Oct. 20, 2009 (PR Newswire) -- MILWAUKEE, Oct. 20 /PRNewswire-FirstCall/ -- Bank Mutual Corporation (Nasdaq: BKMU) reported net income for the nine months ended September 30, 2009, of $12.2 million or $0.26 per diluted share compared to $11.0 million or $0.23 per diluted share in the same period last year. Net income for the third quarter of 2009 was $1.2 million or $0.03 per diluted share compared to $1.6 million or $0.03 per diluted share in the same quarter last year. Results for the nine months ended September 30, 2009, were negatively impacted by a $1.6 million non-recurring special assessment from the Federal Deposit Insurance Corporation ("FDIC") that was recorded in the second quarter. The after tax impact of this special assessment was approximately $930,000 or $0.02 per diluted share.

Net income for the nine months ended September 30, 2009 and 2008, represented a return on average assets ("ROA") of 0.47% and 0.41%, respectively, and a return on average equity ("ROE") of 4.05% and 3.51%, respectively. For the third quarters, net income represented an ROA of 0.14% and 0.18% in 2009 and 2008, respectively, and an ROE of 1.23% and 1.61% in the same periods, respectively.

Michael T. Crowley, Jr., Chairman, President, and Chief Executive Officer of Bank Mutual Corporation ("Bank Mutual") commented, "Our third quarter performance was affected by deterioration in the value of certain commercial and investment real estate properties that secure several of our loans. Although the impact this development had on our earnings is a disappointment to us, we are very pleased that our level of non-performing loans did not increase during the quarter." Mr. Crowley added, "We are also pleased that our year-to-date earnings continue to exceed the previous year's results in what has proven to be a very difficult operating environment for financial institutions."

Net interest income for the nine months ended September 30, 2009, declined by $1.3 million or 2.5% compared to the same period in 2008. This decline was primarily attributable to a $69.9 million or 2.1% decrease in average earning assets that was only partially offset by an eight basis point improvement in interest rate spread between the nine month periods. On a quarterly basis, net interest income declined by $3.3 million or 17.5% in the current year compared to the same quarter in 2008. This decline was principally the result of a $121.6 million or 3.6% decrease in average earning assets, as well as a 26 basis point decrease in interest rate spread.

During 2009 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 continue to decline 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 deposit and certain other deposit accounts. This has resulted in a 63 basis point decline in the weighted average cost of deposits and a $42.7 million or 2.0% decrease in deposit liabilities during the nine months ended September 30, 2009. Management expects this trend to continue in the near term.

Also affecting the comparison of net interest income between the nine month periods ended September 30, 2009 and 2008, 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 were 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 has been positively affected by Bank Mutual's stock repurchase program. Due principally to such repurchases, the weighted average number of diluted shares outstanding declined by 2.8% during the nine months ended September 30, 2009, compared to the same period in 2008. Bank Mutual regularly reviews its capital position, market conditions, and the cost of funds to determine whether share repurchases are appropriate.

Bank Mutual's provision for loan losses was $5.2 million in the quarter just ended compared to $1.1 million in the same period last year. During the third quarter of 2009 Bank Mutual recorded a $1.9 million loss provision against a $4.5 million loan secured by a multi-tenant office building that defaulted during the quarter and which management determined was collateral dependant. The loss was based on an independent appraisal. In addition, Bank Mutual recorded a $0.9 million loss provision against a $9.1 million loan secured by a completed condominium development project. This loss was based on an updated independent appraisal management received during the quarter and was in addition to $1.3 million that had been established against this loan in the first quarter of 2009. Bank Mutual also recorded a $1.3 million provision against this loan in 2008. During the quarter just ended Bank Mutual transferred this loan to foreclosed real estate, net of its entire loss allowance of $3.4 million, which was charged off. Foreclosed real estate is a component of other assets in the statement of financial condition.

In addition to these developments, during the third quarter of 2009 Bank Mutual recorded $2.3 million in loss provisions against three loans to unrelated borrowers that had an aggregate balance of $5.3 million. These loans, which are secured by office and retail buildings, were also determined by management to be collateral dependent during the third quarter. The losses were based on updated independent appraisals that management received during the quarter. One of these loans with a balance of $2.4 million was transferred to foreclosed real estate during the quarter, net of its loss allowance of $1.0 million, which was charged-off.

Year-to-date, the provision for loan loss was $8.8 million in 2009 compared to $1.4 million in 2008. In addition to the developments described above, during the first quarter of 2009 Bank Mutual recorded a $576,000 loss provision on an apartment complex for which the Bank Mutual accepted a deed in lieu of foreclosure, as well as $466,000 in loss provisions on a number of smaller commercial real estate and commercial business loans. Finally, during the first quarter of 2009 Bank Mutual recorded $600,000 in additional loss provision to reflect management's general concerns regarding continued deterioration in economic conditions and declines in real estate values.

Gains (losses) on investment activities for the nine months ended September 30, 2009, were $6.2 million compared to $(3.4) million during the same period in 2008. Gains (losses) on investment activities were $3.5 in the third quarter of 2009 compared to $(3.8) million in the third quarter of last year. Results for the year-to-date periods include $831,000 and $4.5 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, of which $2.3 million was recorded in the third quarter of 2008. As a result of an increase in the fair value of this mutual fund, an additional impairment was not recorded in the third quarter of 2009. Given the significant uncertainty and illiquidity that exists in the markets for investments 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 carrying value of $21.7 million at September 30, 2009, which includes an unrealized gain of $831,000 based on the mutual fund's fair value as of that date. This unrealized gain was recorded in accumulated other comprehensive income (net of related taxes), which is a component of shareholders' equity.

Also included in gains (losses) on investment activities in the third quarter of the previous year was a $1.4 million impairment loss associated with Bank Mutual's investment in the common stock of the Federal Home Loan Mortgage Corporation ("Freddie Mac"), which was placed in conservatorship by the U.S. government during that period. This loss represented the entire recorded book value of the investment.

Excluding the OTTI and Freddie Mac losses described in the previous paragraphs, gains on investment activities were $7.1 million in during the nine months ended September 30, 2009, compared to $2.5 million in the same period of 2008. During the nine months ended September 30, 2009, Bank Mutual sold $492.1 million in longer-term mortgage-related and certain other 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 same period in 2008 resulted from the sale of $208.4 million in mortgage-related securities in that period.

Gains on sales of loans increased by $6.3 million or 413% during the nine months ended September 30, 2009, compared to the same period in 2008. During the third quarter of 2009, gains on loan sales increased to $1.0 million compared to only $171,000 in the same quarter last year. During the nine months ended September 30, 2009, sales of one- to four-family mortgage loans were $493.2 million compared to $115.6 million during the same period of 2008. Sales increased substantially in 2009 as a result of a historically low interest rate environment earlier in the year 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. The pace of loans sales slowed during the third quarter of 2009 compared to earlier in the year due to a generally higher interest rate environment. Nevertheless, the pace was still well ahead of sales in the same period of the prior year. However, lower rates near the end of the third quarter and early in the fourth quarter of 2009 have resulted in increased loan origination and sales activity in recent weeks.

For reasons discussed in the previous paragraph, Bank Mutual's one- to four-family mortgage loan originations were $543.8 million during the first nine months of 2009, compared to $157.5 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.

Loan-related fees and servicing revenue was $(263,000) during the nine months ended September 30, 2009, compared to $546,000 in the same period of 2008. For the third quarter, loan related fees and servicing revenue was $53,000 in 2009 compared to $277,000 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 nine months ended September 30, 2009 and 2008, MSR amortization expense, which is netted against loan-related fees and servicing revenue, was $2.4 million and $1.2 million, respectively. The amortization expense for the third quarter of each year was $493,000 and $309,000, respectively. Loan-related fees and servicing revenue is also impacted by changes in the valuation allowance that is established against MSRs. As of September 30, 2009, Bank Mutual had a valuation allowance of $508,000 against MSRs with a gross book value of $7.0 million. This compared to an allowance of $369,000 against a gross book value of $6.7 million at June 30, 2009, and an allowance of $822,000 against a gross book value of $4.5 million as of December 31, 2008. Bank Mutual included the increase or decrease in this valuation allowance in loan-related fees and servicing revenue as a charge or a recovery, as the case may be, in the period in which the changes occurred. There were no changes in the MSR valuation allowance during the three- and nine-month periods of 2008.

The valuation of MSRs, as well as the periodic amortization of MSRs, is significantly influenced by the level of market interest rates and loan prepayments. If market interest rates for one- to four-family loans increase and/or actual or expected 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 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 September 30, 2009, Bank Mutual serviced $963.9 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.

Service charges on deposits declined by $93,000 or 5.2% and $212,000 or 4.3% during the three- and nine-month periods ended September 30, 2009, compared to the same periods in 2008, respectively. These declines are due primarily to a decrease in overdraft charges and ATM/debit card fees in 2009 relative to 2008. Management believes these declines are due to the current recession, which has resulted in reduced spending by consumers in general, including deposit customers of Bank Mutual.

Other non-interest income declined by $584,000 or 10.7% during the nine months ended September 30, 2009, compared to the same period in 2008. Other non-interest income declined by $32,000 or 1.8% during the three months ended September 30, 2009, compared to the same period in 2008. 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. In addition, Bank Mutual has experienced a modest increase in losses on disposition of foreclosed real estate in 2009, which is included as a component of other non-interest income.

Total non-interest expense increased by $4.4 million or 9.3% during the nine months ended September 30, 2009, compared to the same period in 2008. The increase between the three month periods in these years was $709,000 or 4.4%. Results for the nine month period 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 increased from $241,000 in the first nine months of 2008 to $2.1 million in the same period in 2009; this expense increased from $118,000 during the third quarter of 2008 to $934,000 during the same quarter in 2009. FDIC premium expense in 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 of 2009. In Bank Mutual's case, the assessment was 0.05% of total assets less Tier 1 capital at June 30, 2009.

On September 29, 2009, the FDIC announced a proposal to require insured financial institutions to prepay in the fourth quarter of 2009 their estimated FDIC deposit insurance premiums through 2012. If this proposal is adopted in its present form, Bank Mutual estimates that it would be required to pay the FDIC approximately $12.7 million in the fourth quarter of 2009. This amount would be amortized as deposit insurance expense on a quarterly basis through 2012 and would be in lieu of the regular quarterly payments that would be otherwise required from Bank Mutual. As such, the proposal is not expected to have a material impact on the future operating results, financial condition, or liquidity position of Bank Mutual.

Excluding FDIC deposit premiums and the special assessment, all other non-interest expenses for the nine month period in 2009 increased by $1.0 million or 2.1% in the aggregate compared to the same period in 2008. This increase was 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 an additional Bank Mutual office that was opened in the second quarter of 2008. These developments were offset in part by slightly lower expenditures for legal and professional fees and marketing and advertising, which are included as components of other non-interest expense.

Income tax expense was $5.0 million during the nine months ended September 30, 2009, compared to $5.2 million in the same period of 2008. For the quarter periods, income tax expense was $772,000 in 2009 compared to $645,000 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 previously 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 nine months ended September 30, 2009, would have been $6.8 million. This amount represented an effective tax rate ("ETR") of 39.4% compared to 32.2% 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.