Exhibit 99.1
F O R I M M E D I A T E R E L E A S E
N E W S
| | FROM |
| | |
| |  |
| CONTACTS: | Bank Mutual Corporation |
| | Michael T. Crowley, Jr. |
| | Chairman and Chief Executive Officer |
| | or |
| | Michael W. Dosland |
| | Senior Vice President and Chief Financial Officer |
| | (414) 354-1500 |
BANK MUTUAL CORPORATION REPORTS HIGHER EARNINGS
Milwaukee, Wisconsin
October 18, 2012
Bank Mutual Corporation (NASDAQ: BKMU) reported net income of $2.0 million or $0.04 per diluted share in the third quarter of 2012, which was a $617,000 or 45.7% improvement over the same quarter in 2011. Bank Mutual Corporation (“Bank Mutual”) had net income of $1.3 million or $0.03 per diluted share in the prior year quarter. Year-to-date, Bank Mutual reported net income of $4.4 million or $0.10 per diluted share in 2012 compared to a net loss of $49.0 million or $1.07 per diluted share in the same period in 2011. The loss in the 2011 year-to-date period was caused by a $52.6 million non-cash goodwill impairment in the second quarter of that year. Excluding the impairment, Bank Mutual’s earnings during the year-to-date period in 2011 would have been $3.6 million or $0.08 per diluted share. Bank Mutual also announced that its non-performing loans declined to $33.9 million or 2.45% of loans receivable at September 30, 2012.
Michael T. Crowley, Jr., Chairman and Chief Executive Officer of Bank Mutual noted, “As we anticipated, a higher net interest margin contributed to increased earnings in the third quarter compared to the second quarter. Our net interest margin improved to 2.71% during the quarter compared to 2.47% in the second quarter due in part to lower funding costs.” David A. Baumgarten, President of Bank Mutual, continued, “Also contributing was an improved earning asset mix due to continued growth in our loan portfolio. We believe the initiatives we have taken in this area the past two years are starting to pay off.” Mr. Baumgarten added, “We are also pleased that our non-performing loans declined by a meaningful amount for the sixth straight quarter. We believe this brings our asset quality ratios more into line with industry averages.”
Bank Mutual’s net interest income increased by $113,000 or 0.7% during the third quarter of 2012 compared to the same quarter in 2011. This improvement was due in part to the repayment of $100.0 million in high-cost borrowings from the Federal Home Loan Bank (“FHLB”) of Chicago that matured during the 2012 quarter. Also contributing to the improvement was a $51.9 million or 2.3% increase in average earning assets in the 2012 quarter compared to the same quarter in the previous year. Earlier in 2012 Bank Mutual purchased $158.9 million in held-to-maturity securities that were funded by term borrowings from the FHLB of Chicago. In addition, in the third quarter of 2012 average total loans increased by $38.7 million or 2.8% compared to the same quarter in 2011. These increases in average earning assets were partially offset by a $108.7 million or 19.8% decrease in average available-for-sale securities in the 2012 quarter compared to the same quarter in 2011. Bank Mutual’s net interest margin during the third quarter of 2012 was slightly lower than it was in the third quarter of 2011. However, compared to the second quarter of 2012, Bank Mutual’s net interest margin improved by 24 basis points, due primarily to the aforementioned repayment of the borrowings from the FHLB of Chicago.
On a year-to-date basis, Bank Mutual’s net interest income declined by $2.1 million or 4.4% in 2012 compared to the same period in 2011. This decline was primarily attributable to a decrease in Bank Mutual’s net interest margin, which was 2.61% in the 2012 nine-month period compared to 2.80% in the same period of 2011. This decline was primarily the result of a lower interest rate environment in 2012, which reduced the return on Bank Mutual’s earning assets more than the cost of its funding sources. This development was partially offset by the favorable impact of higher earning assets in 2012, as previously described.
Bank Mutual’s provision for loan losses was $657,000 in the third quarter of 2012 compared to $1.1 million in the same quarter last year. Year-to-date the provision for loan losses was $2.4 million in 2012 compared to $5.1 million in the same period in 2011. During the third quarter of 2012 Bank Mutual recorded additional loss provision of $1.8 million against a number of multi-family, commercial real estate, and business loan relationships, as well as residential and consumer loans. This development was partially offset by a $541,000 loss recapture related to a $7.9 million non-performing loan that paid off during the quarter. In addition, Bank Mutual’s recorded $597,000 in net loss recaptures during the quarter that were related to a general decline in the dollar amount of its classified loans, as described later in this report.
During the third quarter of 2011, Bank Mutual recorded $1.8 million in loss provisions against two unrelated loan relationships that aggregated $6.1 million. During this quarter Bank Mutual also recorded $586,000 in loss provisions against a number of multi-family, commercial real estate, and business loan relationships, as well as certain residential and consumer loans. In addition, during the third quarter of 2011 Bank Mutual recorded $1.1 million in loss provision that reflected management’s concerns at the time relating to general economic and market conditions. The impact of these developments was partially offset by $2.4 million in loss recaptures related to payoffs of a number of non-performing loans.
On a year-to-date basis in 2012 Bank Mutual recorded additional loss provision of $4.2 million against a number of multi-family, commercial real estate, and business loan relationships, as well as residential and consumer loans. This development was partially offset by $1.8 million in loss recaptures related to non-performing loans that paid off during the period and to recoveries of previously charged-off loans.
On a year-to-date basis in 2011 Bank Mutual recorded $10.8 million in loss provisions against a number of multi-family, commercial real estate, and business loan relationships, and certain smaller residential and consumer loans, as well as loss provisions related to management’s general concerns regarding economic and market conditions, as previously described. These developments were partially offset by $5.7 million in loss recaptures on loans that paid-off during the period or were upgraded to performing status.
Bank Mutual’s provision for loan losses has been trending lower in recent periods. This trend is directionally consistent with recent declines in Bank Mutual’s non-performing loans and classified loans, as described below, and is consistent with general trends in the banking industry. It should be noted, however, that Bank Mutual’s loan portfolio continues to be impacted by slow economic growth, persistent unemployment, and low real estate values. These conditions are particularly challenging for borrowers whose loans are secured by commercial real estate, multi-family real estate, and land. As such, there can be no assurances that non-performing loans and/or classified loans will continue to trend lower in future periods or that Bank Mutual’s provision for loan losses will not increase in future periods.
Service charges on deposits increased by $149,000 or 8.9% during the three months ended September 30, 2012, compared to the same period in 2011. During the nine-month period in 2012 this revenue item increased by $346,000 or 7.3% compared to the same period in 2011. Management attributes these improvements to an increase in Bank Mutual’s average checking accounts, which increased by $39.3 million or 12.8% during the nine months ended September 30, 2012, compared to the same period in the previous year. In addition, enhancements in recent periods to Bank Mutual’s commercial deposit products and services generated increased fee revenue in the 2012 periods, particularly related to treasury management services.
Brokerage and insurance commissions were $678,000 during the third quarter of 2012, an $87,000 or 11.4% decrease from the same period in the previous year. On a year-to-date basis, this source of revenue was $2.2 million in 2012, a $13,000 or 0.6% increase from the same period in 2011. This revenue item consists of commissions earned on sales of tax-deferred annuities, mutual funds, and certain other securities, as well as personal and business insurance products. As such, this revenue item will fluctuate from period to period depending on customer demand for these types of financial products and services, as well as differences caused by the timing of various sales initiatives.
Net loan-related fees and servicing revenue was a loss of $1.1 million during the three months ended September 30, 2012, compared to a loss of $1.0 million in the same period of the previous year. Net loan-related fees and servicing revenue was a loss of $2.3 million during the nine months ended September 30, 2012, compared to a loss of $452,000 in the same period of 2011. The following table presents the components of this income statement line item for the periods indicated:
| | | Three Months Ended
September 30 | | | Nine Months Ended
September 30 | |
| | | 2012 | | | 2011 | | | 2012 | | | 2011 | |
| | | (Dollars in thousands) | |
| Gross servicing fees | | $ | 664 | | | $ | 679 | | | $ | 2,104 | | | $ | 2,039 | |
| Mortgage servicing rights amortization | | | (982 | ) | | | (726 | ) | | | (3,004 | ) | | | (1,718 | ) |
| Mortgage servicing rights valuation (loss) recovery | | | (944 | ) | | | (1,103 | ) | | | (1,919 | ) | | | (1,097 | ) |
| Loan servicing revenue, net | | | (1,262 | ) | | | (1,150 | ) | | | (2,819 | ) | | | (776 | ) |
| Other loan fee income | | | 171 | | | | 114 | | | | 471 | | | | 324 | |
| Loan-related fees and servicing revenue, net | | $ | (1,091 | ) | | $ | (1,036 | ) | | $ | (2,348 | ) | | $ | (452 | ) |
Amortization of mortgage servicing rights (“MSRs”) increased in the 2012 periods compared to the same periods in the prior year due to lower market interest rates for one- to four-family mortgage loans, which resulted in increased loan prepayments and faster amortization of the MSRs relative to the 2011 periods. Net loan-related fees and servicing revenue is also impacted by changes in the valuation allowance that is established against MSRs. The change in this allowance is recorded as a recovery or loss, as the case may be, in the period in which the change occurs. Lower market interest rates in 2012 and 2011 resulted in higher prepayment expectations, which caused increases in the MSR valuation allowance during these periods. As of September 30, 2012, Bank Mutual had a valuation allowance of $2.8 million against MSRs with a gross book value of $9.1 million. As of the same date Bank Mutual serviced $1.1 billion in loans for third-party investors compared to a similar amount one year ago.
Gains on sales of loans were $3.4 million in the third quarter of 2012 compared to $2.3 million in the same quarter last year. Year-to-date, gains on sales of loans were $9.9 million in 2012 compared to $3.4 million in 2011. Bank Mutual generally sells most of the fixed-rate, one- to four-family mortgage loans that it originates in the secondary market. During the three and nine months ended September 30, 2012, sales of these loans were $26.3 million or 37.5% higher and $202.2 million or 135% higher than they were during the same periods of 2011, respectively. Management attributes these increases to lower market interest rates for one- to four-family mortgage loans, which encouraged borrowers to refinance higher-rate loans into lower-rate loans during the 2012 periods. Also contributing to the increase in gains on sales of loans in the 2012 periods was an increase in Bank Mutual’s average gross profit margin on the sales of loans. During the nine months ended September 30, 2012, the average gross profit margin was 2.80% compared to 2.26% during the same period in 2011. Management attributes this improvement to the burden that increased consumer demand has placed on the loan production capacity of the mortgage banking industry as a whole, which has caused gross profit margins to increase.
Market interest rates for one- to four-family mortgage loans remain historically low. Despite this, management believes that it is possible such rates could trend lower in the near term as production capacity within the mortgage banking industry becomes less constrained. In addition, the recent announcement by the Federal Open Market Committee (“FOMC”) of the Federal Reserve Board (“FRB”) that it intends to purchase government agency mortgage-backed securities is generally expected to result in lower interest rates for one- to four-family mortgage loans in the near term. As such, management expects that Bank Mutual’s sales of loans and gross profit margins could remain elevated for the remainder of the year. However, management also expects that amortization of MSRs, as well as valuation allowance adjustments related to MSRs, could also remain elevated during this time period.
Bank Mutual recorded $543,000 in gains on sales of investments during the nine months ended September 30, 2012. During this period Bank Mutual sold $20.4 million in mortgage-related securities. The purpose of this sale was to provide additional liquidity to fund the repayment of $100.0 million in borrowings from the FHLB of Chicago that matured during the third quarter, as previously described. During the nine months ended September 30, 2011, Bank Mutual recorded $1.1 million in net gains on sales of investments. In that period Bank Mutual sold a $20.8 million investment in a mutual fund that management did not expect would perform well in future periods.
During the nine months ended September 30, 2012 and 2011, Bank Mutual recorded $336,000 and $389,000 in net other-than-temporary impairment (“OTTI”) losses, respectively. These losses consisted of the credit portion of the total OTTI loss related to Bank Mutual’s investment in certain private-label collateralized mortgage obligations (“CMOs”) rated less than investment grade. Management attributes the net OTTI losses in these periods to low real estate values for residential properties on a nationwide basis. None of Bank Mutual’s remaining private-label CMOs were deemed to be other-than-temporarily impaired as of September 30, 2012. However, the collection of the amounts due on private-label CMOs is subject to numerous factors outside of Bank Mutual’s control and a future determination of OTTI could result in additional losses being recorded through earnings in future periods. As of September 30, 2012, Bank Mutual’s total investment in private-label CMOs was $54.2 million, of which $34.0 million was rated less than investment grade.
Other non-interest income was $1.5 million and $4.5 million during the three and nine months ended September 30, 2012, respectively, compared to $1.2 million and $3.8 million during the same periods in 2011, respectively. The increase in the 2012 periods was due primarily to an increase in the fair value of assets held in trust for certain non-qualifying employee benefit plans, due to the effects of lower interest rates and improved equity markets.
Compensation-related expenses increased by $823,000 or 8.5% and by $3.1 million or 10.8% during the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011, respectively. These increases were due primarily to the hiring of additional commercial relationship managers and other key personnel in recent periods, as well as normal annual merit increases. Also contributing was an increase in expenses related to stock-based compensation, certain non-qualifying employee benefit plans, and the defined-benefit pension plan. The latter development was principally caused by a decline in the interest rate used to determine the present value of the pension obligation.
Federal deposit insurance premiums increased by $75,000 or 9.9% and by $8,000 or 0.3% during the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011, respectively. These increases were caused by higher average total assets in the 2012 periods compared to the corresponding periods in 2011, for reasons described elsewhere in this report. The Federal Deposit Insurance Corporation (“FDIC”) bases its quarterly deposit insurance assessments on an insured institution’s average total assets minus average tangible equity and certain other adjustments.
Advertising and marketing-related expenses decreased by $207,000 or 35.5% during the three months ended September 30, 2012, compared to the same period in the prior year. On a year-to-date basis, advertising and marketing-related expenses increased by $218,000 or 17.8% in 2012 compared to the same period in 2011. These changes were primarily caused by differences in the timing of Bank Mutual’s advertising and marketing efforts between the 2012 and 2011 periods. At this time management does not expect advertising and marketing-related expenses during the whole of 2012 to be substantially different than prior years. However, this will depend on future management decisions and there can be no assurances.
Net losses and expenses on foreclosed properties were $1.7 million and $5.5 million during the three and nine months ended September 30, 2012, respectively, compared to $1.7 million and $5.4 million in the same periods of the prior year, respectively. Bank Mutual’s losses and expenses on foreclosed real estate has remained elevated in recent periods due to lower real estate values and slow economic growth in such periods. If these conditions persist, losses on foreclosed real estate could remain elevated in the near term.
Other non-interest expense was $2.5 million and $7.7 million during the three and nine months ended September 30, 2012, respectively, compared to $2.5 million and $7.2 million during the same periods in 2011, respectively. The increase in the 2012 year-to-date period was primarily the result of higher costs for legal, consulting, and accounting fees related to loan workout efforts and related professional services. In recent months, however, these expenses have declined as Bank Mutual has reduced its level of non-performing loans.
Income tax expense was $1.0 million and $610,000 during the three months ended September 30, 2012 and 2011, respectively, and was $2.1 million and $1.2 million during the nine months ended as of the same dates, respectively. Bank Mutual’s effective tax rate (“ETR”) for the three months ended September 30, 2012 and 2011, was 34.8% and 31.3%, respectively. Excluding the 2011 goodwill impairment from income (loss) before taxes (which is not deductible for income tax purposes), Bank Mutual’s ETR for the nine-month periods in 2012 and 2011 was 32.3% and 25.9%, respectively. Bank Mutual’s ETR increased in the 2012 periods because non-taxable revenue, which consists primarily of earnings from bank-owned life insurance (“BOLI”), comprised a smaller portion of pre-tax earnings in 2012 than it did in 2011.
Bank Mutual’s total assets decreased by $13.4 million or 0.5% during the nine months ended September 30, 2012. During the period Bank Mutual’s available-for-sale securities declined by $163.2 million, its cash and cash equivalents declined by $39.1 million, and its investment in common stock of the FHLB of Chicago declined by $27.0 million. These developments were partially offset by a $158.1 million increase in held-to-maturity securities and a $65.2 million increase in the loan portfolio. Net cash flows from the changes in these assets, as well as a $58.0 million increase in advances from the FHLB of Chicago and a $29.4 million increase in escrow deposits, were used to fund a $101.3 million decline in deposit liabilities during the nine months ended September 30, 2012.
The increase in Bank Mutual’s held-to-maturity securities during the nine months ended September 30, 2012, was due to the purchase of $158.9 million in mortgage-backed securities issued and guaranteed by the Federal National Mortgage Association (“Fannie Mae”) and backed by multi-family residential loans. Bank Mutual funded the purchase of these securities with $158.9 million in new term advances from the FHLB of Chicago. These new term advances were partially offset by the repayment during the third quarter of a $100.0 million advance from the FHLB of Chicago that had an interest rate of 4.52%. The decrease in Bank Mutual’s available-for-sale securities during the nine months ended September 30, 2012, was due primarily to periodic repayments and security sales that exceeded Bank Mutual’s purchase of new available-for-sale securities. The decrease in Bank Mutual’s cash and cash equivalents during this same period was due to the funding of increases in the loan portfolio, as well as decreases in deposit liabilities, as described elsewhere in this report.
During the nine months ended September 30, 2012, loans receivable increased by $65.2 million or 4.9%. Total loans originated for portfolio increased by $91.9 million or 33.4% during this period compared to the same period in 2011. A portion of this improvement came from increased originations of commercial business loans, which increased by $10.4 million or 16.2% during the nine months ended September 30, 2012, compared to the same period in 2011. Management attributed this increase to recent efforts to improve Bank Mutual’s share of the mid-tier commercial banking market (defined as business entities with sales revenues of $5 to $100 million), which was a new market segment for Bank Mutual in 2011. In the past two years Bank Mutual has added experienced leaders to its senior management team and has hired a number of commercial relationship managers and support personnel experienced in managing and selling financial services to the mid-tier commercial banking market. In the near term Bank Mutual expects to add additional professionals capable of serving this market segment, although there can be no assurances as to the extent or timing of such staff additions or the impact on operating results.
Originations of multi-family mortgage loans, both permanent and construction, also increased substantially during the period, which management believes reflects a general decline in the level of home ownership in recent periods. Finally, originations of consumer loans, which consist principally of home equity term loans and lines of credit, increased by $25.5 million or 41.1% during the nine months ended September 30, 2012, due to more competitive pricing and increased marketing efforts for these types of loans.
During the nine months ended September 30, 2012, Bank Mutual’s investment in the common stock of the FHLB of Chicago, which is included as a component of other assets, declined from $46.1 million at December 31, 2011, to $19.1 million at September 30, 2012. During this period the FHLB of Chicago redeemed $27.0 million of excess common stock held by Bank Mutual in accordance with a redemption plan it announced in December 2011. Under this plan, the FHLB of Chicago has stated that it intends to redeem additional excess common stock in quarterly increments through the end of 2013. However, the amount and timing of these redemptions, if any, depend on many factors outside the control of Bank Mutual or the FHLB of Chicago. As of September 30, 2012, Bank Mutual owned approximately $8.5 million more in FHLB of Chicago common stock than it would otherwise be required to own under minimum guidelines established by the FHLB of Chicago.
Bank Mutual’s deposit liabilities decreased by $101.3 million or 5.0% during the nine months ended September 30, 2012. Core deposits, consisting of checking, savings and money market accounts, increased by $51.7 million or 5.3% during the period whereas certificates of deposits declined by $153.0 million or 14.7%. Bank Mutual continues to closely manage the rates it offers on certificates of deposit to control is overall liquidity position, which has resulted in a decline in certificates of deposit in recent periods. Core deposits have increased in recent periods as a result of management efforts to focus sales efforts on such products and related services. Also contributing to the increase in core deposits, however, is customer reaction to the low interest rate environment. Management believes that this environment has encouraged some customers to switch to core deposits in an effort to retain flexibility in the event interest rates rise in the future.
Bank Mutual’s shareholders’ equity increased from $265.8 million at December 31, 2011, to $272.1 million at September 30, 2012. This increase was caused by net income during the period, as well as lower accumulated other comprehensive loss due to an increase in the fair value of available-for-sale securities. These developments were partially offset by the payment of regular cash dividends to shareholders of $0.01 per share during each of the quarters in the year. The book value of Bank Mutual’s common stock was $5.87 per share at September 30, 2012, compared to $5.75 per share at December 31, 2011.
Bank Mutual’s ratio of shareholders’ equity to total assets was 10.95% at September 30, 2012, compared to 10.64% at December 31, 2011. The increase in this ratio was due primarily to an increase in shareholders’ equity, as described in the previous paragraph. Bank Mutual’s subsidiary bank is “well capitalized” for regulatory capital purposes. As of June 30, 2012 (the latest information available), the subsidiary bank had a total risk-based capital ratio of 18.27% and a Tier 1 capital ratio of 9.23%. The minimum ratios to be considered “well capitalized” under current supervisory regulations are 10% for total risk-based capital and 6% for Tier 1 capital. The minimum ratios to be considered “adequately capitalized” are 8% and 4%, respectively.
Bank Mutual’s capital measures remain strong as of September 30, 2012. However, federal banking regulators have continued to focus on the capital levels of financial institutions such as Bank Mutual’s bank subsidiary. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") will eventually impose specific capital requirements on savings and loan holding companies such as Bank Mutual. These developments, and other requirements imposed by regulators (including the existing memoranda of understanding Bank Mutual has with its regulators), as well as proposed rules in response to the new Basel III international capital standards, may impact the ability of Bank Mutual and/or its subsidiary bank to pay dividends or, in the case of Bank Mutual, repurchase stock.
Bank Mutual’s non-performing loans declined by $41.2 million or 54.8% during the nine months ended September 30, 2012. Non-performing assets, which include non-performing loans, declined by $52.4 million or 52.4% during this same period. Finally, loans classified by Bank Mutual as “special mention” and “substandard,” which includes all non-performing loans, declined by $52.6 million or 33.9% in the aggregate during the nine months ended September 30, 2012. As of September 30, 2012, non-performing loans included $9.6 million in loans that were current on all contractual principal and interest payments, but which management determined should be classified as non-performing in light of underlying difficulties with the properties that secure the loans. The decline in Bank Mutual’s non-performing and classified loans during the nine months ended September 30, 2012, was due to loans that were paid off or upgraded during the period, as well as loans that were partially charged off because Bank Mutual had commenced and/or completed foreclosure proceedings during the period. In addition, foreclosed properties and repossessed assets declined by $11.2 million or 45.2% during the nine months ended September 30, 2012, due to sales of foreclosed real estate, as well as continued charge-offs of foreclosed properties. These developments were partially offset by foreclosures related to a number of smaller commercial real estate mortgage loans and, to a lesser extent, one- to four-family mortgage loans.
Bank Mutual’s non-performing loans and assets have trended lower in recent periods. However, this trend is subject to many factors that are outside of Bank Mutual’s control, such as economic and market conditions. As such, there can be no assurances that Bank Mutual’s non-performing loans and assets will continue to trend lower in future periods or that its provision for loan losses will not increase.
Bank Mutual’s allowance for loan losses was $21.0 million or 1.51% of total loans at September 30, 2012, compared to $27.9 million or 2.12% of total loans at December 31, 2011. As a percent of non-performing loans, Bank Mutual’s allowance for loan losses was 61.8% at September 30, 2012, compared to 37.2% at December 31, 2011. The decrease in the allowance was principally caused by $9.4 million in net charge-offs during the period. Most notably, Bank Mutual charged off $5.6 million related to five commercial real estate loan relationships that aggregated $16.5 million on which management commenced and/or completed foreclosure proceedings during the period. The impact of charge-offs during the period was partially offset by $2.4 million in provision for loan losses that was recorded in the allowance during the nine months ended September 30, 2012, as previously described.
Management believes the allowance for loan losses at September 30, 2012, was adequate to cover probable and estimable losses in Bank Mutual’s loan portfolio as of that date. However, future increases to the allowance may be necessary and results of operations could be adversely affected if future conditions differ from the assumptions used by management to determine the allowance for loan losses as of the end of the period.
Bank Mutual Corporation is the fourth largest financial institution holding company headquartered in the state of Wisconsin and its stock is quoted on the NASDAQ Global Select Market under the symbol “BKMU”. Its subsidiary bank, Bank Mutual, operates 76 banking locations in the state of Wisconsin and one in Minnesota.
* * * * *
Cautionary Statements
The discussion in this earnings release contains or incorporates by reference various forward-looking statements concerning Bank Mutual's prospects that are based on the current expectations and beliefs of management. Forward-looking statements may contain, and are intended to be identified by, words such as “anticipate,” “believe,” “estimate,” “expect,” “objective,” “projection,” “intend,” and similar expressions or use of verbs in the future tense any discussions of periods after the date on which this report is issued are also forward-looking statements. The statements contained herein and such future statements involve or may involve certain assumptions, risks, and uncertainties, many of which are beyond Bank Mutual's control, that could cause Bank Mutual's actual results and performance to differ materially from what is stated or expected. In addition to the assumptions and other factors referenced specifically in connection with such statements, the following factors could impact the business and financial prospects of Bank Mutual: general economic conditions, including instability in credit, lending, and financial markets; declines in the real estate market, which could further affect both collateral values and loan activity; continuing relatively high unemployment and other factors which could affect borrowers’ ability to repay their loans; negative developments affecting particular borrowers, which could further adversely impact loan repayments and collection; legislative and regulatory initiatives and changes, including action taken, or that may be taken, in response to difficulties in financial markets and/or which could negatively affect the right of creditors; monetary and fiscal policies of the federal government; the effects of further regulation and consolidation within the financial services industry, including substantial changes under the Dodd-Frank Act; regulators’ increasing expectations for financial institutions’ capital levels and restrictions imposed on institutions, as to payments of dividends or otherwise, to maintain or achieve those levels, including the possible effect of the memoranda of understanding mentioned in this report and potential new regulatory capital requirements under Basel III; pending and/or potential rulemaking or other actions by the Consumer Financial Protection Bureau (“CFPB”); potential regulatory or other actions affecting Bank Mutual or the Bank; potential adverse publicity relating to any such action or other developments affecting Bank Mutual or the Bank; potential changes in Fannie Mae and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), which could impact the home mortgage market; increased competition and/or disintermediation within the financial services industry; changes in tax rates, deductions and/or policies; potential further changes in FDIC premiums and other governmental assessments; changes in deposit flows; changes in the cost of funds; fluctuations in general market rates of interest and/or yields or rates on competing loans, investments, and sources of funds; demand for loan or deposit products; illiquidity of financial markets and other negative developments affecting particular investment and mortgage-related securities, which could adversely impact the fair value of and/or cash flows from such securities; changes in customers’ demand for other financial services; Bank Mutual’s potential inability to carry out business plans or strategies; changes in accounting policies or guidelines; natural disasters, acts of terrorism, or developments in the war on terrorism; the risk of failures in computer or other technology systems or data maintenance, or breaches of security relating to such systems; and the factors discussed in Bank Mutual’s filings with the Securities and Exchange Commission, particularly under Part I, Item 1A, “Risk Factors,” of Bank Mutual’s 2011 Annual Report on Form 10-K.
Bank Mutual Corporation and Subsidiaries
Unaudited Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
| | | September 30 | | | December 31 | |
| | | 2012 | | | 2011 | |
| ASSETS | | | | | | | | |
| Cash and due from banks | | $ | 35,933 | | | $ | 52,306 | |
| Interest-earning deposits | | | 45,944 | | | | 68,629 | |
| Cash and cash equivalents | | | 81,877 | | | | 120,935 | |
| Mortgage-related securities available-for-sale, at fair value | | | 618,545 | | | | 781,770 | |
| Mortgage-related securities held-to-maturity, at amortized cost | | | | | | | | |
| (fair value of $164,174 in 2012) | | | 158,062 | | | | - | |
| Loans held-for-sale, net | | | 26,908 | | | | 19,192 | |
| Loans receivable (net of allowance for loan losses of $20,979 | | | | | | | | |
| in 2012 and $27,928 in 2011) | | | 1,384,805 | | | | 1,319,636 | |
| Foreclosed properties and repossessed assets | | | 13,558 | | | | 24,724 | |
| Mortgage servicing rights, net | | | 6,319 | | | | 7,401 | |
| Other assets | | | 194,967 | | | | 224,826 | |
| | | | | | | | | |
| Total assets | | $ | 2,485,041 | | | $ | 2,498,484 | |
| | | | | | | | | |
| LIABILITIES AND EQUITY | | | | | | | | |
| Liabilities: | | | | | | | | |
| Deposit liabilities | | $ | 1,920,356 | | | $ | 2,021,663 | |
| Borrowings | | | 211,102 | | | | 153,091 | |
| Advance payments by borrowers for taxes and insurance | | | 32,596 | | | | 3,192 | |
| Other liabilities | | | 45,969 | | | | 51,842 | |
| Total liabilities | | | 2,210,023 | | | | 2,229,788 | |
| Equity: | | | | | | | | |
| Preferred stock - $0.01 par value: | | | | | | | | |
| Authorized - 20,000,000 shares in 2012 and 2011 | | | | | | | | |
| Issued and outstanding - none in 2012 and 2011 | | | - | | | | - | |
| Common stock - $0.01 par value: | | | | | | | | |
| Authorized - 200,000,000 shares in 2012 and 2011 | | | | | | | | |
| Issued - 78,783,849 shares in 2012 and 2011 | | | | | | | | |
| Outstanding - 46,326,484 shares in 2012 and 46,228,984 in 2011 | | | 788 | | | | 788 | |
| Additional paid-in capital | | | 489,371 | | | | 490,159 | |
| Retained earnings | | | 143,852 | | | | 140,793 | |
| Accumulated other comprehensive loss | | | (2,467 | ) | | | (5,379 | ) |
| Treasury stock - 32,457,365 shares in 2012 and 32,554,865 in 2011 | | | (359,409 | ) | | | (360,590 | ) |
| Total shareholders' equity | | | 272,135 | | | | 265,771 | |
| Non-controlling interest in real estate partnership | | | 2,883 | | | | 2,925 | |
| Total equity including non-controlling interest | | | 275,018 | | | | 268,696 | |
| | | | | | | | | |
| Total liabilities and equity | | $ | 2,485,041 | | | $ | 2,498,484 | |
Bank Mutual Corporation and Subsidiaries
Unaudited Consolidated Statements of Income
(Dollars in thousands, except per share data)
| | | Three Months Ended | | | Nine Months Ended | |
| | | September 30 | | | September 30 | |
| | | 2012 | | | 2011 | | | 2012 | | | 2011 | |
| Interest income: | | | | | | | | | | | | | | | | |
| Loans | | $ | 16,514 | | | $ | 17,468 | | | $ | 49,142 | | | $ | 52,887 | |
| Mortgage-related securities | | | 4,134 | | | | 4,303 | | | | 13,228 | | | | 12,131 | |
| Investment securities | | | 19 | | | | 219 | | | | 54 | | | | 2,843 | |
| Interest-earning deposits | | | 30 | | | | 27 | | | | 130 | | | | 125 | |
| Total interest income | | | 20,697 | | | | 22,017 | | | | 62,554 | | | | 67,986 | |
| Interest expense: | | | | | | | | | | | | | | | | |
| Deposits | | | 3,543 | | | | 4,731 | | | | 11,467 | | | | 15,210 | |
| Borrowings | | | 1,554 | | | | 1,798 | | | | 5,735 | | | | 5,359 | |
| Advance payment by borrowers for taxes and insurance | | | 1 | | | | 2 | | | | 2 | | | | 3 | |
| Total interest expense | | | 5,098 | | | | 6,531 | | | | 17,204 | | | | 20,572 | |
| Net interest income | | | 15,599 | | | | 15,486 | | | | 45,350 | | | | 47,414 | |
| Provision for loan losses | | | 657 | | | | 1,093 | | | | 2,438 | | | | 5,078 | |
| Net interest income after provision for loan losses | | | 14,942 | | | | 14,393 | | | | 42,912 | | | | 42,336 | |
| Non-interest income: | | | | | | | | | | | | | | | | |
| Service charges on deposits | | | 1,832 | | | | 1,683 | | | | 5,055 | | | | 4,709 | |
| Brokerage and insurance commissions | | | 678 | | | | 765 | | | | 2,224 | | | | 2,211 | |
| Loan-related fees and servicing revenue, net | | | (1,091 | ) | | | (1,036 | ) | | | (2,348 | ) | | | (452 | ) |
| Gain on loan sales activities, net | | | 3,412 | | | | 2,288 | | | | 9,867 | | | | 3,405 | |
| Gain on sales of investments, net | | | - | | | | - | | | | 543 | | | | 1,113 | |
| Other-than-temporary impairment ("OTTI") losses: | | | | | | | | | | | | | | | | |
| Total OTTI losses | | | - | | | | - | | | | (909 | ) | | | (1,576 | ) |
| Non-credit portion of OTTI losses | | | - | | | | - | | | | 573 | | | | 1,187 | |
| Net OTTI losses | | | - | | | | - | | | | (336 | ) | | | (389 | ) |
| Increase in cash surrender value of life insurance | | | 528 | | | | 543 | | | | 1,578 | | | | 1,628 | |
| Other non-interest income | | | 1,486 | | | | 1,231 | | | | 4,468 | | | | 3,803 | |
| Total non-interest income | | | 6,845 | | | | 5,474 | | | | 21,051 | | | | 16,028 | |
| Non-interest expense: | | | | | | | | | | | | | | | | |
| Compensation, payroll taxes, and other employee benefits | | | 10,465 | | | | 9,642 | | | | 31,738 | | | | 28,643 | |
| Occupancy and equipment | | | 2,835 | | | | 2,781 | | | | 8,567 | | | | 8,629 | |
| Federal insurance premiums | | | 831 | | | | 756 | | | | 2,533 | | | | 2,525 | |
| Advertising and marketing | | | 376 | | | | 583 | | | | 1,446 | | | | 1,228 | |
| Losses and expenses on foreclosed real estate, net | | | 1,748 | | | | 1,662 | | | | 5,496 | | | | 5,389 | |
| Other non-interest expense | | | 2,535 | | | | 2,496 | | | | 7,669 | | | | 7,170 | |
| Total non-interest expense before goodwill impairment | | | 18,790 | | | | 17,920 | | | | 57,449 | | | | 53,584 | |
| Goodwill impairment | | | - | | | | - | | | | - | | | | 52,570 | |
| Total non-interest expense | | | 18,790 | | | | 17,920 | | | | 57,449 | | | | 106,154 | |
| Income (loss) before income tax expense | | | 2,997 | | | | 1,947 | | | | 6,514 | | | | (47,790 | ) |
| Income tax expense | | | 1,044 | | | | 610 | | | | 2,107 | | | | 1,236 | |
| Net income (loss) before non-controlling interest | | | 1,953 | | | | 1,337 | | | | 4,407 | | | | (49,026 | ) |
| Net loss attributable to non-controlling interest | | | 13 | | | | 12 | | | | 42 | | | | 39 | |
| Net income (loss) | | $ | 1,966 | | | $ | 1,349 | | | $ | 4,449 | | | $ | (48,987 | ) |
| | | | | | | | | | | | | | | | | |
| Per share data: | | | | | | | | | | | | | | | | |
| Earnings (loss) per share-basic | | $ | 0.04 | | | $ | 0.03 | | | $ | 0.10 | | | $ | (1.07 | ) |
| Earnings (loss) per share-diluted | | $ | 0.04 | | | $ | 0.03 | | | $ | 0.10 | | | $ | (1.07 | ) |
| Cash dividends paid | | $ | 0.01 | | | $ | 0.01 | | | $ | 0.03 | | | $ | 0.05 | |
Bank Mutual Corporation and Subsidiaries
Unaudited Supplemental Financial Information
(Dollars in thousands, except per share amounts and ratios)
| | | Three Months Ended | | | Nine Months Ended | |
| | | September 30 | | | September 30 | |
| Loan Originations and Sales | | | 2012 | | | | 2011 | | | | 2012 | | | | 2011 | |
| Mortgage loans originated for portfolio: | | | | | | | | | | | | | | | | |
| One- to four-family | | $ | 19,136 | | | $ | 13,522 | | | $ | 70,131 | | | $ | 58,831 | |
| Multi-family | | | 21,460 | | | | 20,552 | | | | 48,425 | | | | 28,262 | |
| Commercial real estate | | | 10,579 | | | | 15,627 | | | | 26,951 | | | | 38,025 | |
| Construction and development | | | 31,911 | | | | 10,361 | | | | 59,131 | | | | 23,608 | |
| Total mortgage loans | | | 83,086 | | | | 60,062 | | | | 204,638 | | | | 148,726 | |
| Consumer loan originations | | | 30,422 | | | | 25,565 | | | | 87,578 | | | | 62,072 | |
| Commercial business loan originations | | | 23,484 | | | | 35,626 | | | | 75,080 | | | | 64,635 | |
| Total loans originated for portfolio | | $ | 136,992 | | | $ | 121,253 | | | $ | 367,296 | | | $ | 275,433 | |
| | | | | | | | | | | | | | | | | |
| Mortgage loans originated for sale | | $ | 111,366 | | | $ | 84,751 | | | $ | 359,514 | | | $ | 139,577 | |
| | | | | | | | | | | | | | | | | |
| Mortgage loan sales | | $ | 96,450 | | | $ | 70,138 | | | $ | 352,559 | | | $ | 150,335 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | September 30 | | | | December 31 | | | | | | | | | |
| Loan Portfolio Analysis | | | 2012 | | | | 2011 | | | | | | | | | |
| Mortgage loans: | | | | | | | | | | | | | | | | |
| One- to four-family | | $ | 479,155 | | | $ | 508,503 | | | | | | | | | |
| Multi-family | | | 251,685 | | | | 247,040 | | | | | | | | | |
| Commercial real estate | | | 239,970 | | | | 226,195 | | | | | | | | | |
| Construction and development | | | 111,398 | | | | 82,008 | | | | | | | | | |
| Total mortgage loans | | | 1,082,208 | | | | 1,063,746 | | | | | | | | | |
| Consumer loans | | | 246,173 | | | | 238,454 | | | | | | | | | |
| Commercial business loans | | | 139,566 | | | | 87,715 | | | | | | | | | |
| Total loans receivable | | | 1,467,947 | | | | 1,389,915 | | | | | | | | | |
| Allowance for loan losses | | | (20,979 | ) | | | (27,928 | ) | | | | | | | | |
| Undisbursed loan proceeds and deferred fees and costs | | | (62,163 | ) | | | (42,351 | ) | | | | | | | | |
| Total loans receivable, net | | $ | 1,384,805 | | | $ | 1,319,636 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Loans serviced for others | | $ | 1,134,302 | | | $ | 1,102,126 | | | | | | | | | |
Bank Mutual Corporation and Subsidiaries
Unaudited Supplemental Financial Information (continued)
(Dollars in thousands, except per share amounts and ratios)
| | | September 30 | | | December 31 | | | | | | | |
| Non-Performing Loans and Assets | | 2012 | | | 2011 | | | | | | | |
| Non-accrual mortgage loans: | | | | | | | | | | | | | | | | |
| One- to four-family | | $ | 8,970 | | | $ | 14,868 | | | | | | | | | |
| Multi-family | | | 8,628 | | | | 22,905 | | | | | | | | | |
| Commercial real estate | | | 12,104 | | | | 23,997 | | | | | | | | | |
| Construction and development loans | | | 1,138 | | | | 9,368 | | | | | | | | | |
| Total non-accrual mortgage loans | | | 30,840 | | | | 71,138 | | | | | | | | | |
| Non-accrual consumer loans: | | | | | | | | | | | | | | | | |
| Secured by real estate | | | 1,556 | | | | 1,457 | | | | | | | | | |
| Other consumer loans | | | 171 | | | | 207 | | | | | | | | | |
| Total non-accrual consumer loans | | | 1,727 | | | | 1,664 | | | | | | | | | |
| Non-accrual commercial business loans | | | 680 | | | | 1,642 | | | | | | | | | |
| Total non-accrual loans | | | 33,247 | | | | 74,444 | | | | | | | | | |
| Accruing loans delinquent 90 days or more | | | 700 | | | | 696 | | | | | | | | | |
| Total non-performing loans | | | 33,947 | | | | 75,140 | | | | | | | | | |
| Foreclosed properties and repossessed assets | | | 13,558 | | | | 24,724 | | | | | | | | | |
| Total non-performing assets | | $ | 47,505 | | | $ | 99,864 | | | | | | | | | |
| Non-performing loans to loans receivable, net | | | 2.45 | % | | | 5.69 | % | | | | | | | | |
| Non-performing assets to total assets | | | 1.91 | % | | | 4.00 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | September 30 | | | | December 31 | | | | | | | | | |
| Special Mention and Substandard Loans | | | 2012 | | | | 2011 | | | | | | | | | |
| (includes all non-performing loans, above) | | | | | | | | | | | | | | | | |
| Mortgage loans: | | | | | | | | | | | | | | | | |
| One- to four-family | | $ | 9,360 | | | $ | 16,216 | | | | | | | | | |
| Multi-family | | | 12,707 | | | | 32,465 | | | | | | | | | |
| Commercial real estate | | | 59,874 | | | | 79,692 | | | | | | | | | |
| Construction and development | | | 14,513 | | | | 20,259 | | | | | | | | | |
| Total mortgage loans | | | 96,454 | | | | 148,632 | | | | | | | | | |
| Consumer loans | | | 1,749 | | | | 1,695 | | | | | | | | | |
| Commercial business loans | | | 4,460 | | | | 4,920 | | | | | | | | | |
| Total | | $ | 102,663 | | | $ | 155,247 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | Nine Months Ended September 30 | | | | | | | | | |
| Activity in Allowance for Loan Losses | | | 2012 | | | | 2011 | | | | | | | | | |
| Balance at the beginning of the period | | $ | 27,928 | | | $ | 47,985 | | | | | | | | | |
| Provision for loan losses | | | 2,438 | | | | 5,079 | | | | | | | | | |
| Charge-offs: | | | | | | | | | | | | | | | | |
| One- to four-family | | | (2,292 | ) | | | (2,519 | ) | | | | | | | | |
| Multi-family | | | (857 | ) | | | (4,812 | ) | | | | | | | | |
| Commercial real estate | | | (4,149 | ) | | | (6,941 | ) | | | | | | | | |
| Construction and development loans | | | (2,545 | ) | | | (2,607 | ) | | | | | | | | |
| Consumer loans | | | (555 | ) | | | (724 | ) | | | | | | | | |
| Commercial business loans | | | (48 | ) | | | (551 | ) | | | | | | | | |
| Total charge-offs | | | (10,446 | ) | | | (18,154 | ) | | | | | | | | |
| Total recoveries | | | 1,059 | | | | 657 | | | | | | | | | |
| Net charge-offs | | | (9,387 | ) | | | (17,497 | ) | | | | | | | | |
| Balance at the end of the period | | $ | 20,979 | | | $ | 35,567 | | | | | | | | | |
| Net charge-offs to average loans, annualized | | | 0.90 | % | | | 1.71 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | September 30 | | | | December 31 | | | | | | | | | |
| Allowance Ratios | | | 2012 | | | | 2011 | | | | | | | | | |
| Allowance for loan losses to non-performing loans | | | 61.80 | % | | | 37.17 | % | | | | | | | | |
| Allowance for loan losses to total loans | | | 1.51 | % | | | 2.12 | % | | | | | | | | |
Bank Mutual Corporation and Subsidiaries
Unaudited Supplemental Financial Information (continued)
(Dollars in thousands, except per share amounts and ratios)
| | | September 30 | | | December 31 | | | | | | | |
| Deposit Liabilities Analysis | | 2012 | | | 2011 | | | | | | | |
| Non-interest-bearing checking | | $ | 138,993 | | | $ | 112,211 | | | | | | | | | |
| Interest-bearing checking | | | 220,903 | | | | 229,990 | | | | | | | | | |
| Savings accounts | | | 219,524 | | | | 204,263 | | | | | | | | | |
| Money market accounts | | | 450,957 | | | | 432,248 | | | | | | | | | |
| Certificates of deposit | | | 889,979 | | | | 1,042,951 | | | | | | | | | |
| Total deposit liabilities | | $ | 1,920,356 | | | $ | 2,021,663 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | Three Months Ended | | | | Three Months Ended | |
| | | | September 30 | | | | September 30 | |
| Selected Operating Ratios | | | 2012 | | | | 2011 | | | | 2012 | | | | 2011 | |
| Net interest margin (1) | | | 2.71 | % | | | 2.75 | % | | | 2.61 | % | | | 2.80 | % |
| Net interest rate spread | | | 2.60 | % | | | 2.64 | % | | | 2.51 | % | | | 2.68 | % |
| Return on average assets | | | 0.31 | % | | | 0.22 | % | | | 0.23 | % | | | -2.55 | % |
| Return on average shareholders' equity | | | 2.90 | % | | | 2.01 | % | | | 2.20 | % | | | -22.04 | % |
| Efficiency ratio (2) | | | 83.72 | % | | | 85.50 | % | | | 86.79 | % | | | 85.44 | % |
| Non-interest expense as a percent of average assets (3) | | | 2.97 | % | | | 2.87 | % | | | 2.27 | % | | | 2.09 | % |
| Shareholders' equity to total assets at end of period | | | 10.95 | % | | | 10.87 | % | | | 10.95 | % | | | 10.87 | % |
| (1) | Net interest margin is determined by dividing net interest income by average earning assets for the periods indicated. |
| (2) | Efficiency ratio is determined by dividing non-interest expense before goodwill impairment by the sum of net interest income and non-interest income (excluding investment gains and net OTTI) for the periods indicated. |
| (3) | Non-interest expense is defined as non-interest expense before goodwill impairment. |
| | | Three Months Ended | | | Three Months Ended | |
| | | September 30 | | | September 30 | |
| Other Information | | 2012 | | | 2011 | | | 2012 | | | 2011 | |
| Average earning assets | | $ | 2,304,518 | | | $ | 2,252,664 | | | $ | 2,318,064 | | | $ | 2,258,837 | |
| Average assets | | | 2,529,706 | | | | 2,493,731 | | | | 2,528,257 | | | | 2,559,112 | |
| Average interest bearing liabilities | | | 2,065,010 | | | | 2,059,423 | | | | 2,101,271 | | | | 2,063,747 | |
| Average shareholders' equity | | | 271,414 | | | | 269,024 | | | | 269,651 | | | | 296,333 | |
| Weighted average number of shares outstanding: | | | | | | | | | | | | | | | | |
| As used in basic earnings per share | | | 46,193,694 | | | | 46,179,402 | | | | 46,189,775 | | | | 45,997,087 | |
| As used in diluted earnings per share | | | 46,222,925 | | | | 46,179,402 | | | | 46,203,964 | | | | 45,997,087 | |
| | | | | | | | | | | | | | | | | |
| | | | September 30 | | | | December 31 | | | | | | | | | |
| | | | 2012 | | | | 2011 | | | | | | | | | |
| Number of shares outstanding (net of treasury shares) | | | 46,326,484 | | | | 46,228,984 | | | | | | | | | |
| Book value per share | | $ | 5.87 | | | $ | 5.75 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | September 30 | | | | December 31 | | | | | | | | | |
| Weighted Average Net Interest Rate Spread | | | 2012 | | | | 2011 | | | | | | | | | |
| Yield on loans | | | 4.62 | % | | | 5.01 | % | | | | | | | | |
| Yield on investments | | | 2.35 | % | | | 2.39 | % | | | | | | | | |
| Combined yield on loans and investments | | | 3.80 | % | | | 4.03 | % | | | | | | | | |
| Cost of deposits | | | 0.70 | % | | | 0.83 | % | | | | | | | | |
| Cost of borrowings | | | 2.37 | % | | | 4.75 | % | | | | | | | | |
| Total cost of funds | | | 0.85 | % | | | 1.11 | % | | | | | | | | |
| Interest rate spread | | | 2.95 | % | | | 2.92 | % | | | | | | | | |
