Bank Mutual (BKMU) 10-Q 2010 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2010

OR

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 000-31207

BANK MUTUAL CORPORATION

(Exact name of registrant as specified in its charter)

Wisconsin	39-2004336
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

4949 West Brown Deer Road
Milwaukee, Wisconsin 53223
(414) 354-1500

(Address, including Zip Code, and telephone number,
including area code, of registrant’s principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

Yesþ           Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)

Yeso           Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filero Accelerated filerþ Non-accelerated filero(Do not check if a smaller reporting company) Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso           Noþ

The number of shares outstanding of the issuer’s common stock, $0.01 par value per share, was 45,747,443 shares, at November 4, 2010.

BANK MUTUAL CORPORATION

FORM 10-Q QUARTERLY REPORT

Table of Contents

Item	Page
PART I
Item l. Financial Statements
Unaudited Condensed Consolidated Statements of Financial Condition as of September 30, 2010, and December 31, 2009		3
Unaudited Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2010 and 2009		4
Unaudited Condensed Consolidated Statements of Equity for the three and nine months ended September 30, 2010 and 2009		6
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009		7
Notes to Unaudited Condensed Consolidated Financial Statements		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
Item 3. Quantitative and Qualitative Disclosures about Market Risk		48
Item 4. Controls and Procedures		51
PART II
Item 1A. Risk Factors		52
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds		52
Item 6. Exhibits		52
SIGNATURES		53
EX-31.1
EX-31.2
EX-32.1
EX-32.2

2

PART I

Item 1. Financial Statements

Bank Mutual Corporation and Subsidiaries

Unaudited Condensed Consolidated Statements of Financial Condition

	September 30			December 31
	2010			2009
	(Dollars in thousands)
Assets
Cash and due from banks	$	22,566		$	37,696
Interest-earning deposits		55,843			189,962
Cash and cash equivalents		78,409			227,658
Securities available-for-sale, at fair value:
Investment securities		942,926			614,104
Mortgage-related securities		137,925			866,848
Loans held for sale, net		69,331			13,534
Loans receivable, net		1,377,469			1,506,056
Foreclosed properties and repossessed assets		20,548			17,689
Goodwill		52,570			52,570
Mortgage servicing rights, net		6,649			6,899
Due from broker for securities sales		536,990			—
Other assets		208,787			206,706
Total assets	$	3,431,604		$	3,512,064
Liabilities and equity
Liabilities:
Deposit liabilities	$	2,059,004		$	2,137,508
Borrowings		906,201			906,979
Advance payments by borrowers for taxes and insurance		29,979			2,508
Other liabilities		37,645			59,668
Total liabilities		3,032,829			3,106,663
Equity:
Preferred stock — $.01 par value:
Authorized — 20,000,000 shares in 2010 and 2009 Issued and outstanding — none in 2010 and 2009		—			—
Common stock — $.01 par value:
Authorized — 200,000,000 shares in 2010 and 2009 Issued — 78,783,849 shares in 2010 and 2009 Outstanding — 45,747,443 shares in 2010 and 46,165,635 in 2009		788			788
Additional paid-in capital		494,508			499,376
Retained earnings		268,515			272,518
Unearned ESOP shares		(87	)		(347	)
Accumulated other comprehensive loss		(1,050	)		(2,406	)
Treasury stock — 33,036,406 shares in 2010 and 32,618,214 in 2009		(366,823	)		(367,452	)
Total shareholders’ equity		395,851			402,477
Non-controlling interest in real estate partnership		2,924			2,924
Total equity including non-controlling interest		398,775			405,401
Total liabilities and equity	$	3,431,604		$	3,512,064

Refer to Notes to Unaudited Condensed Consolidated Financial Statements

3

Bank Mutual Corporation and Subsidiaries

Unaudited Condensed Consolidated Statements of Income

	Three Months Ended
	September 30
	2010			2009
	(Dollars in thousands,
	except per share data)
Interest income:
Loans	$	19,780		$	22,727
Investment securities		4,071			3,708
Mortgage-related securities		4,528			9,289
Interest-earning deposits		62			3
Total interest income		28,441			35,727
Interest expense:
Deposit liabilities		6,865			10,524
Borrowings		9,863			9,876
Advance payments by borrowers for taxes and insurance		2			4
Total interest expense		16,730			20,404
Net interest income		11,711			15,323
Provision for loan losses		6,163			5,189
Net interest income after provision for loan losses		5,548			10,134
Non-interest income:
Service charges on deposits		1,624			1,700
Brokerage and insurance commissions		738			552
Loan related fees and servicing revenue, net		(291	)		70
Gain on loan sales activities, net		3,669			1,038
Gain on investments, net		5,220			3,547
Other non-interest income		2,003			1,804
Total non-interest income		12,963			8,711
Non-interest expenses:
Compensation, payroll taxes, and other employee benefits		9,002			9,900
Occupancy and equipment		2,822			2,864
Federal insurance premiums and special assessment		1,036			934
Loss on foreclosed real estate, net		1,162			81
Other non-interest expense		3,256			3,050
Total non-interest expenses		17,278			16,829
Income before income taxes		1,233			2,016
Income tax expense		307			772
Net income before non-controlling interest		926			1,244
Net loss attributable to non-controlling interest		—			1
Net income	$	926		$	1,245
Per share data:
Earnings per share — basic	$	0.02		$	0.03
Earnings per share — diluted	$	0.02		$	0.03
Cash dividends per share paid	$	0.03		$	0.09

Refer to Notes to Unaudited Condensed Consolidated Financial Statements

4

Bank Mutual Corporation and Subsidiaries
Unaudited Condensed Consolidated Statements of Income

	Nine Months Ended
	September 30
	2010			2009
	(Dollars in thousands,
	except per share data)
Interest income:
Loans	$	60,515		$	73,498
Investment securities		13,256			13,466
Mortgage-related securities		16,040			29,839
Interest-earning deposits		207			77
Total interest income		90,018			116,880
Interest expense:
Deposit liabilities		22,501			35,159
Borrowings		29,293			29,332
Advance payments by borrowers for taxes and insurance		4			7
Total interest expense		51,798			64,498
Net interest income		38,220			52,382
Provision for loan losses		15,679			8,822
Net interest income after provision for loan losses		22,541			43,560
Non-interest income:
Service charges on deposits		4,512			4,756
Brokerage and insurance commissions		2,315			2,070
Loan related fees and servicing revenue, net		(39	)		(222	)
Gain on loan sales activities, net		5,486			7,800
Gain on investments, net		16,291			6,219
Other non-interest income		5,756			5,013
Total non-interest income		34,321			25,636
Non-interest expenses:
Compensation, payroll taxes, and other employee benefits		26,713			30,267
Occupancy and equipment		8,500			8,946
Federal insurance premiums and special assessment		3,057			3,660
Loss on foreclosed real estate, net		4,205			145
Other non-interest expense		9,106			8,934
Total non-interest expenses		51,581			51,952
Income before income taxes		5,281			17,244
Income tax expense		1,521			4,994
Net income before non-controlling interest		3,760			12,250
Net income attributable to non-controlling interest		(1	)		—
Net income	$	3,759		$	12,250
Per share data:
Earnings per share — basic	$	0.08		$	0.26
Earnings per share — diluted	$	0.08		$	0.26
Cash dividends per share paid	$	0.17		$	0.27

Refer to Notes to Unaudited Condensed Consolidated Financial Statements

5

Bank Mutual Corporations and Subsidiaries

Unaudited Condensed Consolidated Statements of Equity

												Accumulated						Non-Controlling
			Additional						Unearned			Other						Interest in
	Common		Paid-In			Retained			ESOP			Comprehensive			Treasury			Real Estate
	Stock		Capital			Earnings			Shares			Income (Loss)			Stock			Partnership		Total
	(Dollars in thousands, except per share data)
Balance at January 1, 2010	$	788	$	499,376		$	272,518		$	(347	)	$	(2,406	)	$	(367,452	)	$	2,924	$	405,401
Comprehensive income:
Net income		—		—			3,759			—			—			—			—		3,759
Other comprehensive income:
Change in net unrealized gain on securities available-for-sale, net of deferred income taxes of $7,443		—		—			—			—			11,114			—			—		11,114
Reclassification adjustment for gain on securities included in income, net of income taxes of $(6,533)		—		—			—			—			(9,758	)		—			—		(9,758	)
Total comprehensive income		—		—			—			—			—			—			—		5,115
Purchase of treasury stock		—		—			—			—			—			(5,029	)		—		(5,029	)
Issuance of management recognition plan shares		—		(184	)		—			—			—			184			—		—
Committed ESOP shares		—		338			—			260			—			—			—		598
Exercise of stock options		—		(5,121	)		—			—			—			5,474			—		353
Share based payments		—		99			—			—			—			—			—		99
Cash dividends ($0.17 per share)		—		—			(7,762	)		—			—			—			—		(7,762	)
Balance at September 30, 2010	$	788	$	494,508		$	268,515		$	(87	)	$	(1,050	)	$	(366,823	)	$	2,924	$	398,775
Balance at January 1, 2009	$	788	$	498,501		$	273,826		$	(1,247	)	$	(16,404	)	$	(355,853	)	$	2,924	$	402,535
Comprehensive income:
Net income		—		—			12,250			—			—			—			—		12,250
Other comprehensive income:
Change in net unrealized gain on securities available-for-sale, net of deferred income taxes of $9,736		—		—			—			—			16,984			—			—		16,984
Reclassification adjustment for gain on securities included in income, net of income taxes of $(2,494)		—		—			—			—			(3,725	)		—			—		(3,725	)
Total comprehensive income		—		—			—			—			—			—			—		25,509
Purchase of treasury stock		—		—			—			—			—			(11,219	)		—		(11,219	)
Committed ESOP shares		—		1,588			—			675			—			—			—		2,263
Exercise of stock options		—		(1,400	)		—			—			—			2,154			—		754
Share based payments		—		844			—			—			—			—			—		844
Cash dividends ($0.27 per share)		—		—			(12,671	)		—			—			—			—		(12,671	)
Balance at September 30, 2009	$	788	$	499,533		$	273,405		$	(572	)	$	(3,145	)	$	(364,918	)	$	2,924	$	408,015

Refer to Notes to Unaudited Condensed Consolidated Financial Statements

6

Bank Mutual Corporation and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

	Nine Months Ended
	September 30
	2010			2009
	(Dollars in thousands)
Operating activities:
Net income	$	3,759		$	12,250
Adjustments to reconcile net income to net cash provided by operating activities:
Net provision for loan losses		15,679			8,822
Net loss on foreclosed real estate		4,205			145
Provision for depreciation		1,942			1,875
Amortization of intangibles		304			304
Amortization of mortgage servicing rights		2,100			2,440
Increase (decrease) in valuation allowance on MSRs		198			(314	)
Stock-based compensation expense		697			3,107
Net premium amortization on securities		2,164			1,273
Loans originated for sale		(277,394	)		(492,368	)
Proceeds from loan sales		225,035			496,124
Net gain on loan sales activities		(5,486	)		(7,800	)
Net gain on sale of investments		(16,291	)		(7,050	)
Other-than-temporary impairment of available-for-sale securities		—			831
Accrued FDIC special assessment		—			1,550
Decrease in other liabilities		(22,023	)		(21,893	)
Increase in other assets		(1,322	)		(1,262	)
Decrease in accrued interest receivable		3,226			3,575
Net cash provided (used) by operating activities		(63,207	)		1,609
Investing activities:
Proceeds from maturities of investment securities		1,059,148			316,852
Purchases of investment securities		(1,383,331	)		(444,351	)
Purchases of mortgage-related securities		(496,360	)		(717,709	)
Principal repayments on mortgage-related securities		145,858			260,685
Proceeds from sale of investment securities		554,189			364,427
Net decrease in loans receivable		96,004			235,991
Proceeds from sale of foreclosed properties		4,283			2,427
Net purchases of premises and equipment		(1,584	)		(1,235	)
Net cash provided (used) by investing activities		(21,793	)		17,087

(continued)

7

Bank Mutual Corporation and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows (Continued)

	Nine Months Ended
	September 30
	2010			2009
	(Dollars in thousands)
Financing activities:
Net decrease in deposits liabilities	$	(78,504	)	$	(42,688	)
Repayments of long-term borrowings		(778	)		(739	)
Net increase in advance payments by borrowers for taxes and insurance		27,471			28,308
Proceeds from exercise of stock options		327			527
Excess tax benefit from exercise of stock options		26			227
Cash dividends		(7,762	)		(12,671	)
Purchase of treasury stock		(5,029	)		(11,219	)
Net cash used by financing activities		(64,249	)		(38,255	)
Decrease in cash and cash equivalents		(149,249	)		(19,559	)
Cash and cash equivalents at beginning of period		227,658			112,893
Cash and cash equivalents at end of period	$	78,409		$	93,334
Supplemental information:
Cash paid in period for:
Interest on deposit liabilities and borrowings	$	52,091		$	65,120
Income taxes		5,061			9,078
Non-cash transactions:
Loans transferred to foreclosed properties and repossessed assets		18,704			20,289
Due from broker for securities sales		536,990			118,547
Due to broker for securities purchases		—			94,000

Refer to Notes to Unaudited Condensed Consolidated Financial Statements

8

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2010

(Dollars in Thousands, Except Per Share Amounts)

1. Basis of Presentation

The Unaudited Condensed Consolidated Financial Statements include the accounts of Bank Mutual Corporation (the “Company”), its wholly-owned subsidiary Bank Mutual (the “Bank”), and the Bank’s subsidiaries.

The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information, Rule 10-01 of Regulation S-X, and the instructions to Form 10-Q. The financial statements do not include all of the information and footnotes required by GAAP for complete financial information. However, in the opinion of management, all adjustments (consisting of normal recurring entries) necessary for a fair presentation of operations, cash flows, and financial position have been included in the accompanying financial statements. This report should be read in conjunction with the Company’s 2009 Annual Report on Form 10-K. Operating results for the three and nine months ended September 30, 2010, are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

In 2008 the FASB issued new accounting guidance related to employer’s disclosures about postretirement benefit plan assets. This new guidance was effective for fiscal years ending after December 15, 2009. The Company’s adoption of this new guidance had no impact on the Company’s financial condition, results of operations, or liquidity, although it affected how certain matters are presented in the financial statements.

In April 2009 the FASB issued new accounting guidance in three areas: recognition and presentation of other-than-temporary impairments (“OTTI”); determining fair value for assets or liabilities in markets that are not orderly; and interim disclosures about the fair value of financial instruments. The new guidance in all of these areas was effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ended after March 15, 2009. The Company adopted the new guidance in all three of these areas during the second quarter of 2009. Application of this new guidance did not have a material impact on the Company’s financial condition, results of operations, or liquidity, although it affects how certain matters may be presented in the financial statements.

In June 2009 the Company adopted new guidance issued by the FASB related to subsequent events. In February 2010 this guidance was updated. This new guidance established general standards and requirements for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The Company evaluated subsequent events through the issuance date of the financial statements.

In June 2009 the FASB amended certain accounting guidance related to the transfer of financial assets. This amended guidance was effective for the first annual reporting period that began after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The amended guidance must be applied to transfers occurring on or after the effective date. Earlier application was prohibited. The Company’s adoption of this amended guidance did not have a material impact on its financial condition, results of operations, or liquidity.

In June 2009 the FASB amended certain accounting guidance related to the consolidation of variable interest entities. The amended guidance was effective as of the beginning of each entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual

9

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2010

(Dollars in Thousands, Except Per Share Amounts)

1. Basis of Presentation (continued)

reporting period, and for interim and annual reporting periods thereafter. Earlier application was prohibited. The Company’s adoption of this amended guidance had no impact on its financial condition, results of operations, or liquidity.

In August 2009 the FASB issued new accounting guidance that clarified certain matters relating to the measurement of the fair value of liabilities. This guidance was effective for the first reporting period following its issuance, which for the Company was the fourth quarter of 2009. The Company’s adoption of the new guidance had no impact on its financial condition, results of operations, liquidity, or fair value disclosures.

In January 2010 the FASB issued new accounting guidance related to certain disclosures about fair value measurements. Certain aspects of the new guidance are effective for reporting periods beginning after December 15, 2009, which for the Company was the first quarter of 2010. The Company’s adoption of this new guidance had no impact on its financial condition, results of operations, or liquidity. Certain other aspects of the new guidance are not effective until the first reporting period after December 15, 2010, which will be the first quarter of 2011 for the Company. The Company’s adoption of this portion of the new guidance is not expected to have an impact on its financial condition, results of operations, or liquidity, although it could affect the matters that will be disclosed in the financial statements.

In July 2010 the FASB issued new accounting guidance related to certain disclosures about the credit quality of financing receivables and allowances for credit losses. Certain aspects of the new guidance are effective for reporting periods ending after December 15, 2010, which for the Company will be the fourth quarter of 2010. Certain other aspects of the new guidance are not effective until the accounting periods beginning after December 15, 2010, which will be the first quarter of 2011 for the Company. The Company’s adoption of this new guidance is not expected to have an impact on its financial condition, results of operations or liquidity, although it will affect the matters that will be disclosed in the financial statements.

The Company describes all of its critical and/or significant accounting policies, judgments, and estimates in Note 1 of its Audited Consolidated Financial Statements contained in its 2009 Annual Report on Form 10-K.

Particular attention should be paid to the Company’s allowance for losses on loans, which requires significant management judgments and/or estimates because of the inherent uncertainties surrounding this area and/or the subjective nature of the area. Information regarding the impact loss allowances have had on the Company’s financial condition and results of operations for the three and nine month periods ended September 30, 2010 and 2009, can be found in Note 3, “Loans Receivable,” below.

Significant judgments and/or estimates are also made in accounting for the Company’s goodwill and OTTI of its securities available-for-sale. The Company performed an annual goodwill impairment analysis during the three months ended September 30, 2010. In the judgment of management there was no impairment of the Company’s goodwill as of that date. Information regarding the impact OTTI

10

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2010

(Dollars in Thousands, Except Per Share Amounts)

1. Basis of Presentation (continued)

has had on the Company’s financial condition and results of operations for the three and nine month periods ended September 30, 2010 and 2009, can be found in Note 2, “Securities Available-for-Sale,” below.

2. Securities Available-for-Sale

The amortized cost and fair value of investment securities available-for-sale are as follows:

	September 30, 2010
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Investment securities:
U.S. government and federal obligations	$	918,354	$	1,698	$	(2	)	$	920,050
Mutual funds		21,545		1,395		(64	)		22,876
Total investment securities		939,899		3,093		(66	)		942,926
Mortgage-related securities:
Federal Home Loan Mortgage Corporation		26,631		215		—			26,846
Federal National Mortgage Association		10,341		385		—			10,726
Government National Mortgage Association		3,987		40		—			4,027
Private-label CMOs		99,676		978		(4,328	)		96,326
Total mortgage-related securities		140,635		1,618		(4,328	)		137,925
Total securities available-for-sale	$	1,080,534	$	4,711	$	(4,394	)	$	1,080,851

	December 31, 2009
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Investment securities:
U.S. government and federal obligations	$	594,024	$	128	$	(2,360	)	$	591,792
Mutual funds		21,546		831		(65	)		22,312
Total investment securities		615,570		959		(2,425	)		614,104
Mortgage-related securities:
Federal Home Loan Mortgage Corporation		291,318		4,180		(310	)		295,188
Federal National Mortgage Association		220,437		5,044		(723	)		224,758
Government National Mortgage Association		234,796		1,512		(1,188	)		235,120
Private-label CMOs		120,780		104		(9,102	)		111,782
Total mortgage-related securities		867,331		10,840		(11,323	)		866,848
Total securities available-for-sale	$	1,482,901	$	11,799	$	(13,748	)	$	1,480,952

11

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2010

(Dollars in Thousands, Except Per Share Amounts)

2. Securities Available-for-Sale (continued)

As of September 30, 2010 the following schedule identifies securities by time in which the securities had a gross unrealized loss.

	Less Than 12 Months							Greater Than 12 Months
	in an Unrealized Loss Position							in an Unrealized Loss Position							Gross			Total
	Unrealized			Number		Estimated		Unrealized			Number		Estimated		Unrealized			Estimated
	Loss			of		Fair		Loss			of		Fair		Loss			Fair
	Amount			Securities		Value		Amount			Securities		Value		Amount			Value
Investment securities:
U.S. Government and federal obligations	$	(2	)		5	$	359,972		—			—		—	$	(2	)	$	359,972
Mutual funds		—			—		—	$	(64	)		1	$	644		(64	)		644
Total investment securities		(2	)		5		359,972		(64	)		1		644		(66	)		360,616
Mortgage-related securities:
Private-label CMOs		—			—		—		(4,328	)		21		62,082		(4,328	)		62,082
Total	$	(2	)		5	$	359,972	$	(4,392	)		22	$	62,726	$	(4,394	)	$	422,698

As of December 31, 2009, the following schedule identifies securities by time in which the securities had a gross unrealized loss.

	Less Than 12 Months							Greater Than 12 Months
	in an Unrealized Loss Position							in an Unrealized Loss Position							Gross			Total
	Unrealized			Number		Estimated		Unrealized			Number		Estimated		Unrealized			Estimated
	Loss			of		Fair		Loss			of		Fair		Loss			Fair
	Amount			Securities		Value		Amount			Securities		Value		Amount			Value
Investment securities:
U.S. Government and federal obligations	$	(2,360	)		24	$	441,714		—			—		—	$	(2,360	)	$	441,714
Mutual funds		—			—		—	$	(65	)		1	$	644		(65	)		644
Total investment securities		(2,360	)		24		441,714		(65	)		1		644		(2,425	)		442,358
Mortgage-related securities:														��
Federal Home Loan Mortgage Corporation		(122	)		3		49,961		(188	)		5		6,073		(310	)		56,034
Federal National Mortgage Association		(668	)		5		35,848		(55	)		1		1,490		(723	)		37,338
Government National Mortgage Association		(1,106	)		5		84,135		(82	)		3		7,039		(1,188	)		91,174
Private-label CMOs		—			—		—		(9,102	)		25		88,860		(9,102	)		88,860
Total mortgage-related securities		(1,896	)		13		169,944		(9,427	)		34		103,462		(11,323	)		273,406
Total	$	(4,256	)		37	$	611,658	$	(9,492	)		35	$	104,106	$	(13,748	)	$	715,764

The Company has determined that the unrealized losses reported for its investment and mortgage-related securities as of September 30, 2010, and December 31, 2009, were temporary. The Company believes it is probable that it will receive all future contractual cash flows related to these securities. The Company does not intend to sell these securities and it is unlikely that it will be required to sell the securities before the recovery of their amortized cost.

12

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2010

(Dollars in Thousands, Except Per Share Amounts)

2. Securities Available-for-Sale (continued)

A portion of the Company’s securities that were in an unrealized loss position at September 30, 2010, and/or December 31, 2009, consisted of U.S. government and federal agency obligations and mortgage-related securities issued by government sponsored entities. Accordingly, the Company determined that none of those securities were other-than-temporarily impaired as of those dates. The Company also determined that none of its private-label collateralized mortgage obligations (“CMOs”) were other-than-temporarily impaired as of those dates. This determination was based on management’s judgment regarding the nature of the loan collateral that supports the securities, a review of the current ratings issued on the securities by various credit rating agencies, a review of the actual delinquency and/or default performance of the loan collateral that supports the securities, and recent trends in the fair market values of the securities. In addition, as of September 30, 2010, the Company had eleven private-label CMOs, with an aggregate carrying value of $38,612 and unrealized loss of $2,183, that were rated less than investment grade. These eleven private-label CMOs were analyzed using modeling techniques that considered the priority of cash flows in the CMO structure and various default and loss rate scenarios that management considered appropriate given the nature of the loan collateral. Based on this analysis, management concluded that none of these eleven securities were other-than-temporarily impaired as of September 30, 2010, or December 31, 2009.

During the first quarter of 2009, the Company recorded an impairment of $831 on one of its mutual fund investments. This impairment was included as a component of net gain (loss) on investments in the income statement for the nine months ended September 30, 2009.

Results of operations included gross realized gains on the sale of securities available-for-sale of $5,220, and $3,547 for the three month periods ending September 30, 2010 and 2009, respectively, and $16,291 and $6,219 for the nine month periods ending September 30, 2010, and 2009, respectively. None of these periods included gross realized losses on the sale of securities available-for-sale.

The amortized cost and fair values of securities by contractual maturity at September 30, 2010, are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Fair
	Cost		Value
Due in one year or less	$	528,964	$	528,962
Due after one year through five years		93,645		93,755
Due after five years through ten years		231,745		233,075
Due after ten years		64,000		64,258
Mutual funds		21,545		22,876
Mortgage-related securities		140,635		137,925
Total securities available for sale	$	1,080,534	$	1,080,851

Investment securities with a fair value of approximately $288,918 and $394,789 at September 30, 2010 and December 31, 2009, respectively, were pledged to secure deposits, borrowings, and for other purposes as permitted or required by law.

13

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2010

(Dollars in Thousands, Except Per Share Amounts)

3. Loans Receivable

Loans receivable consist of the following:

	September 30			December 31
	2010			2009
Permanent mortgage loans:
One- to four-family	$	562,298		$	656,018
Multi-family		239,246			190,377
Commercial real estate		284,232			285,764
Total permanent mortgages		1,085,776			1,132,159
Construction and development loans:
One- to four-family		12,514			11,441
Multi-family		19,810			52,323
Commercial real estate		23,115			32,109
Total construction and development		55,439			95,873
Total real estate mortgage loans		1,141,215			1,228,032
Consumer loans:
Fixed home equity		108,770			124,519
Home equity lines of credit		88,710			88,796
Student		18,254			19,793
Home improvement		25,717			28,441
Automobile		3,174			4,077
Other consumer		7,508			9,871
Total consumer loans		252,133			275,497
Commercial business loans		48,898			52,167
Total loans receivable		1,442,246			1,555,696
Undisbursed loan proceeds		(37,832	)		(32,690	)
Allowance for loan losses		(26,409	)		(17,028	)
Unearned loan fees and discounts		(536	)		78
Total loans receivable, net	$	1,377,469		$	1,506,056

The Company’s mortgage loans and home equity loans are primarily secured by properties that are located in the Company’s local lending areas in Wisconsin, Minnesota, Michigan, and Illinois.

14

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2010

(Dollars in Thousands, Except Per Share Amounts)

3. Loans Receivable (continued)

A summary of the activity in the allowance for loan losses follows:

	Nine Months Ended September 30
	2010			2009
	(Dollars in thousands)
Balance at the beginning of the period	$	17,028		$	12,208
Provision for loan losses		15,679			8,822
Charge-offs:
One- to four-family		(275	)		(328	)
Multi-family		—			(4,523	)
Commercial real estate		(5,331	)		(1,964	)
Consumer loans		(570	)		(344	)
Commercial business loans		(173	)		(167	)
Total charge-offs		(6,349	)		(7,326	)
Recoveries:
One- to four-family		20			—
Commercial real estate		1			—
Consumer loans		30			30
Total recoveries		51			30
Net charge-offs		(6,298	)		(7,296	)
Balance at the end of the period	$	26,409		$	13,734

4. Mortgage Servicing Rights

The following table presents the activity in the Company’s mortgage servicing rights (“MSRs”) for the periods indicated.

	Nine Months Ended September 30
	2010			2009
MSRs at beginning of the period	$	7,186		$	4,525
Additions		2,048			4,880
Amortization		(2,100	)		(2,440	)
MSRs at end of period		7,134			6,965
Valuation allowance at end of period		(485	)		(508	)
MSRs at end of the period, net	$	6,649		$	6,457

The projections of amortization expense shown below for MSRs are based on existing asset balances and the existing interest rate environment as of September 30, 2010. Future amortization expense may be significantly different depending upon changes in the mortgage servicing portfolio, mortgage interest rates, and market conditions.

15

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2010

(Dollars in Thousands, Except Per Share Amounts)

4. Mortgage Servicing Rights (continued)

The following table shows the current period and estimated future amortization expense for MSRs:

			Amount
Nine months ended September 30, 2010 (actual)			$	2,100
Estimate for three months ended December 31, 2010			$	310
Estimate for years ended December 31:		2011		1,159
		2012		1,047
		2013		976
		2014		921
		2015		879
	Thereafter			1,357
	Total		$	6,649

5. Other Assets

Other assets are summarized as follows:

	September 30		December 31
	2010		2009
Accrued interest:
Mortgage-related securities	$	2,349	$	4,651
Investment securities		1,596		1,875
Loans receivable		6,149		6,795
Total accrued interest		10,095		13,321
Premises and equipment, net		51,357		51,715
Federal Home Loan Bank stock, at cost		46,092		46,092
Bank owned life insurance		54,887		53,295
Prepaid FDIC insurance premiums		9,643		12,521
Prepaid and other assets		36,713		29,762
Total other assets	$	208,787	$	206,706

16

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2010

(Dollars in Thousands, Except Per Share Amounts)

6. Deposit Liabilities

Deposit liabilities are summarized as follows:

	September 30		December 31
	2010		2009
Checking accounts:
Non-interest-bearing	$	89,309	$	94,619
Interest-bearing		197,575		211,448
Total checking accounts		286,884		306,067
Money market accounts		354,222		345,144
Savings accounts		210,625		196,983
Certificates of deposit:
Due within one year		892,750		992,752
After one but within two years		139,014		145,385
After two but within three years		121,447		23,370
After three but within four years		36,469		98,274
After four but within five years		17,593		29,533
After five years		—		—
Total certificates of deposits		1,207,273		1,289,314
Total deposit liabilities	$	2,059,004	$	2,137,508

7. Borrowings

Borrowings consist of the following:

	September 30, 2010					December 31, 2009
			Weighted-					Weighted-
			Average					Average
	Balance		Rate			Balance		Rate
Federal Home Loan Bank advances maturing in:
2012	$	100,000		4.52	%	$	100,000		4.52	%
2013		252		4.17			264		4.17
2016		200,000		4.25			200,000		4.25
2017		557,403		4.15			557,420		4.15
Thereafter		48,546		5.12			49,295		5.12
Total borrowings	$	906,201		4.26	%	$	906,979		4.26	%

Substantially all of the Company’s advances from the Federal Home Loan Bank (“FHLB”) of Chicago are subject to prepayment penalties if voluntarily repaid prior to their stated maturity. At September 30, 2010, $856,000 of the Company’s FHLB of Chicago advances were redeemable on a quarterly basis at the option of the FHLB of Chicago.

17

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2010

(Dollars in Thousands, Except Per Share Amounts)

7. Borrowings (continued)

The Company is required to maintain certain unencumbered mortgage loans and certain mortgage-related securities as collateral against its outstanding advances from the FHLB of Chicago. Total advances from the FHLB of Chicago are limited to the lesser of: (1) 35% of the Bank’s total assets; (2) 20 times the capital stock of the FHLB of Chicago that is owned by the Bank; or (3) the total of 60% of the book value of certain multi-family mortgage loans, 75% of the book value of one- to four-family mortgage loans, and 95% of certain mortgage-related securities. Advances are also collateralized by any capital stock of the FHLB of Chicago that is owned by the Bank, which amounted to $46,092 at September 30, 2010.

The Bank has $15,000 in aggregate lines of credit with unrelated financial institutions. At September 30, 2010, and December 31, 2009, no amounts were outstanding on these lines of credit.

8. Shareholders’ Equity

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory actions and possible additional discretionary actions by regulators, that, if undertaken, could have a direct material effect on the Bank’s and the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by federal regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total capital and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to adjusted assets (as all of these terms are defined in the applicable regulations). Management believes, as of September 30, 2010, that the Bank met or exceeded all capital adequacy requirements to which it is subject.

The following table presents the Bank’s actual and required regulatory capital amounts and ratios as of September 30, 2010:

											To Be Well
						Required					Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk-weighted assets)	$	348,110		21.87	%	$	127,326		8.00	%	$	159,157		10.00	%
Tier 1 capital (to risk-weighted assets)		336,418		21.14			63,663		4.00			95,949		6.00
Tier 1 capital (to adjusted total assets)		336,418		9.98			134,847		4.00			168,559		5.00

The Company is not aware of any conditions or events which would change the Bank’s status from “well capitalized.”

18

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2010

(Dollars in Thousands, Except Per Share Amounts)

9. Earnings Per Share

The computation of basic and diluted earnings per share is presented in the following table:

	Three Months Ended				Nine Months Ended
	September 30				September 30
	2010		2009		2010		2009
Basic earnings per share:
Net income	$	926	$	1,245	$	3,759	$	12,250
Weighted average shares outstanding		45,573,340		46,012,017		45,518,562		46,308,070
Allocated ESOP shares for period		15,772		81,813		47,316		245,439
Vested MRP shares for period		1,194		1,638		3,082		59,817
Basic shares outstanding		45,590,306		46,095,468		45,568,960		46,613,326
Basic earnings per share	$	0.02	$	0.03	$	0.08	$	0.26
Diluted Earnings Per Share:
Net income	$	926	$	1,245	$	3,759	$	12,250
Weighted average shares used in basic earnings per share		45,590,306		46,095,468		45,568,960		46,613,326
Dilutive effect of:
Stock option shares		208,654		610,241		329,576		645,669
Unvested MRP shares		—		—		—		—
Diluted shares outstanding		45,798,960		46,705,709		45,898,536		47,258,995
Diluted earnings per share	$	0.02	$	0.03	$	0.08	$	0.26

The Company had stock options for 1,904,000 shares outstanding as of September 30, 2010, and for 2,064,000 shares as of September 30, 2009, that were not included in the computation of diluted earnings per share because they were anti-dilutive. These shares had weighted average exercise prices of $10.67 and $10.75 per share as of those dates, respectively.

10. Employee Benefit Plans

The Company has a discretionary, defined contribution savings plan (the “Savings Plan”). The Savings Plan is qualified under Sections 401 and 401(k) of the Internal Revenue Code and provides employees meeting certain minimum age and service requirements the ability to make contributions to the Savings Plan on a pretax basis. The Company then matches a percentage of the employee’s contributions. Matching contributions made by the Company were $47 and $45 during the three months ended September 30, 2010 and 2009, respectively, and $123 and $137 for the nine months ended September 30, 2010 and 2009, respectively.

The Company also has a defined benefit pension plan covering employees meeting certain minimum age and service requirements and a non-qualified supplemental pension plan for certain qualifying employees. The supplemental pension plan is funded through a “rabbi trust” arrangement. The benefits are generally based on years of service and the employee’s average annual compensation for five consecutive calendar

19

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2010

(Dollars in Thousands, Except Per Share Amounts)

10. Employee Benefit Plans (continued)

years in the last ten calendar years that produces the highest average. The Company’s funding policy for the qualified plan is to contribute annually the amount necessary to satisfy the requirements of the Employee Retirement Income Security Act of 1974.

The following tables set forth the plans’ net periodic benefit cost:

	Qualified Plan						Qualified Plan
	For the Three Months						For the Nine Months
	Ended September 30						Ended September 30
	2010			2009			2010			2009
Service cost	$	485		$	441		$	1,455		$	1,323
Interest cost		506			456			1,518			1,367
Expected return on plan assets		(573	)		(430	)		(1,719	)		(1,290	)
Amortization of prior service cost		—			139			—			418
Net periodic benefit cost	$	418		$	606		$	1,254		$	1,818

	Supplemental Plan				Supplemental Plan
	For the Three Months				For the Nine Months
	Ended September 30				Ended September 30
	2010		2009		2010		2009
Service cost		—	$	49		—	$	147
Interest cost	$	107		107	$	321		322
Net periodic benefit cost	$	107	$	156	$	321	$	469

The 2010 contribution of $5,000 made in the second quarter was determined based on a number of factors, including the results of the Actuarial Valuation Report as of January 1, 2010. No contribution is necessary to the Supplemental Plan.

11. Stock-Based Benefit Plans

In 2001 the Company’s shareholders approved the 2001 Stock Incentive Plan (the “2001 Plan”), which provided for stock option awards of up to 4,150,122 shares. Options granted under the 2001 Plan vested over five years and had expiration terms of ten years. The 2001 Plan also provided for restricted stock (“MRP”) awards of up to 1,226,977 shares. All options and MRPs awarded under the 2001 Plan are fully vested and no further awards may be granted under the 2001 Plan.

In 2004 the Company’s shareholders approved the 2004 Stock Incentive Plan (the “2004 Plan”), which provided for stock option awards of up to 4,106,362 shares. Options granted under the 2004 Plan vest over five years and have expiration terms of ten years. The 2004 Plan also provided for MRP awards of up to 1,642,521 shares. MRP shares awarded under the 2004 Plan vest over five years. As of September 30, 2010, 639,721 MRP shares and options for 1,542,362 shares remain eligible for award under the 2004 Plan.

The Company has no stock compensation plans that have not been approved by shareholders.

20

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2010

(Dollars in Thousands, Except Per Share Amounts)

11. Stock-Based Benefit Plans (continued)

MRP grants are amortized to compensation expense as the Company’s employees and directors become vested in the granted shares. The amount amortized to expense was $25 and $19 for the three month periods ended September 30, 2010 and 2009, respectively, and $67 and $685 for the nine month periods ended September 30, 2010 and 2009, respectively. Outstanding non-vested MRP grants had a fair value of $170 and an unamortized cost of $309 at September 30, 2010. The cost of these shares is expected to be recognized over a weighted-average period of 1.7 years.

During the three months ended September 30, 2010 and 2009, the Company recorded stock option compensation expense of $13 and $9, respectively, and for the nine months ended September 30, 2010 and 2009, the Company recorded stock option compensation expense of $33 and $159, respectively. As of September 30, 2010, there was $157 in total unrecognized stock option compensation expense related to non-vested options. This cost is expected to be recognized over a weighted-average period of 1.8 years.

The following schedule reflects activity in the Company’s stock options during the nine month periods ended September 30, 2010 and 2009.

	Nine Months Ended September 30
	2010					2009
				Weighted					Weighted
				Average					Average
	Stock			Exercise		Stock			Exercise
	Options			Price		Options			Price
Outstanding at beginning of period		3,129,398		$	8.1823		3,445,967		$	7.8763
Granted		50,000			7.2200		—			—
Exercised		(566,934	)		3.2056		(179,143	)		3.2056
Forfeited		(210,000	)		10.6730		(69,800	)		10.6730
Outstanding at end of period		2,402,464		$	9.1189		3,197,024		$	8.0770

The following table provides additional information regarding the Company’s outstanding options as of September 30, 2010.

	Remaining	Non-Vested Options				Vested Options
	Contractual	Stock				Stock
	Life	Options		Intrinsic Value		Options		Intrinsic Value
Exercise Price:
$  3.2056	0.6 years		—		—		498,464	$	989
$10.6730	3.6 years		—		—		1,722,000		—
$12.2340	5.8 years		10,000		—		40,000		—
$11.1600	7.6 years		19,200		—		12,800		—
$12.0250	7.9 years		30,000		—		20,000		—
$  7.2200	9.6 years		50,000		—		—		—
Total			109,200		—		2,293,264	$	989
Weighted average remaining contractual life		8.4 years				3.0 years
Weighted average exercise price		$	9.6920			$	9.0916

21

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2010

(Dollars in Thousands, Except Per Share Amounts)

11. Stock-Based Benefit Plans (continued)

The intrinsic value of options exercised during the nine month periods ended September 30, 2010 and 2009, was $1,825 and $1,085, respectively. The weighted average grant date fair value of non-vested options at September 30, 2010, was $3.14 per share. During the nine month ended September 30, 2010, options for 50,000 shares were granted, options for 26,400 shares became vested, and there were no forfeitures of non-vested options.

The Company uses the Black-Scholes option-pricing model to estimate the fair value of granted options. This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. However, the Company’s stock options have characteristics significantly different from traded options and changes in the subjective input assumptions can materially affect the fair value estimate. Option valuation models such as Black-Scholes require the input of highly subjective assumptions including the expected stock price volatility, which is computed using five-years of actual price activity in the Company’s stock. The Company uses historical data of employee behavior as a basis to estimate the expected life of the options, as well as forfeitures due to employee terminations. The Company also uses its actual dividend yield at the time of the grant, as well as actual U.S. Treasury yields in effect at the time of the grant to estimate the risk-free rate. The following assumptions were used to value 50,000 options granted during the nine month period ended September 30, 2010: risk free rate of 3.00%, dividend yield of 3.00%, expected stock volatility of 25%, and expected term to exercise of 7.5 years. These options were valued at $1.52 per option using these assumptions. There were no options granted during the nine month period ended September 30, 2009.

12. Income Taxes

During first quarter of 2009 the Company 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 the Company was unable to determine in prior periods 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, the Company determined that its 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.

22

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2010

(Dollars in Thousands, Except Per Share Amounts)

13. Financial Instruments with Off-Balance Sheet Risk

Off-balance sheet financial instruments or obligations whose contract amounts represent credit and/or interest rate risk at September 30, 2010, and December 31, 2009, are as follows:

	September 30		December 31
	2010		2009
Unused consumer lines of credit	$	146,772	$	150,424
Unused commercial lines of credit		16,654		18,904
Commitments to extend credit:
Fixed rate		76,667		35,769
Adjustable rate		3,156		2,185
Undisbursed commercial loans		391		524
Standby letters of credit		177		111

The Company sells substantially all of its long-term, fixed-rate, one- to four-family loan originations in the secondary market. The Company uses derivative instruments to manage interest rate risk associated with these activities. Specifically, the Company enters into interest rate lock commitments (“IRLCs”) with borrowers, which are considered to be derivative instruments. The Company manages its exposure to interest rate risk in IRLCs (as well as interest rate risk in its loans held-for-sale) by entering into forward commitments to sell loans to the Federal National Mortgage Association (“Fannie Mae”). Commitments to sell loans expose the Company to interest rate risk if market rates of interest decrease during the commitment period. Such forward commitments are considered to be derivative instruments. These derivatives are not designated as accounting hedges as specified in GAAP. As such, changes in the fair value of the derivative instruments are recognized currently through earnings.

As of September 30, 2010 and December 31, 2009, net unrealized gains of $62 and $306, respectively, were recognized in net gain on loan sales activities on the derivative instruments specified in the previous paragraph. These amounts were exclusive of net unrealized gains (losses) of $1,694 and $(67) on loans held-for-sale as of those dates, respectively, which were also included in net gain on loan sales activities.

The following table summarizes the Company’s derivative assets and liabilities as of the dates indicated:

	September 30, 2010					December 31, 2009
	Notional Amount		Fair Value			Notional Amount		Fair Value
Interest rate lock commitments	$	92,339	$	1,615		$	15,433	$	(69	)
Forward commitments		137,278		(1,553	)		27,668		375
Net unrealized gain			$	62				$	306

The unrealized gains shown in the above table were included as a component of other assets as of the dates indicated. The unrealized losses were included in other liabilities as of the dates indicated.

23

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2010

(Dollars in Thousands, Except Per Share Amounts)

14. Fair Value of Financial Instruments

Disclosure of fair value information about certain financial instruments, whether or not recognized in the consolidated financial statements, for which it is practicable to estimate the value, is summarized below. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.

Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.

Certain financial instruments and all nonfinancial instruments are excluded from this disclosure. Accordingly, the aggregate fair value of amounts presented does not represent the underlying value of the Company and is not particularly relevant to predicting the Company’s future earnings or cash flows.

The following methods and assumptions are used by the Company in estimating its fair value disclosures of financial instruments:

Cash and Cash EquivalentsThe carrying amounts reported in the statements of financial condition for cash and cash equivalents approximate those assets’ fair values.

Securities Available-for-SaleFair values for these securities are based on quoted market prices or such prices of comparable instruments. These securities are recorded on the statement of financial condition at fair value; thus the carrying value equals fair value.

Loans Held-for-SaleThe fair value of loans held-for-sale is based on the current market price for securities collateralized by similar loans. Loans held-for-sale are recorded on statement of financial condition at fair value; thus the carrying value equals fair value.

Loans ReceivableLoans receivable are segregated by type such as one- to four-family, multi-family, and commercial real estate mortgage loans, consumer loans, and commercial business loans. The fair value of each type is calculated by discounting scheduled cash flows through the expected maturity of the loans using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan type.

The estimated maturity is based on the Company’s historical experience with prepayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions.

Mortgage Servicing RightsThe Company has calculated the fair market value of MSRs for those loans that are sold with servicing rights retained. For valuation purposes, loans are stratified by product type and, within product type, by interest rates. The fair value of MSRs is based upon the present value of estimated future cash flows using current market assumptions for prepayments, servicing cost and other factors.

Federal Home Loan Bank StockFHLB of Chicago stock is carried at cost, which is its redeemable (fair) value, since the market for this stock is restricted.

24

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2010

(Dollars in Thousands, Except Per Share Amounts)

14. Fair Value of Financial Instruments (continued)

Accrued Interest Receivable and PayableThe carrying values of accrued interest receivable and payable approximate their fair value.

Deposit Liabilities and Advance Payments by Borrowers for Taxes and InsuranceFair value for demand deposits equal book value. Fair values for other deposits are estimated using a discounted cash flow calculation that applies current market borrowing interest rates to a schedule of aggregated expected monthly maturities on deposits. The advance payments by borrowers for taxes and insurance are equal to their carrying amounts at the reporting date.

BorrowingsThe fair value of long-term borrowings is estimated using discounted cash flow calculations with the discount rates equal to interest rates currently being offered for borrowings with similar terms and maturities. The carrying value on short-term borrowings approximates fair value.

The carrying values and fair values of the Company’s financial instruments are presented in the following table as of the indicated dates.

	September 30				December 31
	2010				2009
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Cash and cash equivalents	$	78,409	$	78,409	$	227,658	$	227,658
Securities available-for-sale		1,080,851		1,080,851		1,480,952		1,480,952
Loans held-for-sale		69,331		69,331		13,534		13,534
Loans receivable, net		1,377,469		1,336,668		1,506,056		1,483,981
Mortgage servicing rights, net		6,649		7,003		6,899		7,720
Federal Home Loan Bank stock		46,092		46,092		46,092		46,092
Accrued interest receivable		10,095		10,095		13,321		13,321
Deposit liabilities		2,059,004		2,002,050		2,137,508		2,061,164
Borrowings		906,201		1,037,300		906,979		994,300
Advance payments by borrowers		29,979		29,979		2,508		2,508
Accrued interest payable		3,935		3,935		4,228		4,228

Excluded from the above table are off-balance-sheet items (refer to Note 13) as the fair value of these items is not significant.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing its financial assets and liabilities, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company primarily applies the market approach for recurring fair value measurements and endeavors to utilize the best available information. Accordingly, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company is able to classify fair value balances based on the observability of those inputs. Accounting guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1), the next highest priority to prices based on models, methodologies, and/or management judgments that rely

25

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2010

(Dollars in Thousands, Except Per Share Amounts)

14. Fair Value of Financial Instruments (continued)

on direct or indirect observable inputs (Level 2), and the lowest priority to prices derived from models, methodologies, and/or management judgments that rely on significant unobservable inputs (Level 3).

The following table sets forth by level within the fair value hierarchy (i.e., Level 1, 2, or 3) the Company’s financial assets that were accounted for at fair value on a recurring basis as of the dates indicated. The Company’s financial liabilities accounted for at fair value were a negligible amount as of these dates. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

	At September 30, 2010
	Level 1		Level 2		Level 3		Total
Loans held-for-sale		—	$	69,331		—	$	69,331
Securities available-for-sale:
Investment securities	$	22,876		920,050		—		942,926
Mortgage-related securities		—		137,925		—		137,925

	At December 31, 2009
	Level 1		Level 2		Level 3		Total
Loans held-for-sale		—	$	13,534		—	$	13,534
Securities available-for-sale:
Investment securities	$	22,312		591,792		—		614,104
Mortgage-related securities		—		866,848		—		866,848

For purposes of the impairment testing of MSRs, the underlying mortgage loans are stratified into pools by product type and, within product type, by interest rates. Pools with an amortized cost basis greater than fair value are carried at fair value in the Company’s financial statements (refer to Note 1 for additional discussion). Although not included in the above table, the Company considers the fair value of MSRs to be Level 3 in the fair value hierarchy. Pools determined to be impaired at September 30, 2010, had an amortized cost basis of $4,021 and a fair value of $3,536 as of that date. Pools determined to be impaired at December 31, 2009, had an amortized cost basis of $2,286 and a fair value of $1,999 as of that date. Accordingly, the Company established a valuation allowance of $485 as of September 30, 2010, compared to $287 as of December 31, 2009. Refer to Note 4 for additional disclosures related to MSRs.

For non-accrual loans greater than an established threshold and individually evaluated for impairment and all renegotiated loans, impairment is measured based on: (1) the fair value of the loan or the fair value of the collateral less estimated selling costs (collectively the “collateral value method”) or (2) the present value of the estimated cash flows discounted at the loan’s original effective interest rate (the “discounted cash flow method”). The resulting valuation allowance, if any, is a component of the allowance for loan losses. The discounted cash flow method is a fair value measure. For the collateral value method, the Company generally obtains appraisals to support the fair value of collateral underlying the loans. Appraisals incorporate measures such as recent sales prices for comparable properties and costs of construction. The Company considers these fair values to be Level 3 in the fair value hierarchy. For those loans individually evaluated for impairment using the collateral value method, a valuation

26

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2010

(Dollars in Thousands, Except Per Share Amounts)

14. Fair Value of Financial Instruments (continued)

allowance of $14,718 was recorded for loans with a recorded investment of $36,974 at September 30, 2010. These amounts were $6,033 and $16,299 at December 31, 2009, respectively.

Foreclosed properties acquired through, or in lieu of, loan foreclosure are recorded at the lower of cost or fair value less estimated costs to sell. In determining fair value, the Company generally obtains appraisals to support the fair value of foreclosed properties. The Company considers these fair values to be Level 3 in the fair value hierarchy. As of September 30, 2010, $16,091 in foreclosed properties were valued at collateral value compared to $10,442 at December 31, 2009.

27

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement

This report contains or incorporates by reference various forward-looking statements concerning the Company’s prospects that are based on the current expectations and beliefs of management. Forward-looking statements may contain words such as “anticipate,” “believe,” “estimate,” “expect,” “objective,” “projection” and similar expressions or use of verbs in the future tense, and are intended to identify forward-looking statements; any discussions of periods after the date for 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 the Company’s control, that could cause the Company’s actual results and performance to differ materially from what is 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 the Company: general economic conditions, including high rates of unemployment and the significant instability in credit, lending, and financial markets; declines in the real estate market, which could affect both collateral values and loan activity; high unemployment and other factors which could affect borrowers’ ability to repay their loans; negative developments affecting particular borrowers, which could adversely impact loan repayments and collection; 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; 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; increased competition and/or disintermediation within the financial services industry; the effects of further regulation and consolidation within the financial services industry, including substantial changes under the recently enacted Dodd-Frank Act; changes in regulators’ expectations for financial institutions’ capital levels; changes in tax rates, deductions and/or policies; 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; demand for other financial services; changes in accounting policies or guidelines; natural disasters, acts of terrorism, or developments in the war on terrorism; and the factors discussed in the Company’s filings with the Securities and Exchange Commission, particularly under Part I, Item 1A, “Risk Factors,” of the Company’s 2009 Annual Report on Form 10-K.

Results of Operations

OverviewThe Company’s net income was $926,000 or $0.02 per diluted share for the three months ended September 30, 2010, compared to $1.2 million or $0.03 per diluted share during the same period in 2009. Net income for the nine month period ended September 30, 2010, was $3.8 million or $0.08 per diluted share compared to $12.3 million or $0.26 per diluted share in the same period last year. The Company’s net income for the three month periods represented a return on average assets (“ROA”) of 0.11% and 0.14%, respectively, and a return on average equity (“ROE”) of 0.93% and 1.23%, respectively. For the nine month periods, net income represented an ROA of 0.14% and 0.47% in 2010 and 2009, respectively, and an ROE of 1.25% and 4.05% in the same periods, respectively.

Net income during the three months ended September 30, 2010, decreased by $319,000 or 25.6% compared to the same period in 2009. Net income during the 2010 period was impacted by the following unfavorable developments compared to the same period in 2009:

• a $3.6 million or 23.6% decrease in net interest income;

• a $1.1 million increase in losses on foreclosed real estate; and

• a $1.0 million or 18.8% increase in provision for loan losses.

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These unfavorable developments were partially offset by the following favorable developments relative to the same three months in 2009:

• a $2.6 million or 253% increase in gain on loan sales activities;

• a $1.7 million or 47.2% increase in gains on investments; and

• a $0.9 million or 9.1% decrease in compensation-related expenses.

Net income during the nine months ended September 30, 2010, decreased by $8.5 million or 69.3% compared to the same period in 2009. Net income during the 2010 period was impacted by the following unfavorable developments compared to the same period in 2009:

• a $14.2 million or 27.0% decrease in net interest income;

• a $6.9 million or 77.7% increase in provision for loan losses;

• a $4.1 million increase in losses on foreclosed real estate; and

• a $2.3 million or 29.6% decrease in gains on loan sales activities.

These unfavorable developments were partially offset by the following favorable developments relative to the same nine month period in 2009:

• a $10.1 million or 162% increase in gains on investments;

• a $3.6 million or 11.7% decrease in compensation-related expenses;

• a $3.5 million or 69.5% decrease in income tax expense; and

• a $0.7 million or 14.8% increase in other non-interest income.

The following paragraphs describe these changes in greater detail, along with other matters affecting the Company’s results of operations during the three and nine month periods ended September 30, 2010 and 2009.

Net Interest IncomeNet interest income declined by $3.6 million or 23.6% during the three months ended September 30, 2010, compared to the same period in 2009. Net interest income declined by $14.2 million or 27.0% during the nine months ended September 30, 2010, compared to the same period last year. These declines were primarily attributable to a decrease in interest rate spread between the periods and, to a lesser extent, by a decrease in average earning assets. The Company’s interest rate spread decreased by 36 and 50 basis points during the three and nine month periods ended September 30, 2010, respectively, compared to the same periods in 2009. The Company’s earning assets decreased by $24.0 million or 0.7% and $39.4 million or 1.2% during the three and nine month periods ended September 30, 2010, respectively, compared to the same periods in 2009.

In 2009 and 2010 the Company has experienced increased levels of liquidity due to reduced loan demand and increased repayment and/or call activity in its loan and securities portfolios. These developments have been caused by deterioration in economic conditions, as well as a record low interest rate environment that has resulted in increased refinancing of adjustable-rate residential and home equity loans into fixed-rate residential loans, which the Company typically sells in the secondary market. In addition, in recent periods the Company has sold significant amounts of longer-term mortgage-related securities at gains in an effort to reduce its exposure to interest rate risk. The Company has reinvested the cash proceeds from these sources in short-term securities and overnight investments. These types of investments increase the Company’s flexibility to respond to changes in interest rates or otherwise restructure its balance sheet. However, such investments typically have lower yields than the Company’s loans and other securities, which has contributed to a decline in the Company’s interest rate spread in recent periods. Finally, the Company’s interest rate spread continues to be adversely impacted by long-term, fixed rate advances from the FHLB of Chicago. Refer to “Financial Condition—Borrowings,” below, for additional discussion.

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The Company has also managed its liquidity position over the past year by reducing the rates it offers on its certificates of deposits and certain other deposit accounts. This has resulted in a $17.8 million or 0.9% decrease in average deposit liabilities during the nine months ended September 30, 2010, compared to the same period in 2009. It has also resulted in an 82 basis point decline in the weighted average cost of interest-bearing deposit liabilities during the nine month period in 2010 compared to the same period in 2009.

The following table presents certain details regarding the Company’s average balance sheet and net interest income for the periods indicated. The tables present the average yield on interest-earning assets and the average cost of interest-bearing liabilities. The yields and costs are derived by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods shown. The average balances are derived from daily balances over the periods indicated. Interest income includes fees, which are considered adjustments to yields. Net interest spread is the difference between the yield on interest-earning assets and the rate paid on interest-bearing liabilities. Net interest margin is derived by dividing net interest income by average interest-earning assets. No tax equivalent adjustments were made since the Company does not have any tax exempt investments.

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	Three Months Ended September 30
	2010							2009
			Interest		Average					Interest		Average
	Average		Earned/		Yield/			Average		Earned/		Yield/
	Balance		Paid		Rate			Balance		Paid		Rate
					(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable (1)	$	1,469,435	$	19,780		5.38	%	$	1,622,013	$	22,727		5.60	%
Mortgage-related securities		695,903		4,528		2.60			1,006,168		9,289		3.69
Investment securities (2)		862,224		4,071		1.89			395,198		3,708		3.75
Interest-earning deposits		186,208		62		.13			214,377		3		.01
Total interest-earning assets		3,213,770		28,441		3.54			3,237,756		35,727		4.41
Non-interest-earning assets		251,934							228,262
Total average assets	$	3,465,704						$	3,466,018
Liabilities and equity:
Interest-bearing liabilities:
Regular savings deposits	$	211,173		24		.05		$	202,722		35		0.07
Money market accounts		349,951		534		0.61			325,376		611		.75
Interest-bearing demand accounts		200,015		28		.06			182,544		23		.05
Certificates of deposit		1,238,908		6,279		2.03			1,279,051		9,855		3.08
Total deposit liabilities		2,000,047		6,865		1.37			1,989,693		10,524		2.12
Advance payments by borrowers for taxes and insurance		26,129		2		0.03			26,268		4		0.05
Borrowings		906,297		9,863		4.35			907,324		9,876		4.35
Total interest-bearing liabilities		2,932,473		16,730		2.28			2,923,285		20,404		2.79
Non-interest-bearing liabilities:
Non-interest-bearing deposits		92,425							92,935
Other non-interest-bearing liabilities		42,060							45,906
Total non-interest-bearing liabilities		134,485							138,841
Total liabilities		3,066,958							3,062,126
Total equity		398,746							403,892
Total average liabilities and equity	$	3,465,704						$	3,466,018
Net interest income and net interest rate spread			$	11,711		1.26	%			$	15,323		1.62	%
Net interest margin						1.46	%						1.89	%
Average interest-earning assets to average interest-bearing liabilities		1.10x							1.11x

(1)	For the purposes of these computations, non-accruing loans and loans held-for-sale are included in the average loans outstanding.
(2)	FHLB of Chicago stock and mutual funds are included in investment securities dollars outstanding and yields.

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	Nine Months Ended September 30
	2010							2009
			Interest		Average						Interest		Average
	Average		Earned/		Yield/			Average			Earned/		Yield/
	Balance		Paid		Rate			Balance			Paid		Rate
					(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable (3)	$	1,488,060	$	60,515		5.42	%	$	1,728,597		$	73,498		5.67	%
Mortgage-related securities		732,041		16,040		2.92			968,708			29,839		4.11
Investment securities (4)		806,628		13,256		2.19			401,599			13,466		4.47
Interest-earning deposits		188,908		207		0.15			156,135			77		0.07
Total interest-earning assets		3,215,637		90,018		3.73			3,255,039			116,880		4.79
Non-interest-earning assets		261,768							234,431
Total average assets	$	3,477,405						$	3,489,470
Liabilities and equity:
Interest-bearing liabilities:
Regular savings deposits	$	206,864		81		0.05		$	197,968			150		0.10
Money market accounts		340,173		1,543		0.60			330,645			2,258		0.91
Interest-bearing demand accounts		197,607		79		0.05			182,228			97		0.07
Certificates of deposit		1,258,040		20,798		2.20			1,309,640			32,654		3.32
Total deposit liabilities		2,002,684		22,501		1.50			2,020,481			35,159		2.32
Advance payments by borrowers for taxes and insurance		16,997		4		0.03			16,861			7		0.06
Borrowings		906,555		29,293		4.31			9070,569			29,332		4.31
Total interest-bearing liabilities		2,926,216		51,798		2.36			2,944,911			64,497		2.92
Non-interest-bearing liabilities:
Non-interest-bearing deposits		90,776							90,020
Other non-interest-bearing liabilities		59,586							50,965
Total non-interest-bearing liabilities		150,362							140,985
Total liabilities		3,076,578							3,085,896	��
Total equity		400,827							403,574
Total average liabilities and equity	$	3,477,405						$	3,489,470
Net interest income and net interest rate spread			$	38,220		1.37	%				$	52,382		1.87	%
Net interest margin						1.58	%							2.15	%
Average interest-earning assets to average interest-bearing liabilities		1.10x							1.11x

(3)	For the purposes of these computations, non-accruing loans and loans held-for-sale are included in the average loans outstanding.
(4)	FHLB of Chicago stock and mutual funds are included in investment securities dollars outstanding and yields.

The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to the change attributable to change in volume (change in volume multiplied by prior rate), the change attributable to change in rate (change in rate multiplied by prior volume), and the net change. The change attributable to the combined impact of volume and rate has been allocated proportionately to the change due to volume and the change due to rate.

32

	Three Months Ended September 30, 2010
	Compared to September 30, 2009
	Increase (Decrease)
	Volume			Rate			Net
	(Dollars in thousands)
Interest-earning assets:
Loans receivable	$	(2,080	)	$	(867	)	$	(2,947	)
Mortgage-related securities		(2,432	)		(2,329	)		(4,761	)
Investment securities		2,848			(2,485	)		363
Interest-earning deposits		(1	)		60			59
Total interest-earning assets		(1,665	)		(5,621	)		(7,286	)
Interest-bearing liabilities:
Savings accounts		(1	)		(10	)		(11	)
Money market accounts		43			(120	)		(77	)
Interest-bearing demand accounts		2			3			5
Certificates of deposit		(300	)		(3,276	)		(3,576	)
Total deposit liabilities		(256	)		(3,403	)		(3,659	)
Advance payments by borrowers for taxes and insurance		—			(2	)		(2	)
Borrowings		(11	)		(2	)		(13	)
Total interest-bearing liabilities		(267	)		(3,407	)		(3,674	)
Net change in net interest income	$	(1,398	)	$	(2,214	)	$	(3,612	)

	Nine Months Ended September 30, 2010
	Compared to September 30, 2009
	Increase (Decrease)
	Volume			Rate			Net
	(Dollars in thousands)
Interest-earning assets:
Loans receivable	$	(9,851	)	$	(3,132	)	$	(12,983	)
Mortgage-related securities		(6,298	)		(7,501	)		(13,799	)
Investment securities		8,979			(9,189	)		(210	)
Interest-earning deposits		20			110			130
Total interest-earning assets		(7,150	)		(19,712	)		(26,862	)
Interest-bearing liabilities:
Savings accounts		8			(77	)		(69	)
Money market accounts		63			(778	)		(715	)
Interest-bearing demand accounts		8			(26	)		(18	)
Certificates of deposit		(1,240	)		(10,616	)		(11,856	)
Total deposit liabilities		(1,161	)		(11,497	)		(12,658	)
Advance payments by borrowers for taxes and insurance		—			(3	)		(3	)
Borrowings		(33	)		(6	)		(39	)
Total interest-bearing liabilities		(1,194	)		(11,506	)		(12,700	)
Net change in net interest income	$	(5,956	)	$	(8,206	)	$	(14,162	)

Provision for Loan LossesThe Company’s provision for loan losses was $6.2 million during the three months ended September 30, 2010, compared to $5.2 million in the same period last year. During the nine month periods ended as of these same dates, the Company’s provision for loan losses was $15.7 million and $8.8 million, respectively. The losses in these periods have been affected by continued weakness in economic conditions in general and in real estate markets in particular. These developments, as well as

33

elevated levels of unemployment since 2008, have resulted in increased stress on the Company’s borrowers, increased loan delinquencies, and lower real estate values. These conditions have been particularly challenging for the Company’s portfolio of multi-family and commercial real estate loans and commercial business loans. During the third quarter of 2010, the Company recorded $3.9 million in loss provisions against a number of unrelated loan relationships, the largest of which was a $1.1 million loss on a $4.1 million loan relationship secured by partially developed land. This loan relationship was determined to be collateral dependent in the third quarter and the loss was based on an internal management valuation. In addition, during the third quarter of 2010 the Company recorded $2.3 million in additional loss provisions that reflected management’s general concerns related to continued increases in the Company’s non-performing loans, as well as continued declines in commercial real estate values and continued weaknesses in economic conditions and employment.

During the nine months ended September 30, 2010, the Company recorded $9.7 million in loss provisions against thirteen unrelated loan relationships aggregating $41.5 million, including the loan described in the previous paragraph. The collateral for three of these loan relationships, which amounted to $9.7 million in the aggregate, was transferred to foreclosed real estate during 2010, net of an aggregate loss allowance of $4.1 million. In addition, during the nine months ended September 30, 2010, the Company recorded $3.2 million in loss provisions on a number of smaller commercial business, residential, and consumer loans. Finally, the Company recorded $2.8 million in additional loss provisions that reflected management’s general concerns related to continued declines in commercial real estate values, as well as continued weaknesses in economic conditions and employment

During the nine month period ended September 30, 2009, the Company recorded $6.4 million in loss provisions against five unrelated loan relationships aggregating $18.9 million. The Company also established $1.8 million in losses on a number of smaller loans during the period, consisting principally of commercial real estate and commercial business loans. In addition to these losses, the Company recorded approximately $600,000 in additional loan loss provisions during the period that reflected management’s general concerns relating to deterioration in economic conditions, increased unemployment rates, and declines in real estate values.

For additional discussion related to the Company’s non-performing loans, non-performing assets, and allowance for loan losses, refer to “Financial Condition—Asset Quality,” below.

Non-Interest IncomeTotal non-interest income increased by $4.3 million or 48.8% and $8.7 million or 33.9% during the three and nine month periods ended September 30, 2010, compared to the same periods in 2009, respectively. Significant reasons for these increases are discussed in the following paragraphs.

Gains on investment activities for the three months ended September 30, 2010, were $5.2 million compared to $3.5 million during the same three month period in 2009. These gains were $16.3 million during the nine months ended September 30, 2010, compared to $6.2 million during the same nine month period in 2009. Results for the nine month period in 2009 was net of $831,000 in OTTI charges related to a mutual fund investment. Excluding this charge, gains on investment activities during the nine month period in 2009 were $7.1 million. During the nine months ended September 30, 2010 and 2009, the Company sold $885.0 million and $492.1 million, respectively, in longer-term, fixed-rate mortgage-related securities. In addition, the Company sold $189.9 million in adjustable-rate mortgage-related securities during the nine month period in 2010 compared to no sales of such securities in 2009. As previously noted, the Company reinvested the proceeds from these sales in short-term securities and overnight investments, which management believes increases the Company’s flexibility to respond to changes in interest rates or otherwise restructure its balance sheet.

The mutual fund described in the previous paragraph 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. As a result of an increase in the fair

34

value of this mutual fund, an additional impairment has not been recorded on this investment since the first quarter of 2009. However, given the uncertainty that exists in the markets for investments secured by these types of loans, as well as the possibility of continued deterioration in the performance of these types of loans, the Company may be required to record future impairment charges against this investment, although there can be no assurances. This investment had a carrying value of $22.2 million at September 30, 2010, which included an unrealized gain of $1.4 million 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.

Gains on sales of loans were $3.7 million during the three months ended September 30, 2010, compared to $1.0 million in the same period last year. These gains were $5.5 million during the nine month period ended September 30, 2010, compared to $7.8 million during the same period in 2009. During the three months ended September 30, 2010, sales of one- to four-family mortgage loans were $118.2 million compared to $78.1 million for the same period in 2009. Loan sales increased substantially in the third quarter of 2010 in response to a record low interest rate environment that encouraged many fixed-rate borrowers to refinance existing loans at lower rates. In addition, adjustable-rate borrowers were motivated to refinance into fixed-rate loans. The Company sells substantially all of these loans in the secondary market. On a year-to-date basis loan sales in 2010 were $223.1 million compared to $493.2 million in 2009. Interest rates for mortgage loans were also very low during the first half of 2009 which resulted in high levels of refinance activity during that period. Although interest rates on mortgage loans currently remain at record lows, management is uncertain at this time whether loan origination and sale volumes during the last quarter of 2010 will approach the record levels experienced during the first or second quarters of 2009.

Net loan-related fees and servicing revenue was a loss of $291,000 during the three months ended September 30, 2010, compared to income of $70,000 in the same period of 2009. Net loan-related fees and servicing revenue was a loss of $39,000 during the nine month period in 2010 compared to a loss of $222,000 during the same nine months in 2009. The following table presents the primary components of net loan-related fees and servicing revenue for the periods indicated:

	Three Months Ended						Nine Months Ended
	September 30								September 30
	2010			2009			2010			2009
				(Dollars in thousands)
Gross servicing fees	$	646		$	590		$	1,913		$	1,577
MSR amortization		(1,064	)		(493	)		(2,100	)		(2,440	)
MSR valuation (loss) recovery		8			(139	)		(198	)		314
Loan servicing revenue, net		(410	)		(42	)		(385	)		(549	)
Other loan fee income		119			112			346			327
Loan-related fees and servicing revenue, net	$	(291	)	$	70		$	(39	)	$	(222	)

Gross servicing fees increased in the 2010 periods compared to the previous year periods due to an increase in the amount of loans the Company services for third-party investors. As of September 30, 2010, the Company serviced $1.0 billion in loans for third-party investors compared to a similar amount at December 31, 2009, and $963.9 million at September 30, 2009. Amortization of MSRs typically increases in periods of lower interest rates due to increased loan refinance activity, such as that which was experienced during the three months ended September 30, 2010, as well as the first half of 2009. 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 charge, as the case may be, in the period in which the change occurs.

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, the Company

35

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, the Company could potentially record charges to earnings related to increases in the valuation allowance on its MSRs. In addition, amortization expense could increase due to likely increases in loan prepayment activity.

Service charges on deposits declined by $76,000 or 4.5% and $244,000 or 5.1% during the three and nine month periods ended September 30, 2010, respectively, compared to the same periods in 2009. This decline was due principally to a decrease in overdraft charges and ATM/debit card fees. Management attributes these declines to the economic recession, which has resulted in reduced spending by consumers in general, including deposit customers of the Company. During the three months ended September 30, 2010, the Company implemented procedures in response to new federal regulations that reduced the circumstances in which financial institutions may charge overdraft fees on customer debit card transactions. The Company took steps to reduce the impact the new regulation could have on fee revenue and, as a result, has not noted a significant decline in fee revenue since it implemented the new procedures. However, management is unable to determine what long-term impact the new regulations may have on the Company’s fee revenue at this time.

Brokerage and insurance commissions were $738,000 during the three month period ended September 30, 2010, an $186,000 or 33.6% improvement over the same period in the previous year. For the nine month period ending September 30, 2010, this revenue was $2.3 million, a $245,000 or 11.8% increase compared to 2009. The improvement between the three month periods was principally due to increased sales of tax-deferred annuity products. It is not unusual for sales of such products to increase during periods of low interest rates, when the returns on annuities improve relative to other investment alternatives such as certificates of deposit. The improvement between the year-to-date periods was primarily caused by increased sales of mutual funds and other equity investments earlier in 2010 due to a general improvement in the equity markets.

Other non-interest income increased by $199,000 or 11.0% and $743,000 or 14.8% during the three and nine month periods ended September 30, 2010, respectively, compared to the same periods in 2009. Most of these increases were due to an increase in earnings from the Company’s investment in bank-owned life insurance (“BOLI”), on which total returns of some plans have benefited from a lower interest rate environment. Contributing to a lesser degree were increases in revenue from debit card interchange fees between the periods. Management believes customers are using debit cards more frequently in the current economic environment (as opposed to credit cards) in an effort to control spending.

Non-Interest ExpenseTotal non-interest expense increased by $449,000 or 2.7% during the three months ended September 30, 2010, compared to the same period in 2009. Total non-interest expense decreased by $371,000 or 0.7% during the nine months ended September 30, 2010, compared to the same nine months in 2009. Significant reasons for these decreases are discussed in the following paragraphs.

Compensation-related expense declined by $898,000 or 9.1% and $3.6 million or 11.7% during the three and nine month periods ended September 30, 2010, respectively, compared to the same periods in 2009. These declines were primarily caused by lower levels of stock-based compensation. ESOP expense declined in the most recent year because 2010 is the last year of the Company’s original commitment to the plan. Under the terms of the plan, the number of shares scheduled to be allocated to employees in the final year is substantially lower than it was in earlier years. The Company does not expect to continue ESOP contributions beyond its original commitment at this time. However, this decision is subject to review on a periodic basis and contributions may be reinstated in future periods. Also contributing to the decrease in stock-based compensation in 2010 relative to 2009 was a large grant of stock options and restricted stock that was made in 2004 that became fully vested in mid-2009. No amortization expense related to that grant has been recorded beyond that point. Finally, during the three months ended September 30, 2010, management took steps to modestly reduce the number of Company’s employees through attrition.

36

Federal insurance premiums and special assessments increased by $102,000 or 10.9% and decreased by $603,000 or 16.5% during the three and nine month periods ended September 30, 2010, respectively, compared to the same periods in the previous year. Results in 2009 included a $1.6 million non-recurring special assessment from the FDIC that was charged to all insured financial institutions based on each institution’s total assets, less its Tier 1 capital, as of June 30, 2009. Excluding this special assessment, the Company’s deposit insurance premiums increased by $947,000 or 44.9% during the 2010 year-to-date period compared to the same period in the previous year. In 2009 the FDIC raised its regular premium rates for all financial institutions. In addition, during the first quarter of 2009 the Company utilized the last of certain premium credits that had been available to offset deposit premium costs. As a result of a recent change in federal law, the FDIC will be changing the basis for calculation of its premiums from deposits to assets minus capital. The Company is unable to determine at this time the impact this change may have on its federal insurance premiums.

Occupancy and equipment costs were $2.8 million during the three months ended September 30, 2010, a $42,000 or 1.5% decrease from the same period in 2009. These same costs were $8.5 million during the nine months ended September 30, 2010, which was a $446,000 or 5.0% decrease from the same period in the previous year. These decreases were primarily caused by lower data processing costs, due to the negotiation of a new contract with the Company’s third-party data processor in late 2009, as well as lower levels of repair and maintenance expense and rent expense in the 2010 periods.

Losses on foreclosed real estate were $1.2 million during the three months ended September 30, 2010, compared to $81,000 in the same period last year. During the nine months ended September 30, 2010, these losses were $4.2 million compared to $145,000 during the same nine months in 2009. In recent periods the Company has experienced an increase in losses on foreclosed real estate due to continued declines in real estate values and weak economic conditions. If these conditions persist, future losses on foreclosed real estate could remain elevated in the near term.

Income Tax ExpenseIncome tax expense was $307,000 during the three months ended September 30, 2010, compared to $772,000 in the same period of 2009. Income tax expense during the nine months ended September 30, 2010, was $1.5 million compared to $5.0 million in the same period last year. In the first quarter of 2009 the Company 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 in prior periods 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 the Company’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 this one-time tax benefit, the Company’s effective tax rate (“ETR”) for the nine months ended September 30, 2010 and 2009, was 28.8% and 39.4%, respectively. The ETR for the three month periods ended as of the same dates was 24.9% and 38.3%, respectively. The Company’s ETR is lower in 2010 because non-taxable revenue, such as earnings from BOLI, comprises a larger percentage of pre-tax earnings in 2010 than it did in 2009 due to a lower level of pre-tax earnings in 2010.

Like many Wisconsin financial institutions, the Bank has non-Wisconsin subsidiaries that hold and manage investment assets, the income from which was not subject to Wisconsin tax prior to 2009. The Wisconsin Department of Revenue (the “Department”) has instituted an audit program specifically aimed at financial institutions’ out-of-state investment subsidiaries. The Department has asserted the position that some or all of the income of the out-of-state subsidiaries in years prior to 2009 was taxable in Wisconsin. In June 2010, the Department’s auditor issued a Notice of Proposed Audit Report to the Bank which proposes to tax all of the income of the Bank’s out-of-state investment subsidiaries for all periods that are still open under the statute of limitations, through and including the year 2006. This is merely a preliminary

37

determination made by the auditor and does not represent a formal assessment. The Bank’s outside legal counsel has met with representatives of the Department to discuss, and object to, the auditor’s proposed adjustments. The Department has not yet responded to the Company’s objection. Management continues to believe that the Bank has reported income and paid Wisconsin taxes in prior periods in accordance with applicable legal requirements and the Department’s long-standing interpretations of them and that the Bank’s position will prevail in discussions with the Department, court proceedings, or other actions that may occur. Ultimately, however, an adverse resolution of these matters could result in additional Wisconsin tax obligations for prior periods, which could have a substantial negative impact on the Bank’s earnings in the period such resolution is reached. The Bank may also incur further costs in the future to address and defend these issues.

Financial Condition

OverviewThe Company’s total assets decreased by $80.5 million or 2.3% during the nine months ended September 30, 2010. Total assets at September 30, 2010, were $3.43 billion compared to $3.51 billion at December 31, 2009. During the period the Company’s securities available for sale declined by $400.1 million or 27.0%, its cash and cash equivalents declined by $149.2 million or 65.6%, and its loan portfolio declined by $128.6 million or 8.5%. These developments were partially offset by a $537.0 million receivable from a broker for securities sales that were pending as of September 30, 2010, as well as a $55.8 million increase in loans held for sale during the nine month period. The Company’s deposit liabilities decreased by $78.5 million or 3.7% during the nine months ended September 30, 2010. The Company’s total shareholders’ equity decreased from $402.5 million at December 31, 2009, to $395.9 million at September 30, 2010. Non-performing assets increased by $24.0 million or 39.9% to $84.3 million during the nine months ended September 30, 2010.

The following paragraphs describe these changes in greater detail, along with other changes in the Company’s financial condition during the nine months ended September 30, 2010.

Cash and Cash EquivalentsCash and cash equivalents declined from $227.7 million at December 31, 2009, to $78.4 million at September 30, 2010. Although the Company has generally maintained a higher level of overnight investments during 2010 for the reasons described earlier in this report, as of September 30, 2010, the Company had reduced its holding of such investments to purchase short-term investment securities.

Securities Available-for-SaleThe Company’s portfolio of securities available-for-sale decreased by $400.1 million or 27.0% during the nine months ended September 30, 2010. This decrease was primarily the result of the sale of $532.4 million in longer-term mortgage-related securities near the end of September, the proceeds from which were received in October 2010. As such, the proceeds were presented as “Due from Broker for Securities Sales” in the Company’s statement of financial condition as of September 30, 2010. As previously noted, the Company has sold significant amounts of longer-term mortgage-related securities in recent periods in an effort to reduce its exposure to interest rate risk. The Company has reinvested the cash proceeds from these sources in short-term government agency securities and overnight investments. These types of investments increase the Company’s flexibility to respond to changes in interest rates or otherwise restructure its balance sheet.

The Company classifies all of its securities as available-for-sale. Changes in the fair value of such securities are recorded through accumulated other comprehensive loss (net of deferred income taxes), which is a component of shareholders’ equity. During the nine months ended September 30, 2010, the fair value adjustment on the Company’s available-for-sale securities improved from a net unrealized loss of $1.9 million at December 31, 2009, to a net unrealized gain of $317,000 at September 30, 2010. This improvement was primarily due to an increase in the fair value of the Company’s portfolio of private-label CMOs and, to a lesser extent, certain government agency securities and mutual funds. The Company’s private-label CMOs were originally purchased from 2004 to early 2006 and are secured by

38

prime residential mortgage loans. The securities were all rated “triple-A” by various credit rating agencies at the time of their original purchase. However, in 2009 and 2010 a number of the securities in the portfolio were downgraded. The following table presents the credit ratings, carrying values, and unrealized gains (losses) of the Company’s private-label CMO portfolio as of the dates indicated (in instances of split-ratings, each security has been classified according to its lowest rating):

	September 30, 2010					December 31, 2009
			Unrealized Gain					Unrealized Gain
	Carrying Value		(Loss), Net			Carrying Value		(Loss), Net
			(Dollars in thousands)
Credit rating:
AAA/Aaa	$	15,326	$	488		$	22,959	$	(341	)
AA/Aa		9,055		(46	)		9,980		(483	)
A		20,467		(1,382	)		31,377		(3,260	)
BBB/Baa		12,866		(227	)		15,769		(2,151	)
Less than investment grade		38,612		(2,183	)		31,697		(2,763	)
Total private-label CMOs	$	96,326	$	(3,350	)	$	111,782	$	(8,998	)

Although the net unrealized gain (loss) on the Company’s private-label CMOs improved during the nine months ended September 30, 2010, the market value for these securities has remained depressed due to a general deterioration in economic conditions and related declines in real estate values. However, management has determined that it is unlikely the Company will not collect all amounts due according to the contractual terms of these securities. As such, management has determined that none of the Company’s private-label CMOs are other-than-temporarily impaired as of September 30, 2010. However, collection is subject to numerous factors outside of the Company’s control and a future determination of OTTI could result in significant losses being recorded through earnings in future periods. For additional discussion relating to the Company’s securities available-for-sale, refer to “Results of Operations—Non-Interest Income,” above, as well as Note 2, “Securities Available-for-Sale,” of the Company’s Unaudited Condensed Consolidated Financial Statements, above.

Loans Held-for-SaleLoans held-for-sale increased from $13.5 million at December 31, 2009, to $69.3 million at September 30, 2010. The Company’s policy is to sell substantially all of its fixed-rate, one- to four-family mortgage loan originations in the secondary market. Originations of such loans increased during the third quarter of 2010 in response to lower interest rates on mortgage loans, which resulted in increased refinance activity. As a result, management expects gains on sales of loans to remain elevated in the near term, but cannot be certain whether such gains during the fourth quarter 2010 will approach the record levels experienced during the first and second quarters of 2009.

Loans ReceivableLoans receivable decreased by $128.6 million or 8.5% as of September 30, 2010, compared to December 31, 2009. The Company’s portfolio of one- to four-family loans declined from $656.0 million at December 31, 2009, to $562.3 million at September 30, 2010. This decline was caused by continued refinancing of adjustable-rate loans by borrowers (which the Company typically retains in portfolio) into fixed-rate loans (which the Company generally sells). As previously noted, market interest rates for mortgage loans have declined to record lows during the three months ended September 30, 2010, and have remained at that level. As such, the Company expects borrowers to continue to prefer fixed-rate mortgage loans in the near term, which could impact its ability to increase its portfolio of one- to four-family loans in the near term.

The Company’s multi-family and commercial real estate mortgage loan originations were $50.2 million in the aggregate during the nine months ended September 30, 2010, compared to $43.6 million for the same period in 2009. The Company’s aggregate portfolio of multi-family and commercial real estate mortgage loans increased from $476.3 million at December 31, 2009, to $523.5 million at September 30, 2010. A substantial portion of this increase was due to construction and development loans that were transferred to

39

permanent financing during the period. As a result of this development, the Company’s portfolio of construction and development loans declined by $40.4 million or 42.2% during the nine months ended September 30, 2010.

Commercial business loan originations during the nine months ended September 30, 2010, were $22.2 million compared to $17.2 million during the same period in the previous year. The Company’s portfolio of commercial business loans decreased from $52.0 million at December 31, 2009, to $48.9 million at September 30, 2010.

The Company’s consumer loan originations, including fixed-term home equity loans and lines of credit, were $57.7 million for the nine months ended September 30, 2010, compared to $58.8 million during the same period in the prior year. The Company’s consumer loan portfolio declined from $275.5 million at December 31, 2009, to $252.1 million at September 30, 2010. This decline was due in part to an interest rate environment in recent periods that has encouraged many borrowers to refinance their home equity loans or lines of credit and other consumer loans into first mortgage loans. Many of these borrowers reestablished home equity lines of credit with the Company in accordance with its established lending standards, but had not drawn substantial amounts on these lines as of September 30, 2010.

The following table sets forth the Company’s mortgage, consumer, and commercial loan originations and purchases for the periods indicated:

	Three Months Ended				Nine Months Ended
	September 30				September 30
	2010		2009		2010			2009
			(Dollars in thousands)
Mortgage loans:
One- to four-family	$	178,633	$	86,294	$	311,909		$	543,808
Multi-family		12,278		1,023		34,731			7,341
Commercial real estate		11,186		8,729		15,457			36,259
Total mortgage loans		202,097		91,276		362,097			587,408
Consumer loans		19,313		20,387		57,733			58,776
Commercial business loans		14,716		3,718		22,161			17,190
Total loan originations		236,126		121,815		441,991			663,374
One- to four-family mortgage loans purchased		—		—		—			2,658
Total loans originated and purchased	$	236,126	$	121,815	$	441,991	��	$	666,032

In light of current economic conditions and recent loan origination activity, management expects growth in all categories of the Company’s loan portfolio to be slow or negative in the near term, although there can be no assurances.

GoodwillThe Company analyzes goodwill annually for impairment or more frequently when, in the judgment of management, an event has occurred that may indicate that additional analysis is required. If goodwill is determined to be impaired, it will be expensed in the period in which it becomes impaired.

The Company performed an annual impairment analysis during the three months ended September 30, 2010, and determined that its goodwill was not impaired as of that date. Management has noted, however, that the estimated fair value of the Company as determined in its “Step 1” evaluation (as defined in GAAP) has declined in 2010 relative to prior periods. As such, management believes it is possible that a future “Step 1” evaluation may indicate that a “Step 2” evaluation (as defined in GAAP) must be performed. Management has performed a “Step 2” evaluation in anticipation of this possibility and concludes that goodwill would not be impaired in a “Step 2” evaluation. However, there can be no assurances that future circumstances and/or conditions will not change that could result in an impairment of the Company’s goodwill, which could have a material adverse affect on the Company’s results of operations in a future period.

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Mortgage Servicing RightsThe carrying values of the Company’s MSRs were $6.6 million at September 30, 2010, compared to $6.9 million at December 31, 2009, net of valuation allowances of $485,000 and $287,000, respectively. As of September 30, 2010, and December 31, 2009, the Company serviced $1.0 billion in loans for third-party investors.

Other AssetsAs a condition of membership in the FHLB of Chicago, the Company holds shares of the common stock of the FHLB of Chicago that had a carrying value of $46.1 million at both September 30, 2010, and December 31, 2009, and which is included as a component of other assets. In 2007, the FHLB of Chicago was required to suspend payment of dividends on its stock. If there are any further developments that impair the value of the common stock of the FHLB of Chicago, the Company may be required to write down the value of the shares it holds, which in turn would affect the Company’s net income in the period of the write down and shareholders’ equity.

Deposit LiabilitiesDeposit liabilities decreased by $78.5 million or 3.7% during the nine months ended September 30, 2010, to $2.06 billion compared to $2.14 billion at December 31, 2009. Core deposits, consisting of checking, savings, and money market accounts, decreased by $3.5 million or 0.4% during the period while certificates of deposit declined by $82.0 million or 6.4%. The Company has reduced the rates it offers on its certificates of deposit in recent periods in an effort to manage its overall liquidity position, which has resulted in a decline in certificates of deposit. Due in part to these efforts, the weighted average cost of deposits declined by 82 basis points during the nine months ended September 30, 2010, compared to the same period in the previous year.

BorrowingsBorrowings, which consisted of advances from the FHLB of Chicago, declined slightly during the nine months ended September 30, 2010. The following table presents the Company’s FHLB advances by contractual maturities as of that date.

	Amount		Rate
	(Dollars in thousands)
FHLB advances maturing in:
2012	$	100,000		4.52	%
2013		252		4.17
2016		200,000		4.25
2017		557,403		4.15
Thereafter		48,546		5.12
Total FHLB advances	$	906,201		4.26	%

A substantial portion of these advances contain quarterly redemption options that are subject to potential exercise by the FHLB of Chicago. As of September 30, 2010, substantially all of the Company’s FHLB of Chicago advances were subject to significant prepayment penalties if voluntarily repaid or refinanced prior to their stated maturity. As of that date, the potential prepayment penalty was estimated to be $131.1 million assuming all of the advances were prepaid. From time to time, as part of its review of the Company’s capital resources, liquidity, and operating trends, management evaluates whether to repay and/or refinance FHLB of Chicago advances prior to their stated maturities. The Company expects to conduct such a review in the fourth quarter of 2010. In the event the Company was to determine to repay or refinance certain of its borrowings from the FHLB of Chicago, the Company may be required to recognize the related prepayment penalty in the quarter in which the penalty is paid.

Advance Payments by Borrowers for Taxes and InsuranceAdvance payments by borrowers for taxes and insurance (i.e., escrow deposits) were $30.0 million at September 30, 2010, compared to $2.5 million at December 31, 2009. Escrow deposits typically increase during the course of the calendar year until real estate tax obligations are paid, generally in December of each year or January of the following year.

Shareholders’ EquityThe Company’s shareholders’ equity decreased from $402.5 million at December 31, 2009, to $395.9 million at September 30, 2010. During this period the positive effects of the Company’s earnings and a decline in its accumulated other comprehensive loss were offset by dividend

41

payments and stock repurchases. The Company’s ratio of total shareholders’ equity to total assets was 11.54% at September 30, 2010, compared to 11.46% at December 31, 2009.

From time to time, the Company has repurchased shares of its common stock. Such repurchases have had the effect of reducing the Company’s capital and increasing its borrowings as a percent of total funding sources; further repurchases (if any) would continue to have the same effect. During the first quarter of 2010 the Company repurchased 690,800 shares of Company common stock at an average price of $6.55 per share, which completed the purchases authorized under its latest repurchase program. The Company has not repurchased on the market any shares of its common stock since the first quarter of 2010 nor has its board of directors authorized a new program for the purchase of additional shares. For additional discussion, refer to “Liquidity and Capital Resources—Capital Resources,” below.

A quarterly cash dividend of $0.07 per share was paid in each of the first and second quarters of 2010. A cash dividend of $0.03 per share was paid during the third quarter of 2010. The Company’s board of directors determined that it was prudent to reduce the dividend payment in the third quarter of 2010 in view of the Company’s recent earnings trends and the current regulatory and economic climate. For additional discussion, refer to “Liquidity and Capital Resources—Capital Resources,” below. The dividend payout ratio during the nine months ended September 30, 2010, was 206% of net income.

On November 1, 2010, the Company’s board of directors announced that it had declared a $0.03 per share dividend payable on December 1, 2010, to shareholders of record on November 11, 2010.

Asset QualityThe following table summarizes non-performing loans and assets as of the dates indicated:

	At September 30			At December 31
	2010			2009
	(Dollars in thousands)
Non-accrual mortgage loans:
One- to four-family	$	17,355		$	12,126
Multi-family		11,119			3,357
Commercial real estate		30,190			23,699
Construction and development		—			—
Total non-accrual mortgage loans		58,664			39,182
Non-accrual consumer loans:
Secured by real estate		1,449			1,433
Other consumer loans		160			212
Total non-accrual consumer loans		1,609			1,645
Non-accrual commercial business loans		3,151			923
Total non-accrual loans		63,424			41,750
Accruing loans delinquent 90 days or more		326			834
Total non-performing loans		63,750			42,584
Foreclosed properties and repossessed assets		20,548			17,689
Total non-performing assets	$	84,298		$	60,273
Non-performing loans to loans receivable, net		4.63	%		2.83	%
Non-performing assets to total assets		2.46	%		1.72	%
Additional interest income that would have been recognized if non-accrual loans had been current	$	3,656		$	2,671

The Company’s non-performing loans were 4.63% of loans receivable as of September 30, 2010, compared to 2.83% as of December 31, 2009. The ratios of non-performing assets to total assets were 2.46% and 1.72% as of these same dates, respectively. During the nine months ended September 30, 2010, the Company’s non-performing loans increased by $21.2 million or 49.7%. This increase was

42

caused by the economic recession, a weak real estate market, and increased unemployment over the past year that resulted in increased stress on borrowers and increased loan delinquencies. The increase in non-performing loans during the nine months ended September 30, 2010, was principally caused by the default of $26.4 million in loans to ten unrelated borrowers. These loan relationships are secured by office, commercial, and retail buildings, apartment buildings, residential mortgages, developed land, and equipment and inventory. The largest of these relationships consist of a $6.6 million loan secured by a 100-unit apartment project located in the Twin Cities area and a $4.1 million loan secured by partially developed land located in the Milwaukee area. Management does not expect to incur a loss on the $6.6 million apartment loan at this time, although there can be no assurances. The Company established a $1.1 million loss allowance against the $4.1 million land loan, as previously described.

The increase in non-performing loans described in the previous paragraph was partially offset by the transfer of the collateral for three loans with an aggregate balance of $9.7 million to foreclosed real estate during the nine-month period in 2010, net of an aggregate allowance for loan loss of $4.1 million, which was charged-off. These loans were secured by office buildings and a retail center.

Foreclosed properties and repossessed assets increased from $17.7 million at December 31, 2009, to $20.5 million at September 30, 2010. This increase was due to the transfers described in the previous paragraph, as well as other smaller foreclosures during the period. The impact of these developments was partially offset by sales during the period of two large properties that had a carrying value of $3.3 million. The proceeds from the sales of these properties approximated their carrying value. In addition, the Company recorded $4.2 million in write-offs on certain foreclosed properties during the nine months ended September 30, 2010. These write-offs were caused by continued declines in real estate values during the period and were based on updated independent appraisals or internal management valuations. The write-offs were included as a component of non-interest expense, as previously described in this report.

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A summary of the allowance for loan losses is shown below for the periods indicated:

	Nine Months Ended September 30
	2010			2009
	(Dollars in thousands)
Balance at the beginning of the period	$	17,028		$	12,208
Provision for loan losses		15,679			8,822
Charge-offs:
One- to four-family		(275	)		(328	)
Multi-family		—			(4,523	)
Commercial real estate		(5,331	)		(1,964	)
Consumer loans		(570	)		(344	)
Commercial business loans		(173	)		(167	)
Total charge-offs		(6,349	)		(7,326	)
Recoveries:
One- to four-family		20			—
Commercial real estate		1			—
Consumer loans		30			30
Total recoveries		51			30
Net charge-offs		(6,298	)		(7,296	)
Balance at the end of the period	$	26,409		$	13,734

	September 30			December 31
	2010			2009
Allowance as a percent of total loans		1.92	%		1.13	%
Allowance as a percent of non-performing loans		41.43	%		39.99	%
Net charge-offs to average loans (1)		0.56	%		0.45	%

(1) Annualized rates for the nine months ended September 30, 2010, and twelve months ended December 31, 2009, respectively.

The Company’s allowance for loan losses increased to $26.5 million or 1.92% of total loans at September 30, 2010, compared to $17.0 million or 1.13% at December 31, 2009. As a percent of non-performing loans, the Company’s allowance for loan losses was 41.4% at September 30, 2010, compared to 40.0% at December 31, 2009. The dollar increase in the allowance was caused by the additional loss allowances that were established during the first nine months of 2010, as described earlier in this report. This development was partially offset by loan charge-offs during the period, the most significant of which were the charge-offs related to the three transfers to foreclosed real estate that were described earlier.

The allowance for loan losses has been determined in accordance with GAAP. Management is responsible for the timely and periodic determination of the amount of the allowance required. Future provisions for loan losses will continue to be based upon management’s assessment of the overall loan portfolio and the underlying collateral, trends in non-performing loans, current economic conditions, and other relevant factors. To the best of management’s knowledge, all known and inherent losses have been provided for in the allowance for loan losses.

Refer to “Operating Results—Provision for Loan Losses,” above, for additional discussion.

Liquidity and Capital Resources

LiquidityThe term “liquidity” refers to the Company’s ability to generate cash flow to fund loan originations, loan purchases, deposit withdrawals, and operating expenses. The Company’s primary

44

sources of funds are deposit liabilities, scheduled payments, prepayments, and maturities of loans and securities available-for-sale, sales of one- to four-family loans in the secondary market, sales of securities available-for-sale, borrowings from the FHLB of Chicago, and cash flow provided by the Company’s operations. Historically, these sources of funds have been adequate to maintain liquidity, with the Company borrowing correspondingly more in periods in which its operations generate less cash. In the event these sources of liquidity would become inadequate, management believes that the Company could access the wholesale deposit market, although there can be no assurances that wholesale deposits would be available if needed.

Scheduled payments and maturities of loans and securities available-for-sale are relatively predictable sources of funds. However, cash flows from deposit liabilities, calls of investment securities, and prepayments of loans and mortgage-related securities are strongly influenced by interest rates, general and local economic conditions, and competition in the marketplace. For example, during the nine months ended September 30, 2010, prepayments in the Company’s mortgage-related securities, prepayments in its one- to four-family mortgage loan portfolio, and calls of certain investment securities remained elevated because of the interest rate environment. A different interest rate environment could lead to a significantly different result. These factors reduce the predictability of the timing of these sources of funds.

The Company is committed to maintaining a strong liquidity position; therefore, management monitors the Company’s liquidity position on a daily basis. Based upon historical experience and available sources of liquidity, management anticipates that the Company will have sufficient funds to meet current funding commitments. For additional discussion refer to “Financial Condition,” above, and “Qualitative and Quantitative Disclosures about Market Risk” in Part I, Item 3, below.

Capital ResourcesAt September 30, 2010, the Bank exceeded each of the applicable regulatory capital requirements (refer to Note 8, “Shareholders’ Equity,” of the Unaudited Condensed Consolidated Financial Statements, above). In order to be classified as “well-capitalized” by the FDIC, the Bank is required to have Tier 1 (leverage) capital to total adjusted assets of at least 5.0% and total risk-based capital to risk-weighted assets of at least 10.0%. At September 30, 2010, the Bank had a Tier 1 capital ratio of 9.98% and a total risk-based capital ratio of 21.87%.

As noted in “Financial Condition—Shareholders’ Equity,” above, the Company has not repurchased shares of its common stock since the first quarter of 2010 nor has its board of directors authorize a new program for the purchase of additional shares. In addition, during the third quarter of 2010 the board of directors reduced the regular quarterly dividend from $0.07 per share paid in each of the first and second quarters of 2010 to $0.03 per share in the third quarter. In view of the Company’s earnings trends and the current regulatory and economic climate, the board of directors determined that it would be prudent to reduce the Company’s quarterly dividend payment and to continue the suspension of stock repurchases.

The payment of dividends or the repurchase of common stock by the Company is highly dependent on the ability of the Company’s bank subsidiary to pay dividends or otherwise distribute capital to the Company. Although the capital of the Company’s bank subsidiary remains strong, regulators and lawmakers have increased their focus in recent periods on the earnings and capital levels of regulated financial institutions. The Company is unable to determine at this time when stock repurchases might resume or whether future operating results will enable the Company to maintain its dividend at the current level. Furthermore, future changes in regulatory requirements and/or new legislation could affect required capital levels and/or the percentage of income that such institutions may use for dividends, which could have an adverse impact on the Company’s ability to maintain its dividend and/or repurchase shares of its stock in future periods. Refer to Part I, Item 1, “Business—Regulation and Supervision,” of the Company’s 2009 Annual Report on Form 10-K for additional discussion.

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Contractual Obligations, Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements

Contractual ObligationsThe following table presents, as of September 30, 2010, significant fixed and determinable contractual obligations to third parties by payment date (excluding interest payments due in the future on deposits and borrowed funds).

	Payments Due In
			One to		Three to		Over
	One Year		Three		Five		Five
	Or Less		Years		Years		Years		Total
			(Dollars in thousands)
Deposits with no stated maturity	$	851,731		—		—		—	$	851,731
Certificates of deposits		892,750	$	260,461	$	54,062		—		1,207,273
Borrowed funds (1)		—		100,253		—	$	805,948		906,201
Operating leases		906		1,320		1,176		2,347		5,749
Purchase obligations		1,680		3,360		3,360		6,720		15,120
Non-qualified retirement plans and deferred compensation plans		1,070		2,166		2,619		8,005		13,859

(1) Includes $856.0 million in advances that are redeemable on a quarterly basis at the option of the FHLB of Chicago.

The Company’s operating lease obligations represent short- and long-term lease and rental payments for facilities, certain software and data processing equipment, and other equipment. Purchase obligations represent obligations under agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The purchase obligation amounts presented above primarily relate to certain contractual payments for services provided for information technology.

The Company also has obligations under its deferred retirement plan for executives and directors as described in Note 10, “Employee Benefit Plans,” to the Unaudited Condensed Consolidated Financial Statements, above.

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Commitments to Extend CreditThe following table details the amounts and expected maturities of approved commitments as of September 30, 2010.

	Payments Due In
			One to		Three to		Over
	One Year		Three		Five		Five
	Or Less		Years		Years		Years		Total
			(Dollars in thousands)
Commercial loans	$	587		—		—		—	$	587
Residential real estate loans		79,236		—		—		—		79,236
Revolving home equity and credit card lines		146,772		—		—		—		146,772
Standby letters of credit		126		—	$	41	$	10		177
Commercial lines of credit		16,654		—		—		—		16,654
Undisbursed commercial loans		391		—		—		—		391

Approved commitments to extend credit, including loan commitments, standby letters of credit, unused lines of credit, and commercial letters of credit do not necessarily represent future cash requirements, since these commitments often expire without being drawn upon.

Off-Balance Sheet ArrangementsAt September 30, 2010, the Company had forward commitments to sell one- to four-family mortgage loans of $137.3 million to Fannie Mae. As described in Note 13, “Financial Instruments with Off-Balance Sheet Risk,” to the Company’s Unaudited Condensed Consolidated Financial Statements, the Company uses forward commitments to sell loans to mitigate interest rate risk on one- to four-family IRLCs and loans held-for-sale.

Contingent LiabilitiesThe Company did not have a material exposure to contingent liabilities as of September 30, 2010.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Gap Analysis

Repricing characteristics of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring a financial institution’s interest rate sensitivity “gap.” An asset or liability is said to be “interest rate sensitive” within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity “gap” is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period.

A gap is considered positive when the amount of interest-earning assets maturing or repricing within a specific time period exceeds the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered negative when the amount of interest-bearing liabilities maturing or repricing within a specific time period exceeds the amount of interest-earning assets maturing or repricing within the same period. During a period of rising interest rates, a financial institution with a negative gap position would be expected, absent the effects of other factors, to experience a greater increase in the costs of its liabilities relative to the yields of its assets and thus a decrease in the institution’s net interest income. An institution with a positive gap position would be expected, absent the effect of other factors, to experience the opposite result. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to reduce net interest income.

The following table presents the amounts of the Company’s interest-earning assets and interest-bearing liabilities outstanding at September 30, 2010, which management anticipates will reprice or mature in each of the future time periods shown. The information presented in the following table is based on the following assumptions:

• Investment securities—based upon contractual maturities and if applicable, call dates. Investments with call dates may or may not be called prior to their stated maturities.

• Mortgage-related securities—based upon known repricing dates (if applicable) and an independent outside source for determining estimated repayment speeds. Actual cash flows may differ from these assumptions.

• Loans receivable—based upon contractual maturities, repricing dates (if applicable), scheduled repayments of principal, and projected prepayments of principal based upon the Company’s historical experience or anticipated prepayments. Actual cash flows may differ from these assumptions.

• Deposit liabilities—based upon contractual maturities and historical decay rates. Actual cash flows may differ from these assumptions.

• Borrowings—based upon stated maturity. However, $856.0 million of borrowings classified as due beyond one year contain a redemption option which has not been reflected in the analysis. These borrowings could be redeemed at the option of the lender prior to their stated maturity (refer to “Financial Condition—Borrowings” in Part I, Item 2, above).

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	At September 30, 2010
							More Than One Year			More Than
	Within Three			Three to Twelve			To Three			Three Years
	Months			Months			Years			To Five Years			Over Five Years			Total
	(Dollars in thousands)
Interest-earning assets:
Loans receivable:
Mortgage loans:
Permanent:
Fixed	$	96,989		$	115,705		$	172,771		$	76,779		$	83,010		$	545,254
Adjustable		89,260			318,549			121,327			5,896			68			535,100
Construction:
Fixed		5,837			2,975			39			—			10,592			19,443
Adjustable		11,597			1,008			—			—			—			12,605
Consumer loans		105,061			41,384			56,731			24,836			22,595			250,607
Commercial business loans		16,403			11,733			17,209			368			34			45,747
Interest-earning deposits		55,843			—			—			—			—			55,843
Investment securities		844,935			94,964			—			—			—			939,899
Mortgage-related securities:
Fixed		18,870			24,190			24,210			8,234			18,694			94198
Adjustable		46,437			—			—			—			—			46437
Other interest-earning assets		46,092			—			—			—			—			46,092
Total interest-earning assets		1,337,324			610,508			392,287			116,113			134,993			2,591,225
Non-interest-bearing and interest-bearing liabilities:
Non-interest-bearing demand accounts		491			1,455			3,754			3,578			80,031			89,309
Interest-bearing liabilities:
Deposit liabilities:
Interest-bearing demand accounts		1,227			3,637			9,385			8,944			174,382			197,575
Savings accounts		1,423			4,209			10,795			10,202			183,996			210,625
Money market accounts		354,222			—			—			—			—			354,222
Certificates of deposit		302,549			640,463			210,199			54,062			—			1,207,273
Advance payments by borrowers for taxes and insurance		29,979			—			—			—			—			29,979
Borrowings		267			819			102,546			2,561			800,008			906,201
Total interest-bearing and non-interest-bearing liabilities		690,158			650,583			336,679			79,347			1,238,417			2,995,184
Interest rate sensitivity gap	$	647,166		$	(40,075	)	$	55,608		$	36,766		$	(1,103,424	)	$	(403,959	)
Cumulative interest rate sensitivity gap	$	647,166		$	607,091		$	662,699		$	699,465		$	(403,959	)
Cumulative interest rate sensitivity gap as a percentage of total assets		18.86	%		17.69	%		19.31	%		20.38	%		(11.77	)%
Cumulative interest-earning assets as a percentage of interest bearing liabilities		193.77	%		145.28	%		139.51	%		139.82	%		86.51	%

Based on the above gap analysis, at September 30, 2010, the Company’s interest-earning assets maturing or repricing within one year exceeded its interest-bearing liabilities maturing or repricing within the same period by $607.1 million. This represented a positive cumulative one-year interest rate sensitivity gap of 17.69%, and a ratio of interest-earning assets maturing or repricing within one year to interest-bearing liabilities maturing or repricing within one year of 145.28%. Based on this information, management anticipates that over the course of the next year the Company’s net interest income could benefit from an increase in market interest rates. Alternatively, the Company’s net interest income could be adversely

49

affected by a decline in market interest rates. However, it should be noted that the Company’s future net interest income is affected by more than just future market interest rates. Net interest income is also affected by absolute and relative levels of earning assets and interest-bearing liabilities, the level of non-performing loans and other investments, and by other factors outlined in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Cautionary Statement,” above, as well as Part I, Item 1A, “Risk Factors,” of the Company’s 2009 Annual Report on Form 10-K.

In addition to not anticipating all of the factors that could impact future net interest income, gap analysis has certain shortcomings. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Certain assets, such as adjustable-rate loans, have features which limit changes in interest rates on a short-term basis and over the life of the loan. If interest rates change, prepayment, and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of borrowers to make payments on their adjustable-rate loans may decrease if interest rates increase.

Present Value of Equity

In addition to the gap analysis table, management also uses simulation models to monitor interest rate risk. The models report the present value of equity (“PVE”) in different interest rate environments, assuming an instantaneous and permanent interest rate shock to all interest rate-sensitive assets and liabilities. The PVE is the difference between the present value of expected cash flows of interest rate-sensitive assets and liabilities. The changes in market value of assets and liabilities due to changes in interest rates reflect the interest rate sensitivity of those assets and liabilities as their values are derived from the characteristics of the asset or liability (i.e., fixed rate, adjustable rate, caps, and floors) relative to the current interest rate environment. For example, in a rising interest rate environment, the fair market value of a fixed rate asset will decline whereas the fair market value of an adjustable rate asset, depending on its repricing characteristics, may not decline. Increases in the market value of assets will increase the PVE whereas decreases in market value of assets will decrease the PVE. Conversely, increases in the market value of liabilities will decrease the PVE whereas decreases in the market value of liabilities will increase the PVE.

The following table presents the estimated PVE over a range of interest rate change scenarios at September 30, 2010. The present value ratio shown in the table is the PVE as a percent of the present value of total assets in each of the different rate environments. For purposes of this table, management has made assumptions such as prepayment rates and decay rates similar to those used for the gap analysis table.

									Present Value of Equity
									as a Percent of
Change in	Present Value of Equity								Present Value of Assets
Interest Rates	Dollar		Dollar			Percent			Present Value			Percent
(Basis Points)	Amount		Change			Change			Ratio			Change
	(Dollars in thousands)
+400	$	412,166	$	45,692			12.5	%		12.34	%		17.0	%
+300		418,361		51,888			14.2			12.36			17.2
+200		416,989		50,516			13.8			12.18			15.6
+100		397,083		30,610			8.4			11.51			9.2
0		366,473		—			—			10.54			—
-100		302,636		(63,838	)		(17.4	)		8.66			(17.9	)

Based on the above analysis, management anticipates that the Company’s PVE may be favorably impacted by an increase in interest rates. This is primarily attributable to a decrease in the present value of the Company’s FHLB advances, which are more likely to be redeemed at their carrying values as interest rates rise. In contrast, as of September 30, 2010, a substantial portion of the Company’s available-for-sale

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securities consisted of securities with very short-term maturities, which are not as adversely impacted by changes in interest rates as financial instruments with longer terms to maturity. As previously noted, the Company has reinvested proceeds from recent security sales and maturities/calls of other loans and investments in short-term securities and overnight investments. Management believes these latter types of investments increase the Company’s flexibility to respond to changes in interest rates or otherwise restructure its balance sheet. Management also anticipates that the Company’s PVE may be adversely impacted by a decline in interest rates. This is primarily attributable to an increase in the present value of the Company’s FHLB advances in declining interest rate environments.

It should be noted that the Company’s PVE is impacted by more than changes in market interest rates. Future PVE is also affected by management’s decisions relating to reinvestment of future cash flows, decisions relating to funding sources, and by other factors outlined in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Cautionary Statement,” above, as well as Part I, Item 1A, “Risk Factors,” of the Company’s 2009 Annual Report on Form 10-K.

As is the case with gap analysis, PVE analysis also has certain shortcomings. PVE modeling requires management to make assumptions about future changes in market interest rates that are unlikely to occur, such as parallel or equal changes in all market rates across all maturity terms. PVE modeling also requires that management make assumptions which may not reflect the manner in which actual yields and costs respond to changes in market interest rates. For example, management makes assumptions regarding the acceleration rate of the prepayment speeds of higher yielding mortgage loans. Prepayments will accelerate in a falling rate environment and the reverse will occur in a rising rate environment. Management also assumes that decay rates on core deposits will accelerate in a rising rate environment and the reverse in a falling rate environment. The model assumes that the Company will take no action in response to the changes in interest rates, when in practice rate changes on certain products, such as savings deposits, may lag behind market changes. In addition, prepayment estimates and other assumptions within the model are subjective in nature, involve uncertainties, and therefore cannot be determined with precision. Accordingly, although the PVE model may provide an estimate of the Company’s interest rate risk at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in interest rates on the Company’s PVE.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

Item 1A. Risk Factors

Refer to “Risk Factors” in Part I, Item 1A, of the Company’s 2009 Annual Report on Form 10-K. Refer also to “Management���s Discussion and Analysis of Financial Condition and Results of Operations—Cautionary Statement” in Part I, Item 2, above.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

None

Item 6. Exhibits

Refer to Exhibit Index, which follows the signature page hereof.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	BANK MUTUAL CORPORATION (Registrant)
Date: November 4, 2010	/s/ Michael T. Crowley, Jr.
	Michael T. Crowley, Jr.
	Chairman and Chief Executive Officer

Date: November 4, 2010	/s/ Michael W. Dosland
	Michael W. Dosland
	Senior Vice President and Chief Financial Officer

53

EXHIBIT INDEX

BANK MUTUAL CORPORATION

Form 10-Q for Quarter Ended September 30, 2010

Exhibit		Incorporated Herein
No.	Description	by Reference To	Filed Herewith
31.1	Sarbanes-Oxley Act Section 302 Certification signed by the Chairman and Chief Executive Officer of Bank Mutual Corporation		X
31.2	Sarbanes-Oxley Act Section 302 Certification signed by the Senior Vice President and Chief Financial Officer of Bank Mutual Corporation		X
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by the Chief Executive Officer of Bank Mutual Corporation		X
32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by the Chief Financial Officer of Bank Mutual Corporation		X