The net recovery in the valuation allowance of $453,000 in 2009 was recorded in loan-related fees and servicing revenue. In the prior year, a $174,000 increase in the valuation allowance in the first quarter was recovered in its entirety in the following quarter when interest rates increased in the second quarter of 2008, similar to 2009.

If market interest rates for one- to four-family loans continue to increase and/or loan prepayment expectations decrease in future periods, Bank Mutual could recover all or a portion of its previously established allowance on MSRs, as well as record reduced levels of MSR amortization expense. Alternatively, if interest rates decrease and/or prepayment expectations increase, Bank Mutual could potentially record additional charges to earnings related to increases in the valuation allowance on its MSRs. In addition, amortization expense could remain elevated due to likely increases in loan prepayment activity.

As of June 30, 2009, Bank Mutual serviced $924.4 million in loans for third-party investors compared to $728.4 million at December 31, 2008. This increase was a result of the substantial increase in one- to four-family loans originated and sold in the secondary market, as previously described.

Gains on investment activities were $610,000 in the second quarter of 2009 compared to a loss of $1.1 million in the second quarter of 2008. For the six month periods, gains were $2.7 million in 2009 compared to $351,000 in 2008. Results for the six month periods of 2009 and 2008 are net of $831,000 and $2.1 million, respectively, in other-than-temporary impairment ("OTTI") charges related to one of Bank Mutual's mutual fund investments. This mutual fund invests primarily in mortgage-related securities, none of which are secured by sub-prime mortgages, but a portion of which are secured by interest-only mortgages, option-payment mortgages, and other "Alt-A" mortgages. Bank Mutual has recorded a total of $8.7 million in impairment charges on this mutual fund since the fourth quarter of 2007, although no additional impairment was recorded in the second quarter of 2009. The $2.1 million charge recorded in 2008 occurred in the second quarter of that year. Given the significant uncertainty and illiquidity that exists in the markets for securities secured by these types of loans, Bank Mutual may be required to record future impairment charges against this investment, although there can be no assurances. This investment had a remaining book value of $20.8 million at June 30, 2009 (after impairment charges).

Excluding the OTTI losses described in the previous paragraph, gains on investment activities were $610,000 in the second quarter of 2009 compared to $1.0 million in the same period in 2008. Year-to-date, these gains were $3.5 million in 2009 and $2.5 million in 2008. During the six months ended June 30, 2009, Bank Mutual sold $174.5 million in long-term, fixed-rate, mortgage-related securities, the proceeds of which were reinvested primarily in adjustable-rate government agency mortgage-backed securities ("MBSs") and other medium-term government agency securities. Management considered these actions to be prudent in light of its expectations that interest rates may trend higher in the future. Gains on investment activities during the first six months of 2008 resulted from the sale of $392.4 million in mortgage-related securities in that period.

Other non-interest income declined by $264,000 or 14.7% during the three months ended June 30, 2009, compared to the same period in 2008. For the six month periods the decline was $552,000 or 14.9% from 2008 to 2009. These declines were primarily attributable to a decrease in earnings from Bank Mutual's investment in bank-owned life insurance ("BOLI"), the yield on which has been adversely impacted by a lower interest rate environment since last year.

Total non-interest expense increased by $2.9 million or 18.1% during the three months ended June 30, 2009, compared to the same period in 2008. The increase between the six month periods in these years was $3.7 million or 11.8%. Results in 2009 included the impact of higher FDIC deposit insurance premiums. Beginning in the current year the FDIC raised its regular premium rates for all financial institutions by a substantial amount. As a result, Bank Mutual's regular deposit premium expense, which is included as a component of other non-interest expense, increased from $123,000 in the first six months of 2008 to $1.2 million in the same period in 2009. This increase in regular FDIC premiums will continue to affect Bank Mutual's expenses in future periods. Other non-interest expense in the second quarter of 2009 also included a $1.6 million non-recurring special assessment from the FDIC, as previously noted. This special assessment was charged to all FDIC-insured financial institutions in the second quarter, although it will not be paid until September 30, 2009. In Bank Mutual's case, the assessment was 0.05% of total assets less Tier 1 capital at June 30, 2009.

Excluding FDIC deposit premiums and the special assessment, all other non-interest expenses for the second quarter of 2009 increased $548,000 or 3.5% in the aggregate from the same quarter in the prior year; the increase for the six month periods was $1.1 million or 3.5%. These increases were due to normal annual merit increases in employee compensation, an increase in the number of personnel employed by Bank Mutual, and an increase in expenses associated with increased residential loan production, as previously discussed. Also contributing was an increase in expenses related to the number of Bank Mutual office locations. Bank Mutual opened one new office in the third quarter of 2008.

Income tax expense was $2.6 million during the second quarter of 2009 compared to $2.1 million in the same quarter of 2008. Year-to-date, income tax expense was $4.2 million in 2009 compared to $4.6 million in 2008. In the first quarter of 2009 Bank Mutual recorded a $1.8 million tax benefit related to the elimination of a valuation allowance it had established against a deferred tax asset in prior years. The deferred tax asset related to Wisconsin net operating loss carryovers for which management was unable to determine whether it was more likely than not that the tax benefits would be realized in future periods. In the first quarter of 2009 Wisconsin law was amended from a system that taxed each affiliated entity separately to a form of combined reporting. As a result of this change, management determined that Bank Mutual's Wisconsin net operating losses that had not been recognized in prior periods would be realizable, resulting in a one-time tax benefit of $1.8 million in the first quarter of 2009.

Excluding the impact of the one-time tax benefit described in the previous paragraph, Bank Mutual's income tax expense for the six months ended June 30, 2009, would have been $6.0 million. This amount represented an effective tax rate ("ETR") of 39.5% compared to 32.9% in the same period last year. This increase was caused by the amendment of the Wisconsin law described above, which became effective January 1, 2009. Prior to this amendment, the state of Wisconsin imposed a corporate franchise tax on the separate taxable incomes of the members of Bank Mutual's consolidated income tax group, excluding its out-of-state investment subsidiaries. However, beginning January 1, 2009, Bank Mutual's consolidated income tax group is subject to combined reporting, which results in Wisconsin taxes being imposed on the earnings of its out-of-state investment subsidiaries. Accordingly, Bank Mutual's ETR increased relative to prior periods. Management expects the current period ETR to be representative of the rate in future periods, although there can be no assurances.

As previously discussed, originations of one- to four-family mortgage loans increased significantly during the six months ended June 30, 2009. Despite this development, Bank Mutual's portfolio of one- to four-family loans declined from $881.3 million at December 31, 2008, to $736.6 million at June 30, 2009. This decline was caused by increased refinancing of adjustable-rate mortgage loans by borrowers (which Bank Mutual typically retains in portfolio) into fixed-rate mortgage loans (which Bank Mutual generally sells in the secondary market). Although Bank Mutual expects this trend to continue in the near term, increases in mortgage interest rates near the end of the second quarter may result in smaller declines in the portfolio of one- to four-family loans in future periods. However, there can be no assurances.

Multi-family and commercial real estate mortgage loan originations were $26.7 million in the aggregate during the six months ended June 30, 2009, compared to $102.8 million during the same period in 2008. In addition, commercial business loan originations for the first six months of 2009 were $19.0 million compared to $21.7 million for the same period in 2008. Although Bank Mutual continues to emphasize originations of these types of loans, originations have declined in recent periods due to a general deterioration in economic conditions, as well as Bank Mutual's conservative underwriting standards. Primarily as a result of lower origination activity, Bank Mutual's aggregate portfolio of multi-family and commercial real estate mortgage loans declined from $466.3 million at December 31, 2008, to $453.8 million at June 30, 2009. Furthermore, its portfolio of construction and development loans declined by $17.8 million or 11.2%. Bank Mutual's portfolio of commercial business loans increased modestly, from $49.6 million to $51.4 million during the six months ended June 30, 2009.

Consumer loan originations, including fixed-term home equity loans and lines of credit, were $38.4 million for the first six months of 2009 compared to $54.2 million during the same time-frame in 2008. Lower origination activity in 2009 was primarily the result of declining demand due to slower economic growth, as well as smaller increases, or even decreases, in home values, which has had a negative impact on homeowners' equity. This reduced origination activity resulted in a decline in Bank Mutual's consumer loan portfolio from $338.1 million at December 31, 2008, to $293.4 million at June 30, 2009.