Bank Mutual 10Q 2012 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934for the quarterly period endedSeptember 30, 2012

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		(IRS Employer Identification No.)
incorporation or organization)

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.

Yesx No¨

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.)

Yesx No¨

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 filer	¨		Accelerated filer	x
Non-accelerated filer	¨		Small reporting company	¨

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

Yes¨ Nox

The number of shares outstanding of the issuer’s common stock, $0.01 par value per share, was46,326,484 shares, at November 6, 2012.

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, 2012, and December 31, 2011	3

	Unaudited Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2012 and 2011	4

	Unaudited Condensed Consolidated Statements of Total Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011	6

	Unaudited Condensed Consolidated Statements of Equity for the Nine Months Ended September 30, 2012 and 2011	7

	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011	8

	Notes to Unaudited Condensed Consolidated Financial Statements	10

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	53

Item 4.	Controls and Procedures	57

PART II

Item 1A.	Risk Factors	58

Item 6.	Exhibits	58

SIGNATURES		59

PART I

Item 1. Financial Statements

Bank Mutual Corporation and Subsidiaries

Unaudited Condensed Consolidated Statements of Financial Condition

	September 30			December 31
	2012			2011
	(Dollars in thousands)
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 2011Outstanding–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

Refer to Notes to Unaudited Condensed Consolidated Financial Statements

Bank Mutual Corporation and Subsidiaries

Unaudited Condensed Consolidated Statements of Income

	Three Months Ended September 30
	2012			2011
	(Dollars in thousands, except per share data)
Interest income:
Loans	$	16,514		$	17,468
Mortgage-related securities		4,134			4,303
Interest-earning deposits		30			27
Investment securities		19			219
Total interest income		20,697			22,017
Interest expense:
Deposit liabilities		3,543			4,731
Borrowings		1,554			1,798
Advance payments by borrowers for taxes and insurance		1			2
Total interest expense		5,098			6,531
Net interest income		15,599			15,486
Provision for loan losses		657			1,093
Net interest income after provision for loan losses		14,942			14,393
Non-interest income:
Service charges on deposits		1,832			1,683
Brokerage and insurance commissions		678			765
Loan related fees and servicing revenue, net		(1,091	)		(1,036	)
Gain on loan sales activities, net		3,412			2,288
Increase in cash surrender value of life insurance		528			543
Other non-interest income		1,486			1,231
Total non-interest income		6,845			5,474
Non-interest expense:
Compensation, payroll taxes, and other employee benefits		10,465			9,642
Occupancy and equipment		2,835			2,781
Federal insurance premiums		831			756
Advertising and marketing		376			583
Losses and expenses on foreclosed real estate, net		1,748			1,662
Other non-interest expense		2,535			2,496
Total non-interest expense		18,790			17,920
Income before income taxes		2,997			1,947
Income tax expense		1,044			610
Net income before non-controlling interest		1,953			1,337
Net loss attributable to non-controlling interest		13			12
Net income	$	1,966		$	1,349

Per share data:
Earnings per share–basic	$	0.04		$	0.03
Earnings per share–diluted	$	0.04		$	0.03
Cash dividends per share paid	$	0.01		$	0.01

Refer to Notes to Unaudited Condensed Consolidated Financial Statements

Bank Mutual Corporation and Subsidiaries

Unaudited Condensed Consolidated Statements of Income

	Nine Months Ended September 30
	2012			2011
	(Dollars in thousands, except per share data)
Interest income:
Loans	$	49,142		$	52,887
Mortgage-related securities		13,228			12,131
Interest-earning deposits		130			125
Investment securities		54			2,843
Total interest income		62,554			67,986
Interest expense:
Deposit liabilities		11,467			15,210
Borrowings		5,735			5,359
Advance payments by borrowers for taxes and insurance		2			3
Total interest expense		17,204			20,572
Net interest income		45,350			47,414
Provision for loan losses		2,438			5,078
Net interest income after provision for loan losses		42,912			42,336
Non-interest income:
Service charges on deposits		5,055			4,709
Brokerage and insurance commissions		2,224			2,211
Loan related fees and servicing revenue, net		(2,348	)		(452	)
Gain on loan sales activities, net		9,867			3,405
Gain on 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		1,578			1,628
Other non-interest income		4,468			3,803
Total non-interest income		21,051			16,028
Non-interest expense:
Compensation, payroll taxes, and other employee benefits		31,738			28,643
Occupancy and equipment		8,567			8,629
Federal insurance premiums		2,533			2,525
Advertising and marketing		1,446			1,228
Losses and expenses on foreclosed real estate, net		5,496			5,389
Other non-interest expense		7,669			7,170
Total non-interest expense before goodwill impairment		57,449			53,584
Goodwill impairment		–			52,570
Total non-interest expense		57,449			106,154
Income (loss) before income taxes		6,514			(47,790	)
Income tax expense		2,107			1,236
Net income (loss) before non-controlling interest		4,407			(49,026	)
Net loss attributable to non-controlling interest		42			39
Net income (loss)	$	4,449		$	(48,987	)

Per share data:
Earnings (loss) per share–basic	$	0.10		$	(1.07	)
Earnings (loss) per share–diluted	$	0.10		$	(1.07	)
Cash dividends per share paid	$	0.03		$	0.05

Refer to Notes to Unaudited Condensed Consolidated Financial Statements

Bank Mutual Corporations and Subsidiaries

Unaudited Condensed Consolidated Statements of Total Comprehensive Income

	Three Months Ended September 30
	2012		2011
	(Dollars in thousands)

Net income before non-controlling interest	$	1,953	$	1,337
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) during the period:
Non-credit portion of OTTI on securities available-for sale, net of of deferred income taxes of $(111) in 2011		–		(166	)
Change in net unrealized gain on securities available-for-sale, net of deferred income taxes of $485 in 2012 and $3,139 in 2011		724		4,689
		724		4,523
Defined benefit pension plans:
Amortization of prior period net loss included in net periodic pension cost, net of deferred income taxes of $176 in 2012		263		–
		263		–
Total other comprehensive income, net of tax		987		4,523
Total comprehensive income before non-controlling interest		2,940		5,860
Comprehensive loss attributable to non-controlling interest		13		12

Total comprehensive income	$	2,953	$	5,872

	Nine Months Ended September 30
	2012			2011
	(Dollars in thousands)

Net income (loss) before non-controlling interest	$	4,407		$	(49,026	)
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) during the period:
Non-credit portion of OTTI on securities available-for sale, net of of deferred income taxes of $(230) in 2012 and $(476) in 2011		(343	)		(711	)
Change in net unrealized gain on securities available-for-sale, net of deferred income taxes of $1,870 in 2012 and $6,668 in 2011		2,790			9,960
Reclassification adjustment for realized gains on sales of securities available-for-sale, net of income taxes of $(218) in 2012 and $(446) in 2011		(325	)		(667	)
		2,122			8,582
Defined benefit pension plans:
Amortization of prior period net loss included in net periodic pension cost, net of deferred income taxes of $527 in 2012		790			–
Other pension-related adjustments, net of deferred income taxes of $(41) in 2011		–			(62	)
		790			(62	)
Total other comprehensive income, net of tax		2,912			8,520
Total comprehensive income (loss) before non-controlling interest		7,319			(40,506	)
Comprehensive loss attributable to non-controlling interest		42			39

Total comprehensive income (loss)	$	7,361		$	(40,467	)

Refer to Notes to Unaudited Condensed Consolidated Financial Statements

Bank Mutual Corporations and Subsidiaries

Unaudited Condensed Consolidated Statements of Equity

									Accumulated						Non-Controlling
			Additional						Other						Interest in
	Common		Paid-In			Retained			Comprehensive			Treasury			Real Estate
	Stock		Capital			Earnings			Income (Loss)			Stock			Partnership			Total
	(Dollars in thousands, except per share data)

Balance at January 1, 2012	$	788	$	490,159		$	140,793		$	(5,379	)	$	(360,590	)	$	2,925		$	268,696
Net income		–		–			4,449			–			–			–			4,449
Net loss attributable to non-controlling interest		–		–			–			–			–			(42	)		(42	)
Other comprehensive income		–		–			–			2,912			–			–			2,912
Issuance of management recognition plan shares		–		(1,181	)		–			–			1,181			–			–
Share based payments		–		393			–			–			–			–			393
Cash dividends ($0.03 per share)		–		–			(1,390	)		–			–			–			(1,390	)

Balance at September 30, 2012	$	788	$	489,371		$	143,852		$	(2,467	)	$	(359,409	)	$	2,883		$	275,018

Balance at January 1, 2011	$	788	$	494,377		$	191,238		$	(6,897	)	$	(366,553	)	$	2,925		$	315,878
Net loss		–		–			(48,987	)		–			–			–			(48,987	)
Net loss attributable to non-controlling interest		–		–			–			–			–			(39	)		(39	)
Other comprehensive income		–		–			–			8,520			–			–			8,520
Equity contribution by non-controlling real estate partnership		–		–			–			–			–			50			50
Issuance of management recognition plan shares		–		(123	)		–			–			123			–			–
Exercise of stock options		–		(4,375	)		–			–			5,840			–			1,465
Share based payments		–		210			–			–			–			–			210
Cash dividends ($0.05 per share)		–		–			(2,418	)		–			–			–			(2,418	)

Balance at September 30, 2011	$	788	$	490,089		$	139,833		$	1,623		$	(360,590	)	$	2,936		$	274,679

Refer to Notes to Unaudited Condensed Consolidated Financial Statements

Bank Mutual Corporation and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

	Nine Months Ended September 30
	2012			2011
	(Dollars in thousands)
Operating activities:
Net income (loss)	$	4,449		$	(48,987	)
Adjustments to reconcile net income to net cash from operating activities:
Net provision for loan losses		2,438			5,078
Net loss on foreclosed real estate		4,559			4,002
Provision for depreciation		1,913			1,931
Goodwill impairment		–			52,570
Net OTTI losses		336			389
Amortization of mortgage servicing rights		3,004			1,718
Increase in valuation allowance on MSRs		1,919			1,097
Net premium amortization on securities		3,674			2,568
Loans originated for sale		(359,514	)		(139,577	)
Proceeds from loan sales		357,824			150,531
Net gain on loan sales activities		(9,867	)		(3,405	)
Net gain on sale of investments		(543	)		(1,113	)
Other, net		(3,412	)		2,738
Net cash provided by operating activities		6,780			29,540
Investing activities:
Proceeds from maturities of investment securities available-for-sale		–			185,824
Proceeds from sale of investment securities		–			21,950
Purchases of mortgage-related securities available-for-sale		(51,374	)		(407,532	)
Principal repayments on mortgage-related securities available-for-sale		194,020			92,253
Proceeds from sales of mortgage-related securities available-for-sale		20,938			–
Purchases of mortgage-related securities held-to-maturity		(158,915	)		–
Principal repayments on mortgage-related securities held-to-maturity		570			–
Proceeds from redemption of FHLB of Chicago stock		27,021			–
Net increase in loans receivable		(76,248	)		(20,023	)
Proceeds from sale of foreclosed properties		15,248			8,843
Net purchases of premises and equipment		(1,816	)		(1,193	)
Net cash used by investing activities		(30,556	)		(119,878	)

					(continued)

Bank Mutual Corporation and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows (Continued)

	Nine Months Ended September 30
	2012			2011
	(Dollars in thousands)
Financing activities:
Net decrease in deposit liabilities	$	(101,307	)	$	(69,165	)
Proceeds from long-term borrowings		158,935			4,270
Repayments of borrowings		(100,924	)		(819	)
Net increase in advance payments by borrowers for taxes and insurance		29,404			27,485
Cash dividends		(1,390	)		(2,418	)
Other, net		–			1,515
Net cash used by financing activities		(15,282	)		(39,132	)
Decrease in cash and cash equivalents		(39,058	)		(129,470	)
Cash and cash equivalents at beginning of period		120,935			232,832
Cash and cash equivalents at end of period	$	81,877		$	103,362

Supplemental information:
Cash paid in period for:
Interest on deposit liabilities and borrowings	$	17,462		$	22,195
Income taxes		171			–
Non-cash transactions:
Loans transferred to foreclosed properties and repossessed assets		8,641			21,641

Refer to Notes to Unaudited Condensed Consolidated Financial Statements

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2012

(Dollars in Thousands, Except Share and 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 2011 Annual Report on Form 10-K. Operating results for the three and nine months ended September 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

In April 2011 the Financial Accounting Standards Board (“FASB”) issued new accounting guidance related to a creditor’s determination of whether a loan restructuring is a troubled debt restructuring. The new guidance was effective for the first interim period beginning on or after June 15, 2011, which was the third quarter of 2011 for the Company. The Company's adoption of this new guidance did not have a material impact on its financial condition, results of operations, or liquidity, although it did affect the matters that are disclosed in the financial statements.

During the second quarter of 2011 the FASB issued new accounting guidelines related to (i) accounting for repurchase agreements, (ii) certain fair value measurements of assets, liability, and instruments classified in shareholders’ equity, and (iii) presentation of net income, other comprehensive income, and total comprehensive income (certain aspects the adoption of which were deferred indefinitely in the fourth quarter of 2011). These new guidelines were effective for the first interim period beginning on or after December 15, 2011, which was the first quarter of 2012 for the Company. The Company's adoption of these guidelines did not have a material impact on its financial condition, results of operations, or liquidity. However, the new guidelines did affect the matters that are disclosed in the financial statements.

During the fourth quarter of 2011 the FASB issued new accounting guidelines related to (i) the determination of whether a parent should derecognize the in-substance real estate of a subsidiary that is in-substance real estate when the parent ceases to have a controlling financial interest in the subsidiary and (ii) the disclosure of both gross information and net information about instruments eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting agreement. Item (i) was effective for the Company in the third quarter of 2012. The adoption of this item did not have a material impact on its financial condition, results of operations, or liquidity. Item (ii) will be effective for interim and fiscal periods beginning on or after January 1, 2013, which for the Company will be the first quarter of 2013. The Company's adoption of item (ii) is not expected to have a material impact on its financial condition, results of operations, or liquidity. However, the new guidelines may affect matters that will be disclosed in the financial statements.

During the third quarter of 2012 the FASB issued new accounting guidance related to testing indefinite-lived intangible assets for impairment. The new guidance permits an entity to first assess qualitative factors to determine if it is more likely than not that an indefinite-lived intangible asset other than goodwill is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. This new guidance is effective for years beginning after September 15, 2012, which will be the first quarter of 2013 for the Company. The Company’s adoption of this new guidance is not expected to have a material impact in its financial condition, results of operations, or liquidity.

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 2011 Annual Report on Form 10-K. Particular attention should be paid to the Company’s allowance for losses on loans, which requires significant management

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2012

(Dollars in Thousands, Except Share and Per Share Amounts)

1. Basis of Presentation (continued)

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 months ended September 30, 2012 and 2011, can be found in Note 3, “Loans Receivable,” below.

Significant judgments and/or estimates are also made in accounting for the Company’s net deferred income taxes and other-than-temporary impairment (“OTTI”) of its mortgage-related securities. Management evaluates the Company’s net deferred tax asset on an on-going basis to determine if a valuation allowance is required. In the judgment of management there was no need for a valuation allowance against the Company’s net deferred tax asset as of September 30, 2012. Information regarding the impact OTTI has had on the Company’s financial condition and results of operations for the three and nine months ended September 30, 2012 and 2011, can be found in Note 2, “Mortgage-Related Securities Available-for-Sale and Held-to-Maturity,” below.

2. Mortgage-Related Securities Available-for-Sale and Held-to-Maturity

The amortized cost and fair value of mortgage-related securities available-for-sale and held-to-maturity are as follows:

	September 30, 2012
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Securities available-for-sale:
Federal Home Loan Mortgage Corporation	$	382,526	$	8,052		–		$	390,578
Federal National Mortgage Association		170,749		2,947	$	(24	)		173,672
Government National Mortgage Association		38		7		–			45
Private-label CMOs		53,976		896		(622	)		54,250
Total available-for-sale	$	607,289	$	11,902	$	(646	)	$	618,545
Securities held-to-maturity:
Federal National Mortgage Association	$	158,062	$	6,112		–		$	164,174
Total held-to-maturity	$	158,062	$	6,112		–		$	164,174

	December 31, 2011
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Securities available-for-sale:
Federal Home Loan Mortgage Corporation	$	537,935	$	11,009		–		$	548,944
Federal National Mortgage Association		167,601		2,476	$	(57	)		170,020
Government National Mortgage Association		767		10		–			777
Private-label CMOs		67,754		540		(6,265	)		62,029
Total available-for-sale	$	774,057	$	14,035	$	(6,322	)	$	781,770

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2012

(Dollars in Thousands, Except Share and Per Share Amounts)

2. Mortgage-Related Securities Available-for-Sale and Held-to-Maturity (continued)

The following tables summarize mortgage-related securities available-for-sale and held-to-maturity by amount of time the securities have had a gross unrealized loss as of the dates indicated:

	September 30, 2012
	Less Than 12 Months						Greater Than 12 Months						Total
	in an Unrealized Loss Position						in an Unrealized Loss Position						Gross		Total
	Unrealized Loss Amount		Number of Securities		Estimated Fair Value		Unrealized Loss Amount		Number of Securities		Estimated Fair Value		Unrealized Loss Amount		Estimated Fair Value
Securities available-for-sale:
Federal National Mortgage Association	$	24		1	$	18,320		–		–		–	$	24	$	18,320
Private-label CMOs		–		–		–	$	622		13	$	25,158		622		25,158
Total available-for-sale	$	24		1	$	18,320	$	622		13	$	25,158	$	646	$	43,478

	December 31, 2011
	Less Than 12 Months						Greater Than 12 Months						Total
	in an Unrealized Loss Position						in an Unrealized Loss Position						Gross		Total
	Unrealized Loss Amount		Number of Securities		Estimated Fair Value		Unrealized Loss Amount		Number of Securities		Estimated Fair Value		Unrealized Loss Amount		Estimated Fair Value
Securities available-for-sale:
Federal National Mortgage Association	$	57		1	$	9,603		–		–		–	$	57	$	9,603
Private-label CMOs		1		1		448	$	6,264		20	$	40,523		6,265		40,971
Total available-for-sale	$	58		2	$	10,051	$	6,264		20	$	40,523	$	6,322	$	50,574

Certain of the Company’s available-for-sale and held-to-maturity securities that were in an unrealized loss position at September 30, 2012, and December 31, 2011, consisted of mortgage-related securities issued by government-sponsored entities. As of those dates, the Company believed that it was probable that it would receive all future contractual cash flows related to such securities. The Company does not intend to sell the securities and it is unlikely that it will be required to sell the securities before the recovery of their amortized cost. Accordingly, the Company determined that the unrealized loss on its mortgage-related securities issued by government-sponsored entities was temporary as of September 30, 2012, and December 31, 2011.

Except as noted below, the Company also determined that the unrealized loss on its private-label collateralized mortgage obligations (“CMOs”) was temporary as of September 30, 2012, and December 31, 2011. The Company does not intend to sell these securities and it is unlikely that it will be required to sell these securities before the recovery of their amortized cost. The Company believes it is probable that it will receive all future contractual cash flows related to these securities. 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.

As of September 30, 2012, and December 31, 2011, the Company had private-label CMOs, with a fair value of $34,022 and $36,751 respectively, and unrealized losses of $284 and $5,357, respectively, that were rated less than investment grade. These 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. In the second quarter of 2012 the Company recognized $336 in net OTTI losses in earnings related to its investment in four private-label CMOs. The Company recognized $389 in net OTTI losses in earnings the second quarter of 2011 on three private-label CMOs. The determination of the net OTTI loss was based on 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. The following assumptions were used in determining the amount of the credit loss in 2012: (i) prepayments speeds with a range of 5.1% to 16.5% and a weighted average rate of 9.9%, (ii) default rates with a range of 4.0% to 5.5% and a weighted average rate of 4.5%, (iii) loss severity rates with a range of 40.0% to 52.0% and a weighted average rate of 42.9%, and (iv) current credit enhancements with a range of 2.2% to 4.6% and a weighted average rate of 3.4%. The following assumptions were used in determining the amount of the credit loss in 2011: (i) prepayments speeds with a range of 6.1% to 14.9% and a weighted average rate of 11.6%, (ii) default rates with a range of 3.7% to 5.2% and a weighted average rate of 4.4%, (iii) loss severity rates with a range of 40.0% to 43.0% and a weighted average rate of 40.8%, and (iv) current credit enhancements with a range of 5.1% to 6.7% and a weighted average rate of 5.6%.

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2012

(Dollars in Thousands, Except Share and Per Share Amounts)

2. Mortgage-Related Securities Available-for-Sale and Held-to-Maturity (continued)

The following table is a summary of OTTI related to credit losses that have been recognized in earnings as of the dates indicated, as well as end of period values for securities that have experienced such losses:

	At or For the Three Months Ended September 30				At or For the Nine Months Ended September 30
	2012		2011		2012		2011
Beginning balance of unrealized OTTI related to credit losses	$	725		389	$	389		–
Additional unrealized OTTI related to credit losses for which OTTI was not previously recognized		–	$	–		82	$	389
Additional unrealized OTTI related to credit losses for which OTTI was previously recognized		–		–		254		–
Net OTTI losses recognized in earnings		–		–		336		389
Ending balance of unrealized OTTI related to credit losses	$	725	$	389	$	725	$	389
Adjusted cost at end of period	$	8,541	$	8,616	$	8,541	$	8,616
Estimated fair value at end of period	$	8,609	$	7,429	$	8,609	$	7,429

The three and nine months ended September 30, 2012, included gross realized gains on the sale of securities of zero, and $543, respectively. There were no gross realized losses during these periods. The three and nine months ended September 30, 2011, included gross realized gains on the sale of securities of zero and $1,113, respectively. There were no gross realized losses during these periods.

Mortgage-related securities available-for-sale with a fair value of approximately $71,702 and $91,731 at September 30, 2012, and December 31, 2011, respectively, were pledged to secure deposits, borrowings, and for other purposes as permitted or required by law.

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2012

(Dollars in Thousands, Except Share and Per Share Amounts)

3. Loans Receivable

The following table summarizes the components of loans receivable as of the dates indicated:

	September 30			December 31
	2012			2011
Permanent mortgage loans:
One- to four-family	$	479,155		$	508,503
Multi-family		251,685			247,040
Commercial real estate		239,970			226,195
Total permanent mortgages		970,810			981,738
Construction and development loans:
One- to four-family		20,691			16,263
Multi-family		55,124			29,409
Commercial real estate		20,602			19,907
Land		14,981			16,429
Total construction and development		111,398			82,008
Total real estate mortgage loans		1,082,208			1,063,746
Consumer loans:
Fixed home equity		121,873			102,561
Home equity lines of credit		82,413			86,540
Student		13,305			15,711
Home improvement		18,144			24,237
Automobile		1,761			2,228
Other consumer		8,677			7,177
Total consumer loans		246,173			238,454
Commercial business loans		139,566			87,715
Total loans receivable		1,467,947			1,389,915
Undisbursed loan proceeds		(61,391	)		(41,859	)
Allowance for loan losses		(20,979	)		(27,928	)
Unearned loan fees and discounts		(772	)		(492	)
Total loans receivable, net	$	1,384,805		$	1,319,636

The Company’s first mortgage loans and home equity loans are primarily secured by properties that are located in the Company's local lending areas in Wisconsin, Illinois, Michigan, and Minnesota. Substantially all of the Company’s non-mortgage loans have also been made to borrowers in these same lending areas.

At September 30, 2012, and December 31, 2011, certain one- to four-family mortgage loans, multi-family mortgage loans, and home equity loans with aggregate carrying values of approximately $282,000 and $204,000 were pledged to secure advances from the FHLB of Chicago.

The unpaid principal balance of loans serviced for others was $1,134,302 and $1,102,126 at September 30, 2012, and December 31, 2011, respectively. These loans are not reflected in the consolidated financial statements.

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2012

(Dollars in Thousands, Except Share and Per Share Amounts)

3. Loans Receivable (continued)

The following tables summarize the activity in the allowance for loan losses by loan portfolio segment for the periods indicated. The tables also summarize the allowance for loan loss and loans receivable by the nature of the impairment evaluation, either individually or collectively, at the dates indicated (the loans receivable amounts in the table are net of undisbursed loan proceeds).

	At or For the Nine Months Ended September 30, 2012
Allowance for loan losses:	One- to Four- Family			Multi- Family			Commercial Real Estate			Construction and Development			Consumer			Commercial Business			Total
Beginning balance	$	3,201		$	7,442		$	9,467		$	4,506		$	1,214		$	2,098		$	27,928
Provision		2,408			(2,268	)		1,198			597			682			(179	)		2,438
Charge-offs		(2,292	)		(857	)		(4,149	)		(2,545	)		(555	)		(48	)		(10,446	)
Recoveries		3			568			428			–			34			26			1,059
Ending balance	$	3,320		$	4,885		$	6,944		$	2,558		$	1,375		$	1,897		$	20,979
Loss allowance individually evaluated for impairment	$	492		$	319		$	125		$	300		$	427		$	65		$	1,728
Loss allowance collectively evaluated for impairment	$	2,828		$	4,566		$	6,819		$	2,258		$	948		$	1,832		$	19,251

Loan receivable balances at the end of the period:
Loans individually evaluated for impairment	$	9,231		$	12,707		$	25,716		$	14,513		$	1,749		$	1,877		$	65,793
Loans collectively evaluated for impairment		463,075			238,978			214,252			42,343			244,462			137,653			1,340,763
Total loans receivable	$	472,306		$	251,685		$	239,968		$	56,856		$	246,211		$	139,530		$	1,406,556

	At or For the Nine Months Ended September 30, 2011
Allowance for loan losses:	One- to Four- Family			Multi- Family			Commercial Real Estate			Construction and Development			Consumer			Commercial Business			Total
Beginning balance	$	3,726		$	9,265		$	21,885		$	10,141		$	1,427		$	1,541		$	47,985
Provision		1,446			617			577			897			450			1,092			5,078
Charge-offs		(2,519	)		(4,812	)		(6,941	)		(2,607	)		(724	)		(551	)		(18,154	)
Recoveries		49			19			4			550			17			18			657
Transfers		–			2,765			2,026			(4,791	)		–			–			–
Ending balance	$	2,702		$	7,854		$	17,551		$	4,190		$	1,170		$	2,100		$	35,567
Loss allowance individually evaluated for impairment	$	145		$	3,683		$	10,301		$	2,762		$	367		$	129		$	17,387
Loss allowance collectively evaluated for impairment	$	2,557		$	4,171		$	7,250		$	1,428		$	803		$	1,971		$	18,180

Loan receivable balances at the end of the period:
Loans individually evaluated for impairment	$	15,278		$	25,112		$	43,040		$	20,915		$	1,741		$	4,871		$	110,957
Loans collectively evaluated for impairment		493,706			208,848			192,133			29,122			232,887			76,244			1,232,940
Total loans receivable	$	508,984		$	233,960		$	235,173		$	50,037		$	234,628		$	81,115		$	1,343,897

During the nine months ended September 30, 2012 and 2011, the Company adjusted certain factors used to determine the allowance for loan losses on loans that are collectively evaluated for impairment. Management considered these adjustments necessary and prudent in light of recent trends in real estate values, economic conditions, and unemployment. The Company estimates that these adjustments, as well as overall changes in the balance of loans to which these factors were applied, resulted in a decrease of $372 and an increase of $961 in the total allowances for loan losses during the nine months ended September 30, 2012 and 2011, respectively. The transfers noted in the table were the result of the reclassification of certain construction loans to permanent loans as a result of the completion of construction.

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2012

(Dollars in Thousands, Except Share and Per Share Amounts)

3. Loans Receivable (continued)

The following tables present information regarding impaired loans that have a related allowance for loan loss and those that do not as of the dates indicated (the loans receivable amounts in the table are net of undisbursed loan proceeds).

	September 30, 2012
With an allowance recorded:	Loans Receivable Balance, Net		Unpaid Principal Balance		Related Allowance for Loss		Average Loan Receivable Balance, Net		Interest Income Recognized
One- to four-family	$	1,602	$	1,602	$	492	$	2,689		–
Multi-family		2,446		2,584		319		12,415		–
Commercial real estate:
Office		137		145		77		993	$	1
Retail/wholesale/mixed		515		542		48		1,833		3
Industrial/warehouse		–		–		–		379		–
Other		–		–		–		240		–
Total commercial real estate		652		687		125		3,445		4
Construction and development:
One- to four-family		–		–		–		69		–
Multi-family		–		–		–		1,117		–
Commercial real estate		–		–		–		689		–
Land		509		534		300		2,071		–
Total construction and development		509		534		300		3,946		–
Consumer:
Home equity		307		307		283		331		–
Student		–		–		–		–		–
Other		144		144		144		94		–
Total consumer		451		451		427		425		–
Commercial business:
Term loans		105		109		65		208		1
Lines of credit		–		–		–		37		–
Total commercial business		105		109		65		245		1
Total with an allowance recorded	$	5,765	$	5,967	$	1,728	$	23,165	$	5

With no allowance recorded:
One- to four-family	$	7,368	$	9,779		–	$	9,421	$	161
Multi-family		6,182		8,159		–		4,933		405
Commercial real estate:
Office		2,292		3,959		–		3,356		34
Retail/wholesale/mixed		8,631		13,841		–		7,472		244
Industrial/warehouse		529		631		–		670		12
Other		–		–		–		978		–
Total commercial real estate		11,452		18,431		–		12,476		290
Construction and development:
One- to four-family		–		–		–		19		–
Multi-family		–		107		–		29		–
Commercial real estate		–		–		–		685		–
Land		629		2,173		–		1,057		6
Total construction and development		629		2,280		–		1,790		6
Consumer:
Home equity		1,249		1,249		–		1,073		22
Student		–		–		–		–		–
Other		27		42		–		93		4
Total consumer		1,276		1,291		–		1,166		26
Commercial business:
Term loans		505		587		–		627		17
Lines of credit		70		161		–		385		1
Total commercial business		575		748		–		1,012		18
Total with no allowance recorded	$	27,482	$	40,688		–	$	30,798	$	906

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2012

(Dollars in Thousands, Except Share and Per Share Amounts)

3. Loans Receivable (continued)

	December 31, 2011
Impaired loans with an allowance recorded:	Loans Receivable Balance, Net		Unpaid Principal Balance		Related Allowance for Loss		Average Loan Receivable Balance, Net		Interest Income Recognized
One- to four-family	$	2,606	$	2,606	$	364	$	3,916	$	51
Multi-family		19,006		19,106		2,357		23,158		851
Commercial real estate:
Office		2,474		2,474		746		7,917		30
Retail/wholesale/mixed		3,220		3,225		570		16,931		78
Industrial/warehouse		1,250		1,250		250		1,286		–
Other		959		964		318		1,175		67
Total commercial real estate		7,903		7,913		1,884		27,309		175
Construction and development:
One- to four-family		–		–		–		–		–
Multi-family		4,466		4,488		678		4,482		248
Commercial real estate		152		153		84		1,908		11
Land		2,993		2,995		2,434		2,944		58
Total construction and development		7,611		7,636		3,196		9,334		317
Consumer:
Home equity		413		413		327		446		–
Student		–		–		–		–		–
Other		67		67		49		126		–
Total consumer		480		480		376		572		–
Commercial business:
Term loans		164		165		83		690		15
Lines of credit		117		117		45		324		5
Total commercial business		281		282		128		1,014		20
Total with an allowance recorded	$	37,887	$	38,023	$	8,305	$	65,303	$	1,414

Impaired loans with no allowance recorded:
One- to four-family	$	12,262	$	13,645		–	$	12,382	$	264
Multi-family		3,899		4,413		–		7,117		306
Commercial real estate:
Office		6,580		8,520		–		2,937		375
Retail/wholesale/mixed		8,716		15,318		–		7,797		712
Industrial/warehouse		530		754		–		1,146		25
Other		268		1,044		–		673		9
Total commercial real estate		16,094		25,636		–		12,553		1,121
Construction and development:
One- to four-family		–		–		–		–		–
Multi-family		–		–		–		20		–
Commercial real estate		–		–		–		2,459		–
Land		1,757		1,967		–		3,219		28
Total construction and development		1,757		1,967		–		5,698		28
Consumer:
Home equity		1,044		1,044		–		962		43
Student		–		–		–		–		–
Other		140		140		–		110		4
Total consumer		1,184		1,184		–		1,072		47
Commercial business:
Term loans		787		896		–		825		44
Lines of credit		574		699		–		268		40
Total commercial business		1,361		1,595		–		1,094		84
Total with no allowance recorded	$	36,557	$	48,440		–	$	39,915	$	1,850

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2012

(Dollars in Thousands, Except Share and Per Share Amounts)

3. Loans Receivable (continued)

The following tables present information relating to the Company’s internal risk ratings of its loans receivable as of the dates indicated (all amounts in the tables are net of undisbursed loan proceeds):

	September 30, 2012
	Pass		Watch		Special Mention		Substandard		Total
One- to four-family	$	462,010	$	936	$	129	$	9,231	$	472,306
Multi-family		205,074		33,904		–		12,707		251,685
Commercial real estate:
Office		48,328		7,533		18,168		3,984		78,013
Retail/wholesale/mixed use		79,633		11,958		15,984		19,965		127,540
Industrial/warehouse		24,700		3,242		6		1,567		29,515
Other		4,700		–		–		200		4,900
Total commercial real estate		157,361		22,733		34,158		25,716		239,968
Construction and development:
One- to four-family		10,360		–		–		–		10,360
Multi-family		3,135		4,350		–		12,172		19,657
Commercial real estate		11,459		623		–		–		12,082
Land		11,255		1,161		–		2,341		14,757
Total construction/development		36,209		6,134		–		14,513		56,856
Consumer:
Home equity		220,911		–		–		1,520		222,431
Student		13,305		–		–		–		13,305
Other		10,246		–		–		229		10,475
Total consumer		244,462		–		–		1,749		246,211
Commercial business:
Term loans		74,510		1,813		297		1,135		77,755
Lines of credit		54,644		4,103		2,286		742		61,775
Total commercial business		129,154		5,916		2,583		1,877		139,530
Total	$	1,234,270	$	69,623	$	36,870	$	65,793	$	1,406,556

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2012

(Dollars in Thousands, Except Share and Per Share Amounts)

3. Loans Receivable (continued)

	December 31, 2011
	Pass		Watch		Special Mention		Substandard		Total
One- to four-family	$	482,271	$	4,044	$	141	$	16,075	$	502,531
Multi-family		196,231		18,123		8,357		24,108		246,819
Commercial real estate:
Office		49,324		1,853		20,405		9,054		80,636
Retail/wholesale/mixed use		50,108		9,376		19,870		19,849		99,203
Industrial/warehouse		24,431		3,237		2,230		5,698		35,596
Other		4,897		1,318		181		2,405		8,801
Total commercial real estate		128,760		15,784		42,686		37,006		224,236
Construction and development:
One- to four-family		7,704		–		–		–		7,704
Multi-family		4,503		–		–		14,347		18,850
Commercial real estate		4,411		–		–		908		5,319
Land		11,125		299		184		4,820		16,428
Total construction/development		27,743		299		184		20,075		48,301
Consumer:
Home equity		211,834		–		–		1,505		213,339
Student		15,711		–		–		–		15,711
Other		9,214		–		–		190		9,404
Total consumer		236,759		–		–		1,695		238,454
Commercial business:
Term loans		35,433		1,342		–		2,823		39,598
Lines of credit		44,291		1,729		252		1,845		48,117
Total commercial business		79,724		3,071		252		4,668		87,715
Total	$	1,151,488	$	41,321	$	51,620	$	103,627	$	1,348,056

Loans rated “pass” or “watch” are generally current on contractual loan and principal payments and comply with other contractual loan terms. Pass loans generally have no noticeable credit deficiencies or potential weaknesses. Loans rated watch, however, will typically exhibit early signs of credit deficiencies or potential weaknesses that deserve management’s close attention. Loans rated “special mention” do not currently expose the Company to a sufficient degree of risk to warrant a lower rating, but possess clear trends in credit deficiencies or potential weaknesses that deserve management’s close attention. The allowance for loan losses on loans rated pass, watch, or special mention is typically evaluated collectively for impairment using a homogenous pool approach. This approach utilizes quantitative factors developed by management from its assessment of historical loss experience, qualitative factors, and other considerations.

Loans rated “substandard” involve a distinct possibility that the Company could sustain some loss if deficiencies associated with the loan are not corrected. Loans rated “doubtful” indicate that full collection is highly questionable or improbable. The Company did not have any loans that were rated doubtful at September 30, 2012, or December 31, 2011. Loans rated substandard or doubtful that are also considered in management’s judgment to be impaired are generally analyzed individually to determine an appropriate allowance for loan loss. A loan rated “loss” is considered uncollectible, even if a partial recovery could be expected in the future. The Company generally charges off loans that are rated as a loss. As such, the Company did not have any loans that were rated loss at September 30, 2012, or December 31, 2011.

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2012

(Dollars in Thousands, Except Share and Per Share Amounts)

3. Loans Receivable (continued)

The following tables contain information relating to the past due and non-accrual status of the Company’s loans receivable as of the dates indicated (all amounts in the table are net of undisbursed loan proceeds):

	September 30, 2012
	Past Due Status												Total
	30-59 Days		60-89 Days		> 90 Days		Total Past Due		Total Current		Total Loans		Non- Accrual
One- to four-family	$	7,201	$	3,509	$	7,752	$	18,462	$	453,844	$	472,306	$	8,970
Multi-family		7,247		–		5,960		13,207		238,478		251,685		8,628
Commercial real estate:
Office		–		–		1,677		1,677		76,336		78,013		2,429
Retail/wholesale/mixed		180		–		5,502		5,682		121,858		127,540		9,146
Industrial/warehouse		74		–		456		530		28,985		29,515		529
Other		–		–		–		–		4,900		4,900		–
Total commercial real estate		254		–		7,635		7,889		232,079		239,968		12,104
Construction and development:
One- to four-family		–		–		–		–		10,360		10,360		–
Multi-family		–		–		–		–		19,657		19,657		–
Commercial real estate		–		–		–		–		12,082		12,082		–
Land		10		–		271		281		14,476		14,757		1,138
Total construction		10		–		271		281		56,575		56,856		1,138
Consumer:
Home equity		1,054		304		1,556		2,914		219,517		222,431		1,556
Student		296		81		701		1,078		12,227		13,305		–
Other		90		20		171		281		10,194		10,475		171
Total consumer		1,440		405		2,428		4,273		241,938		246,211		1,727
Commercial business:
Term loans		–		69		289		358		77,397		77,755		610
Lines of credit		422		–		33		455		61,320		61,775		70
Total commercial		422		69		322		813		138,717		139,530		680
Total	$	16,574	$	3,983	$	24,368	$	44,925	$	1,361,631	$	1,406,556	$	33,247

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2012

(Dollars in Thousands, Except Share and Per Share Amounts)

3. Loans Receivable (continued)

	December 31, 2011
	Past Due Status												Total
	30-59 Days		60-89 Days		> 90 Days		Total Past Due		Total Current		Total Loans		Non- Accrual
One- to four-family	$	10,713	$	2,491	$	12,890		26,094	$	476,437	$	502,531	$	14,868
Multi-family		7,692		–		9,949		17,640		229,179		246,819		22,905
Commercial real estate:
Office		745		–		3,743		4,488		76,147		80,636		9,054
Retail/wholesale/mixed		695		154		7,214		8,063		91,139		99,203		11,936
Industrial/warehouse		2,230		–		1,474		3,704		31,892		35,596		1,780
Other		–		–		560		560		8,241		8,801		1,227
Total commercial real estate		3,670		154		12,991		16,815		207,419		224,236		23,997
Construction and development:
One- to four-family		–		–		–		–		7,704		7,704		–
Multi-family		–		4,466		–		4,466		14,384		18,850		4,466
Commercial real estate		–		–		–		–		5,319		5,319		152
Land		238		1,046		3,310		4,594		11,834		16,428		4,750
Total construction		238		5,512		3,310		9,060		39,241		48,301		9,368
Consumer:
Home equity		1,172		439		1,457		3,067		210,271		213,339		1,457
Student		396		310		696		1,403		14,309		15,711		–
Other		137		64		202		404		9,000		9,404		207
Total consumer		1,705		813		2,355		4,874		233,580		238,454		1,664
Commercial business:
Term loans		86		169		412		668		38,930		39,598		951
Lines of credit		58		–		608		665		47,452		48,117		691
Total commercial		144		169		1,020		1,333		86,382		87,715		1,642
Total	$	24,162	$	9,139	$	42,515	$	75,816	$	1,272,238	$	1,348,056	$	74,444

As of September 30, 2012, and December 31, 2011, $700 and $696 in student loans, respectively, were 90-days past due, but remained on accrual status. No other loans 90-days past due were in accrual status as of either date.

The Company classifies a loan modification as a troubled debt restructuring (“TDR”) when it has granted a borrower experiencing financial difficulties a concession that it would otherwise not consider. Loan modifications that result in insignificant delays in the receipt of payments (generally six months or less) are not considered TDRs under the Company’s TDR policy. TDRs are relatively insignificant and/or infrequent in the Company and generally consist of loans placed in interest-only status for a short period of time or payment forbearance for greater than six months. Loans added as TDRs for the nine months ended September 30, 2012 consisted of nine one- to four-family residential loans totaling $2,147, one commercial real estate loan totaling $296, and one commercial business loan totaling $37. TDRs are evaluated for impairment and appropriate credit losses are recorded in accordance with the Company’s accounting policies. There were no loans that had a payment default in the nine months ended September 30, 2012, that were restructured within the preceding 12 months.

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2012

(Dollars in Thousands, Except Share and Per Share Amounts)

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
	2012			2011
MSRs at beginning of the period	$	8,269		$	7,775
Additions		3,841			1,664
Amortization		(3,004	)		(1,718	)
MSRs at end of period		9,106			7,721
Valuation allowance at end of period		(2,787	)		(1,103	)
MSRs at end of the period, net	$	6,319		$	6,618

The following table shows the estimated future amortization expense for MSRs for the periods indicated:

		Amount
Estimate for three months ended December 31:	2012	$	256
Estimate for years ended December 31:	2013		1,006
	2014		986
	2015		969
	2016		947
	2017		850
	Thereafter		1,305
	Total	$	6,319

The projections of amortization expense shown above for MSRs are based on existing asset balances and the existing interest rate environment as of September 30, 2012. Future amortization expense may be significantly different depending upon changes in the mortgage servicing portfolio, mortgage interest rates, and market conditions.

5. Other Assets

The following table summarizes the components of other assets as of the dates indicated:

	September 30		December 31
	2012		2011
Accrued interest:
Loans receivable	$	4,960	$	4,664
Mortgage-related securities		1,758		1,851
Interest-earning deposits		5		6
Total accrued interest		6,723		6,521
Premises and equipment, net		50,321		50,423
Federal Home Loan Bank stock, at cost		19,071		46,092
Bank owned life insurance		58,096		56,604
Prepaid FDIC insurance premiums		3,252		5,673
Deferred tax asset, net		33,587		37,493
Prepaid and other assets		23,917		22,020
Total other assets	$	194,967	$	224,826

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2012

(Dollars in Thousands, Except Share and Per Share Amounts)

6. Deposit Liabilities

The following table summarizes the components of deposit liabilities as of the dates indicated:

	September 30		December 31
	2012		2011
Checking accounts:
Non-interest-bearing	$	138,993	$	112,211
Interest-bearing		220,903		229,990
Total checking accounts		359,896		342,201
Money market accounts		450,957		432,248
Savings accounts		219,524		204,263
Certificates of deposit:
Due within one year		671,977		709,362
After one but within two years		170,436		250,613
After two but within three years		31,113		61,291
After three but within four years		9,447		13,301
After four but within five years		7,006		8,384
Total certificates of deposits		889,979		1,042,951
Total deposit liabilities	$	1,920,356	$	2,021,663

7. Borrowings

The following table summarizes borrowings as of the dates indicated:

	September 30, 2012					December 31, 2011
			Weighted-					Weighted-
			Average					Average
	Amount		Rate			Amount		Rate
Federal Home Loan Bank advances maturing in:
2012		–		–		$	100,000		4.52	%
2013	$	221		4.17	%		233		4.17
2014		–		–			–		–
2015		23,450		0.80			–		–
2016		23,450		1.04			–		–
2017 and thereafter		163,981		2.74			52,858		5.00
Total borrowings	$	211,102		2.34	%	$	153,091		4.69	%

All of the Company’s advances from the Federal Home Loan Bank (“FHLB”) of Chicago are subject to prepayment penalties if voluntarily repaid by the Company prior to stated maturity.

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: (i) 35% of the Bank’s total assets; (ii) twenty times the capital stock of the FHLB of Chicago that is owned by the Bank; or (iii) 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.

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2012

(Dollars in Thousands, Except Share and Per Share Amounts)

7. Borrowings (continued)

At September 30, 2012 and December 31, 2011, the Company had lines of credit with two financial institutions that totaled $10,000 as of both dates. There were no amounts outstanding on these lines of credits as of either of the dates.

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, 2012, that the Bank met or exceeded all capital adequacy requirements to which it is subject. The Company is not aware of any conditions or events which would change the Bank’s status from “well capitalized.”

The following table presents the Bank’s actual and required regulatory capital amounts and ratios as of the dates indicated:

	Actual					Required For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2012:
Total capital (to risk-weighted assets)	$	261,942		17.91	%	$	117,010		8.00	%	$	146,262		10.00	%
Tier 1 capital (to risk-weighted assets)		243,626		16.66			58,505		4.00			87,757		6.00
Tier 1 capital (to adjusted total assets)		243,626		9.93			98,101		4.00			122,626		5.00

As of December 31, 2011:
Total capital (to risk-weighted assets)	$	253,815		18.34	%	$	110,714		8.00	%	$	138,392		10.00	%
Tier 1 capital (to risk-weighted assets)		236,516		17.09			55,354		4.00			83,035		6.00
Tier 1 capital (to adjusted total assets)		236,516		9.59			98,601		4.00			123,252		5.00

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2012

(Dollars in Thousands, Except Share and Per Share Amounts)

9. Earnings Per Share

The following table summarizes the computation of basic and diluted earnings per share for the periods indicated:

	Three Months Ended September 30				Nine Months Ended September 30
	2012		2011		2012		2011
Basic earnings (loss) per share:
Net income (loss)	$	1,966	$	1,349	$	4,449	$	(48,987	)
Weighted average shares outstanding		46,184,264		46,177,657		46,184,263		45,991,853
Vested MRP shares for period		9,430		1,745		5,512		5,234
Basic shares outstanding		46,193,694		46,179,402		46,189,775		45,997,087
Basic earnings (loss) per share	$	0.04	$	0.03	$	0.10	$	(1.07	)

Diluted earnings per share:
Net income (loss)	$	1,966	$	1,349	$	4,449	$	(48,987	)
Weighted average shares outstanding used in basic earnings per share basic earnings per share		46,193,694		46,179,402		46,189,775		45,997,087
Net dilutive effect of:				46,179,402
Stock option shares		16,627		–		5,542		–
Unvested MRP shares		12,604		–		8,647		–
Diluted shares outstanding		46,222,925		46,179,402		46,203,964		45,997,087
Diluted earnings (loss) per share	$	0.04	$	0.03	$	0.10	$	(1.07	)

The Company had stock options for 2,268,500 shares outstanding as of September 30, 2012, and for 2,382,500 shares as of September 30, 2011, 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 $9.37 and $9.46 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 $44 and $45 during the three months ended September 30, 2012 and 2011, respectively, and $143 and $124 during the nine months ended as of the same dates, 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 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.

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2012

(Dollars in Thousands, Except Share and Per Share Amounts)

10. Employee Benefit Plans (continued)

The following table summarizes the qualified plan’s net periodic benefit cost for the periods indicated:

	Three Months Ended September 30						Nine Months Ended September 30
	2012			2011			2012			2011
Service cost	$	725		$	626		$	2,175		$	1,878
Interest cost		564			569			1,692			1,707
Expected return on plan assets		(756	)		(650	)		(2,268	)		(1,950	)
Amortization of unrecognized prior service cost		440			216			1,320			648
Net periodic benefit cost	$	973		$	761		$	2,919		$	2,283

The net periodic benefit cost for the Company’s supplemental plan was $126 and $117 for the three months ended September 30, 2012 and 2011, respectively, and $378 and $351 for the nine months ended as of the same dates, respectively. The amount in 2012 consisted of interest cost of $282, amortization of unrecognized prior service costs of $9, and service costs of $87. The amount in 2011 consisted of interest cost of $312, amortization of unrecognized prior service costs of $5, and service costs of $34.

The Company does not expect to make a contribution to the qualified and supplemental plans in 2012. This determination was based on a number of factors, including the results of the Actuarial Valuation Reports as of January 1, 2012.

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. The 2001 Plan also provided for restricted stock ("MRP") awards of up to 1,226,977 shares. The 2001 Plan has expired, no further awards may be granted under the 2001 Plan, and no options or unvested MRP awards remain outstanding 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, 2012, 520,221 MRP shares and options for 621,362 shares remain eligible for award under the 2004 Plan.

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 $46 and $30 for the three months ended September 30, 2012 and 2011, respectively, and $139 and $90 for the nine months ended as of the same dates, respectively. Outstanding non-vested MRP grants had a fair value of $499 and an unamortized cost of $463 at September 30, 2012. The cost of these shares is expected to be recognized over a weighted-average period of 1.78 years.

During the three months ended September 30, 2012 and 2011, the Company recorded stock option compensation expense of $58 and $40, respectively. During the nine months ended as of the same dates stock option compensation expense was $174 and $121, respectively. As of September 30, 2012, there was $745 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 1.82 years.

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2012

(Dollars in Thousands, Except Share and Per Share Amounts)

11. Stock-Based Benefit Plans (continued)

The following table summarizes the activity in the Company’s stock options during the periods indicated:

	Nine Months Ended September 30
	2012					2011
	Stock Options			Weighted Average Exercise Price		Stock Options			Weighted Average Exercise Price
Outstanding at beginning of period		2,382,500		$	9.4637		2,462,464		$	9.0184
Granted		412,500			3.3999		438,500			4.9730
Exercised		–			–		(488,464	)		3.2056
Forfeited		(124,000	)		10.6730		(30,000	)		9.1735
Outstanding at end of period		2,671,000		$	8.4711		2,382,500		$	9.4637

The following table provides additional information regarding the Company’s outstanding options as of September 30, 2012.

		Remaining		Non-Vested Options				Vested Options
		Contractual Life in Years		Stock Options		Intrinsic Value		Stock Options		Intrinsic Value
Exercise Price:
$	10.6730		1.6		–		–		1,576,000		–
$	12.2340		3.8		–		–		50,000		–
$	11.1600		5.6		6,400		–		25,600		–
$	12.0250		5.9		10,000		–		40,000		–
$	7.2200		7.6		30,000		–		20,000		–
$	4.7400		8.2		56,000		–		14,000		–
$	5.0500		8.3		310,400		–		77,600		–
$	4.3000		8.5		20,000	$	5		5,000	$	1
$	3.7200		8.8		14,000		12		3,500		3
$	3.3900		9.3		402,500		467		–		–
$	3.8000		9.5		10,000		8		–		–
Total					859,300	$	492		1,811,700	$	4
Weighted average remaining contractual life					8.7 years				2.2 years
Weighted average exercise price				$	4.4010			$	10.3970

The intrinsic value of options exercised during the nine months ended September 30, 2011, was $296. There were no options exercised during the nine months ended September 30, 2012. The weighted average grant date fair value of non-vested options at September 30, 2012, was $1.06 per share. During the nine months ended September 30, 2012, options for 412,500 shares were granted, options for 112,500 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 valuationmodels 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

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2012

(Dollars in Thousands, Except Share and Per Share Amounts)

11. Stock-Based Benefit Plans (continued)

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 weighted-average assumptions were used to value 412,500 options granted during the nine months ended September 30, 2012: risk free rate of 1.50%, dividend yield of 1.18%, expected stock volatility of 25%, and expected term to exercise of 7.5 years. These options had a weighted-average value of $0.86 per option using these assumptions. The following weighted-average assumptions were used to value 421,000 options granted during the nine months ended September 30, 2011: risk free rate of 2.06%, dividend yield of 2.04%, expected stock volatility of 25%, and expected term to exercise of 7.5 years.

12. Financial Instruments with Off-Balance Sheet Risk

Off-balance sheet financial instruments or obligations whose contract amounts represent credit and/or interest rate risk are summarized in the following table as of the dates indicated:

	September 30		December 31
	2012		2011
Unused consumer lines of credit	$	152,263	$	151,807
Unused commercial lines of credit		56,694		43,518
Commitments to extend credit:
Fixed rate		29,327		23,793
Adjustable rate		40,353		17,197
Undisbursed commercial loans		2,620		870
Standby letters of credit		1,890		410

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, 2012, and December 31, 2011, net unrealized gains of $475 and $243, 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 of $1,265 and $507 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, 2012					December 31, 2011
	Notional Amount		Fair Value			Notional Amount		Fair Value
Interest rate lock commitments	$	64,929	$	2,743		$	52,699	$	1,012
Forward commitments		73,979		(2,268	)		62,025		(769	)
Net unrealized gain			$	475				$	243

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2012

(Dollars in Thousands, Except Share and Per Share Amounts)

12. Financial Instruments with Off-Balance Sheet Risk (continued)

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.

13. Fair Value Measurements

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 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). There were no transfers of assets or liabilities between categories of the fair value hierarchy during the three and nine months ended September 30, 2012.

The methods and assumptions used by the Company in estimating the fair value of its financial instruments, whether or not such fair values are recognized in the consolidated financial statements, are summarized below:

Cash and Cash EquivalentsThe carrying amounts reported in the statements of financial condition for cash and cash equivalents approximate those assets’ fair values. The Company considers the fair value of cash and cash equivalents to be Level 1 in the fair value hierarchy.

Mortgage-Related Securities Available-for-Sale and Held-to-MaturityFair values for these securities are based on price estimates obtained from a third-party independent pricing service. This service utilizes pricing models that vary by asset class and incorporate available trade, bid, ask, and other market information of comparable instruments. For structured securities, such as CMOs, the pricing models include cash flow estimates that consider the impact of loan performance data, including, but not limited to, expectations relating to loan prepayments, default rates, and loss severities. Management has reviewed the pricing methodology used by its pricing service to verify that prices are determined in accordance with the fair value guidance specified in GAAP. The Company considers the fair value of mortgage-related securities to be Level 2 in the fair value hierarchy.

Loans Held-for-Sale The fair value of loans held-for-sale is based on the current market price for securities collateralized by similar loans. The Company considers the fair value of loans held for sale to be Level 2 in the fair value hierarchy.

Loans Receivable Loans 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. The Company considers the fair value of loans receivable to be Level 3 in the fair value hierarchy.

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2012

(Dollars in Thousands, Except Share and Per Share Amounts)

13. Fair Value Measurements (continued)

Mortgage Servicing Rights The Company estimates the fair market value of MSRs for those loans that are sold with servicing rights retained. For valuation purposes, the related loans are stratified into pools by product type and, within product type, by contractual interest rates. The fair value of the MSR pools is based upon the present value of estimated future cash flows using current market assumptions for prepayments, servicing cost, and other factors. The Company considers the fair value of MSRs to be Level 3 in the fair value hierarchy.

The following table summarizes the significant inputs utilized by the Company to estimate the fair value of its MSRs as of September 30, 2012:

	Weighted- Average			Range
Loan size	$	126			$1 - $417
Contractual interest rate		4.13	%		2.00% - 7.75%
Constant prepayment rate (“CPR”)		24.80	%		13.68% - 31.62%
Remaining maturity in months		261			42 - 417
Servicing fee		0.25	%		–
Annual servicing cost per loan (not in thousands)	$	82.66			–
Annual ancillary income per loan (not in thousands)	$	54.90			–
Discount rate		3.20	%		2.75% - 3.50%

MSR pools with an amortized cost basis greater than fair value are carried at fair value in the Company’s financial statements. Pools determined to be impaired at September 30, 2012, had an amortized cost basis of $8,299 and a fair value of $5,512 as of that date. Accordingly, the Company recorded a valuation allowance of $2,787 as of September 30, 2012, as well as a corresponding loss of $1,919 during the nine month period then ended, which was equal to the change in the valuation allowance during that period. Pools determined to be impaired at December 31, 2011, had an amortized cost basis of $6,812 and a fair value of $5,944 as of that date. Accordingly, the Company recorded a valuation allowance of $868 as of December 31, 2011, as well as a corresponding loss of $862 during the twelve month period then ended, which was equal to the change in the valuation allowance during that period. The company recorded a loss of $1,097 during the nine month period ended September 30, 2011.

Federal Home Loan Bank Stock FHLB of Chicago stock is carried at cost, which is its redeemable (fair) value, since the market for this stock is restricted. The Company considers the fair value of FHLB of Chicago stock to be Level 2 in the fair value hierarchy.

Accrued Interest Receivable and Payable The carrying values of accrued interest receivable and payable approximate their fair value. The Company considers the fair value of accrued interest receivable and payable to be Level 2 in the fair value hierarchy.

Deposit Liabilities and Advance Payments by Borrowers for Taxes and Insurance Fair value for demand deposits equals book value. The Company considers the fair value of demand deposits to be Level 2 in the fair value hierarchy. Fair values for certificates of 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 Company considers the fair value of certificates of deposit to be Level 3 in the fair value hierarchy. The advance payments by borrowers for taxes and insurance are equal to their carrying amounts at the reporting date. The Company considers the fair value of advance payment by borrowers to be Level 2 in the fair value hierarchy.

Borrowings The 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 Company considers the fair value of borrowings to be Level 2 in the fair value hierarchy.

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2012

(Dollars in Thousands, Except Share and Per Share Amounts)

13. Fair Value Measurements (continued)

Off-Balance Sheet Financial InstrumentsOff-balance sheet financial instruments consist of commitments to extend credit, IRLCs, and forward commitments to sell loans. Commitments to extend credit that are not IRLCs generally carry variable rates of interest. As such, the fair value of these instruments is not material. The Company considers the fair value of these instruments to be Level 2 in the fair value hierarchy. The carrying value of IRLCs and forward commitments to sell loans, which is equal to their fair value, is the difference between thecurrent market prices for securities collateralized by similar loans and the notional amounts of the IRLCs and forward commitments. The Company considers the fair value of IRLCs and forward commitments to sell loans to be Level 2 in the fair value hierarchy.

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, 2012						December 31, 2011
	Carrying Value			Fair Value			Carrying Value			Fair Value
Cash and cash equivalents	$	81,877		$	81,877		$	120,935		$	120,935
Mortgage-related securities available-for-sale		618,545			618,545			781,770			781,770
Mortgage-related securities held-to-maturity		158,062			164,174			–			–
Loans held-for-sale		26,908			26,908			19,192			19,192
Loans receivable, net		1,384,805			1,368,023			1,319,636			1,284,651
Mortgage servicing rights, net		6,319			6,500			7,401			7,577
Federal Home Loan Bank stock		19,071			19,071			46,092			46,092
Accrued interest receivable		6,723			6,723			6,521			6,521
Deposit liabilities		1,920,356			1,871,454			2,021,663			1,968,842
Borrowings		211,102			229,361			153,091			167,418
Advance payments by borrowers		32,596			32,596			3,192			3,192
Accrued interest payable		491			491			750			750
Unrealized gain (loss) on off-balance-sheet items:
Interest rate lock commitments on loans		2,743			2,743			1,012			1,012
Forward commitments to sell loans		(2,268	)		(2,268	)		(769	)		(769	)

Certain financial instruments and all nonfinancial instruments are excluded from the table, above. Accordingly, the aggregate fair value of amounts presented in the table does not represent the underlying value of the Company and is not particularly relevant to predicting the Company’s future earnings or cash flows. Furthermore, because the fair value estimates in the table are estimated under Levels 2 or 3 of the fair value hierarchy, the fair value estimates presented in the table cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.

The following table segregates by fair value hierarchy (i.e., Level 1, 2, or 3) all of the Company's assets and liabilities that were accounted for at fair value on a recurring basis as of the dates indicated:

At September 30, 2012

Level 1

Level 2

Level 3

Total

Loans held-for-sale

–

26,908

–

26,908

Mortgage-related securities available-for-sale

–

618,545

–

618,545

At December 31, 2011

Level 1

Level 2

Level 3

Total

Loans held-for-sale

–

19,192

–

19,192

Mortgage-related securities available-for-sale

–

781,770

–

781,770

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2012

(Dollars in Thousands, Except Share and Per Share Amounts)

13. Fair Value Measurements (continued)

Impaired Loans For non-accrual loans greater than an established threshold and individually evaluated for impairment and all renegotiated loans, impairment is measured based on: (i) the fair value of the loan or the fair value of the collateral less estimated selling costs (collectively the “collateral value method”) or (ii) 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 on a periodic basis to support the fair value of collateral underlying the loans. Appraisals are performed by independent certified and/or licensed appraisers that have been reviewed by the Company and incorporate information such as recent sales prices for comparable properties, costs of construction, and net operating income of the property or business. Selling costs are generally estimated at 10%. Appraised values may be further discounted based on management judgment regarding changes in market conditions and other factors since the time of the appraisal. A significant unobservable input in using net operating income to estimate fair value is the capitalization rate. At September 30, 2012, the range of capitalization rates utilized to determine the fair value of the underlying collateral on certain loans was 7% to 13%. 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 allowance of $1,728 was recorded for loans with a recorded investment of $65,793 at September 30, 2012. These amounts were $8,305 and $103,627 at December 31, 2011, respectively. Provision for loan losses related to these loans was $(2,911) during the nine months ended September 30, 2012, and $1,257 during the twelve month period ended December 31, 2011. Provision for loan losses related to impaired loans at September 30, 2011, was $510 for the nine months ended September 30, 2011.

Foreclosed Properties 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, as described in the previous paragraph. In certain instances, the Company may also use the selling list price, less estimated costs to sell, as the fair value of foreclosed properties. In such instances, the list price is generally less than the appraised value. The Company considers these fair values to be Level 3 in the fair value hierarchy. As of September 30, 2012, $12,793 in foreclosed properties were valued at collateral value compared to $22,655 at December 31, 2011. Losses of $2,151 and $4,639 related to these foreclosed properties valued at collateral value were recorded during the nine months ended September 30, 2012, and the twelve months ended December 31, 2011, respectively. Losses on foreclosed properties valued at collateral value at September 30, 2011, were $2,990 for the nine months ended September 30, 2011. The following table summarizes foreclosed properties and repossessed assets as of the dates indicated:

	September 30		December 31
	2012		2011
Commercial real estate	$	6,362	$	13,115
Land		4,007		3,890
One- to four-family		3,031		6,557
Multi-family		146		1,162
Consumer		12		–
	$	13,558	$	24,724

14. Goodwill Impairment

During the three months ended June 30, 2011, the Company determined that the goodwill recorded as a result of the purchase of financial institutions in 1997 and 2000 was impaired. The Company performed a goodwill impairment test during that period as a result of a number of developments including the decline in the Company’s stock price and market capitalization and the Memoranda of Understanding (“MOU”) with the Office of Thrift Supervision (“OTS”). To determine the fair value of goodwill, as well as the amount of the impairment, the Company obtained a third-party independent appraisal of the Company, which consists of a single reporting unit, and its assets and liabilities. The fair value of the Company was estimated using a weighted average of three valuation methodologies, including apublic market peers approach, a comparable transactions approach, and a discounted cash flow approach.

Bank Mutual Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2012

(Dollars in Thousands, Except Share and Per Share Amounts)

14. Goodwill Impairment (continued)

A comparison of the weighted average value from these approaches to the net carrying value of the Company indicated that potential impairment existed. The weighted average value of the Company was subsequently compared to the estimated net fair value of the Company’s individual assets and liabilities. As a result of this comparison, the Company concluded that goodwill was impaired and recorded an impairment charge of $52.6 million during the three months ended June 30, 2011, which represented the total amount of the Company’s goodwill.

Goodwill impairment is not deductible for income tax purposes. Accordingly, the Company recorded income tax expense of $1,236 during the nine months ended September 30, 2011, regardless of the fact that it incurred a net loss before income taxes. Excluding the goodwill impairment from the Company’s net loss before income taxes, the Company’s effective tax rate for the nine months ended September 30, 2011 was 25.8%.

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, 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 the Company's control, that could cause the Company'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 the Company: 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 Wall Street Reform and Consumer Protection Act (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 the Company or the Bank; potential adverse publicity relating to any such action or other developments affecting the Company 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 Federal Deposit Insurance Corporation (“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; the Company’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 the Company’s filings with the Securities and Exchange Commission, particularly under Part I, Item 1A, “Risk Factors,” of the Company’s 2011 Annual Report on Form 10-K.

Results of Operations

Overview The Company’s net income was $2.0 million or $0.04 per diluted share during the three months ended September 30, 2012, which was a $617,000 or 45.7% improvement over the same period in 2011. The Company had net income of $1.3 million or $0.03 per diluted share during the three-month period in the prior year. The Company’s net income was $4.4 million or $0.10 per diluted share during the nine months ended September 30, 2012, compared to a net loss of $49.0 million or $1.07 per diluted share in the same period of 2011. The loss in the 2011 period was caused by a $52.6 million non-cash goodwill impairment in the second quarter of that year. Excluding this impairment, the Company’s earnings during the nine-month period in 2011 were $3.6 million or $0.08 per diluted share. The following paragraphs describe the reasons for the changes in the Company’s earnings during the three- and nine-month periods ended September 30, 2012 and 2011, along with other matters affecting the Company’s operations.

Net Interest Income The Company’s net interest income increased by $113,000 or 0.7% during the three months ended September 30, 2012, compared to the same period in 2011. This improvement was due in part to the repayment of $100.0 million in high-cost borrowings from the FHLB of Chicago that matured during the third quarter of 2012. Also contributing to the improvement was a $51.9 million or 2.3% increase in average earning assets in the third quarter of 2012 compared to the same quarter in the prior year. Earlier in 2012 the Company purchased $158.9 million in held-to-maturity securities that were funded by term borrowings from the FHLB of Chicago. In addition, during the three months ended September 30, 2012, average total loans increased by $38.7 million or 2.8% compared to the same period 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 during the third quarter of 2012 compared to the same quarter in the previous year. The Company’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, the Company’s net interest margin improved by 24 basis points, due principally to the aforementioned repayment of the borrowings from the FHLB of Chicago.

The Company’s net interest income declined by $2.1 million or 4.4% during the nine months ended September 30, 2012, compared to the same period in 2011. This decline was primarily attributable to a decrease in the Company’s net interest margin, which was 2.61% in the 2012 nine-month period compared to 2.80% in the same period in 2011. This decline was primarily the result of a lower interest rate environment in 2012, which reduced the return on the Company’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.

The following tables present 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.

	Three Months Ended September 30
	2012								2011
				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)	$	1,401,016		$	16,514		4.71	%	$	1,362,337		$	17,468		5.13	%
Mortgage-related securities		805,044			4,134		2.05			755,394			4,303		2.28
Interest-earning deposits		76,761			30		0.16			59,058			27		0.18
Investment securities (2)		21,697			19		0.35			75,875			219		1.15
Total interest-earning assets		2,304,518			20,697		3.59			2,252,664			22,017		3.91
Non-interest-earning assets		225,188								241,067
Total average assets	$	2,529,706							$	2,493,731

Liabilities and equity:
Interest-bearing liabilities:
Regular savings deposits	$	220,448			16		0.03		$	213,942			18		0.03
Money market accounts		432,249			165		0.15			408,888			435		0.43
Interest-bearing demand accounts		216,361			7		0.01			193,627			25		0.05
Certificates of deposit		930,692			3,355		1.44			1,067,048			4,253		1.59
Total interest-bearing deposits		1,799,750			3,543		0.79			1,883,505			4,731		1.00
Borrowings		237,306			1,554		2.62			149,958			1,798		4.80
Advance payments by borrowers for taxes and insurance		27,954			1		0.01			25,960			2		0.03
Total interest-bearing liabilities		2,065,010			5,098		0.99			2,059,423			6,531		1.27
Non-interest-bearing liabilities:
Non-interest-bearing deposits		136,367								114,689
Other non-interest-bearing liabilities		56,915								50,595
Total non-interest-bearing liabilities		193,282								165,284
Total liabilities		2,258,292								2,224,707
Total equity		271,414								269,024
Total average liabilities and equity	$	2,529,706							$	2,493,731
Net interest income and net interestrate spread				$	15,599		2.60	%				$	15,486		2.64	%
Net interest margin							2.71	%							2.75	%
Average interest-earning assets to average interest-bearing liabilities		1.12	x							1.09	x

(1)

For the purposes of these computations, non-accruing loans and loans held-for-sale are included in loans receivable.

(2)

The carrying value and earnings on stock in the FHLB of Chicago is included in investment securities.

	Nine Months Ended September 30
	2012											2011
				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)	$	1,384,180		$	49,142		4.73	%	$	1,366,840		$	52,887		5.16	%
Mortgage-related securities		812,989			13,228		2.17			613,668			12,131		2.64
Interest-earning deposits		92,758			130		0.19			85,182			125		0.20
Investment securities (2)		28,137			54		0.26			193,147			2,843		1.96
Total interest-earning assets		2,318,064			62,554		3.60			2,258,837			67,986		4.01
Non-interest-earning assets		210,193								300,275
Total average assets	$	2,528,257							$	2,559,112

Liabilities and equity:
Interest-bearing liabilities:
Regular savings deposits	$	216,075			47		0.03		$	213,841			62		0.04
Money market accounts		425,614			536		0.17			401,368			1,417		0.47
Interest-bearing demand accounts		218,525			30		0.02			199,578			72		0.05
Certificates of deposit		989,790			10,854		1.46			1,074,425			13,659		1.70
Total interest-bearing deposits		1,850,004			11,467		0.83			1,889,212			15,210		1.07
Borrowings		233,171			5,735		3.28			157,639			5,359		4.53
Advance payments by borrowers for taxes and insurance		18,096			2		0.01			16,896			3		0.02
Total interest-bearing liabilities		2,101,271			17,204		1.09			2,063,747			20,572		1.33
Non-interest-bearing liabilities:
Non-interest-bearing deposits		126,686								106,325
Other non-interest-bearing liabilities		30,649								92,707
Total non-interest-bearing liabilities		157,335								199,032
Total liabilities		2,258,606								2,262,779
Total equity		269,651								296,333
Total average liabilities and equity	$	2,528,257							$	2,559,112
Net interest income and net interestrate spread				$	45,350		2.51	%				$	47,414		2.68	%
Net interest margin							2.61	%							2.80	%
Average interest-earning assets to average interest-bearing liabilities		1.10	x							1.09	x

(1)

For the purposes of these computations, non-accruing loans and loans held-for-sale are included in loans receivable.

(2)

The carrying value and earnings on stock in the FHLB of Chicago is included in investment securities.

The following tables present 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.

	Three Months Ended September 30, 2012 Compared to September 30, 2011
	Increase (Decrease)
	Volume			Rate			Net
	(Dollars in thousands)
Interest-earning assets:
Loans receivable	$	506		$	(1,460	)	$	(954	)
Mortgage-related securities		283			(452	)		(169	)
Interest-earning deposits		7			(4	)		3
Investment securities		(101	)		(99	)		(200	)
Total interest-earning assets		695			(2,015	)		(1,320	)
Interest-bearing deposits:
Savings accounts		(2	)		–			(2	)
Money market accounts		24			(294	)		(270	)
Interest-bearing demand accounts		3			(21	)		(18	)
Certificates of deposit		(513	)		(385	)		(898	)
Total interest-bearing deposits		(488	)		(700	)		(1,188	)
Borrowings		781			(1,025	)		(244	)
Advance payments by borrowers for taxes and insurance		–			(1	)		(1	)
Total interest-bearing liabilities		293			(1,726	)		(1,433	)
Net change in net interest income	$	402		$	(289	)	$	113

	Nine Months Ended September 30, 2012 Compared to September 30, 2011
	Increase (Decrease)
	Volume			Rate			Net
	(Dollars in thousands)
Interest-earning assets:
Loans receivable	$	(774	)	$	(2,971	)	$	(3,745	)
Mortgage-related securities		2,705			(1,608	)		1,097
Interest-earning deposits		8			(3	)		5
Investment securities		(921	)		(1,868	)		(2,789	)
Total interest-earning assets		1,018			(6,450	)		(5,432	)
Interest-bearing deposits:
Savings accounts		(4	)		(11	)		(15	)
Money market accounts		54			(935	)		(881	)
Interest-bearing demand accounts		5			(47	)		(42	)
Certificates of deposit		(682	)		(2,123	)		(2,805	)
Total interest-bearing deposits		(627	)		(3,116	)		(3,743	)
Borrowings		1,411			(1,035	)		376
Advance payments by borrowers for taxes and insurance		–			(1	)		(1	)
Total interest-bearing liabilities		784			(4,152	)		(3,368	)
Net change in net interest income	$	234		$	(2,298	)	$	(2,064	)

Provision for Loan Losses The Company’s provision for loan losses was $657,000 during the three months ended September 30, 2012, compared to $1.1 million in the same period last year. The provision for the nine months ended September 30, 2012, was $2.4 million compared to $5.1 million in the same period last year. During the third quarter of 2012 the Company 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, the Company recorded $1.8 million in loss provisions against two unrelated loan relationships that aggregated $6.1 million. During this quarter the Company 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 the Company 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 the Company 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 the Company 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.

The Company’s provision for loan losses has been trending lower in recent periods. This trend is directionally consistent with recent declines in the Company’s non-performing loans and classified loans, as described in “Financial Condition—Asset Quality,” below, and is consistent with general trends in the banking industry. It should be noted, however, that the Company’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 the Company’s provision for loan losses will not increase in future periods.

Non-Interest Income Total non-interest income increased by $1.4 million or 25.0% and $5.0 million or 31.3% during the three and nine months ended September 30, 2012, compared to the same periods in 2011, respectively. Significant reasons for this increase are discussed in the following paragraphs.

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 the Company’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 the Company’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 million during the three months ended September 30, 2012, a $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 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, the Company had a valuation allowance of $2.8 million against MSRs with a gross book value of $9.1 million. As of the same date the Company serviced $1.1 billion in loans for third-party investors compared to a similar amount one year ago.

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 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. Alternatively, 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 could recover all or a portion of previously established allowance on MSRs, as well as record reduced levels of MSR amortization expense.

Gains on sales of loans were $3.4 million during the three months ended September 30, 2012, compared to $2.3 million in the same quarter last year. During the nine months ended as of the same date gains on sales of loans were $9.9 million compared to $3.4 million during the same period in the prior year. The Company 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 the Company’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 attributed 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 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 the Company’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.

The Company recorded $543,000 in gains on sales of investments during the nine months ended September 30, 2012. During this period the Company 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, the Company recorded $1.1 million in net gains on sales of investments. In that period the Company 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, the Company recorded $336,000 and $389,000 in net OTTI losses, respectively. These losses consisted of the credit portion of the total OTTI loss related to the Company’s investment in certain private-label 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 the Company’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 the Company’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, the Company’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.

Non-Interest Expense Total non-interest expense was $18.8 million and $57.4 million during three and nine months ended September 30, 2012, respectively, and $17.9 million and $106.2 million during the same periods in 2011, respectively. The nine-month period in 2011 included a $52.6 million non-cash goodwill impairment that had no effect on the Company’s liquidity, operations, tangible capital, or regulatory capital. The Company determined that the value of its goodwill had become impaired in the second quarter of 2011 based on a number of factors including the decline in its stock price and market capitalization and the impact the MOU with the OTS had on the impairment valuation process (for additional discussion refer to “Note 14. Goodwill Impairment” in the Company’s Unaudited Condensed Consolidated Financial Statements). Total non-interest expense increased by $870,000 or 4.9% during the three months ended September 30, 2012, compared to the same period in 2011. Excluding the impact of the goodwill impairment, total non-interest expense increased by $3.9 million or 7.2% during the nine months ended September 30, 2012, compared to the same period in 2011. The following paragraphs discuss the components of the Company’s non-interest expense and the primary reasons for their changes during the three and nine months ended September 30, 2012, compared to the same periods in 2011.

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 9.8% 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 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 the Company’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. The Company’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 nine-month period of 2012 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 the Compnay has reduced its level of non-performing loans.

Income Tax Expense 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. The Company’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), the Company’s ETR for the nine-month periods in 2012 and 2011 was 32.3% and 25.9%, respectively. the Company’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.

Like many Wisconsin financial institutions, the Company has non-Wisconsin subsidiaries that hold and manage investment assets and loans, the income from which has not been 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 2010 the Department’s auditor issued a Notice of Proposed Audit Report to the Company which proposes to tax all of the income of its out-of-state investment subsidiaries for all periods that are still open under the statute of limitations, which includes tax years back to 1997. This is a preliminary determination made by the auditor and does not represent a formal assessment. The Company’s outside legal counsel has met with representatives of the Department to discuss, and object to, the auditor’s proposed adjustments. The Department has requested further information to support the Company’s position, which the Company has provided. The Company is awaiting a further response from the Department.

Management continues to believe that the Company 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 Company’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 Company’s earnings in the period such resolution is reached. The Company may also incur further costs in the future to address and defend these issues.

Financial Condition

OverviewThe Company’s total assets decreased by $13.4 million or 0.5% during the nine months ended September 30, 2012. During the period the Company’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 Company’s total shareholders’ equity increased from $265.8 million at December 31, 2011, to $272.1 million at September 30, 2012. Non-performing assets decreased from $99.9 million or 4.00% of total assets at December 31, 2011, to $47.5 million or 1.91% at September 30, 2012. The following paragraphs describe these changes in greater detail, as well as other changes in the Company’s financial condition during the nine months ended September 30, 2012.

Cash and Cash EquivalentsThe Company’s cash and cash equivalents decreased by $39.1 million or 32.3% during the nine months ended September 30, 2012. This decrease was due to the funding of increases in the Company’s loan portfolio, as well as decreases in its deposit liabilities, as previously described.

Mortgage-Related Securities Available-for-Sale The Company’s portfolio of securities available-for-sale decreased by$163.2 million or 20.9%during the nine months ended September 30, 2012. This decrease was principally caused by periodic repayments and security sales that exceeded the Company’s purchase of new securities during the period. Also contributing to the decrease was a $20.4 million sale of securities, as previously described. The Company purchased $51.4 million of CMOs issued by government-sponsored entities during the nine months ended September 30, 2012.

Changes in the fair value of the Company’s available-for-sale securities are recorded through accumulated other comprehensive loss (net of deferred income taxes), which is a component of shareholders’ equity. The fair value adjustment on the Company’s available-for-sale securities was a net unrealized gain of $11.3 million at September 30, 2012, compared to a net unrealized gain of $7.7 million at December 31, 2011.

The Company maintains an investment in private-label CMOs that were purchased from 2004 to 2006 and are secured by prime residential mortgage loans. The securities were all rated “triple-A” by various credit rating agencies at the time of their purchase. However, most of the securities in the portfolio have been downgraded since their purchase. 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, 2012					December 31, 2011
	Carrying Value		Unrealized Gain (Loss), Net			Carrying Value		Unrealized Gain (Loss), Net
	(Dollars in thousands)
Credit rating:
AAA/Aaa	$	3,969	$	177		$	5,386	$	210
AA/Aa		1,474		51			2,512		58
A		4,466		102			6,951		(271	)
BBB/Baa		10,319		228			10,428		(366	)
Less than investment grade		34,022		(284	)		36,751		(5,357	)
Total private-label CMOs	$	54,250	$	274		$	62,028	$	(5,726	)

During the second quarter of 2012 management determined that it is unlikely the Company will collect all amounts due according to the contractual terms on certain of its private-label CMOs rated less than investment grade. Accordingly, the Company recorded $336,000 in net OTTI losses on these securities in that quarter (for additional discussion refer to “Results of Operations—Non-Interest Income,” above). As of September 30, 2012, management has determined that none of the Company’s private-label CMOs had incurred additional OTTI losses as of that date. The Company does not intend to sell these securities and it is unlikely it would be required to sell them before the recovery of their amortized cost. 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.

Mortgage-Related Securities Held-to-MaturityDuring the nine months ended September 30, 2012, the Company purchased $158.9 million in held-to-maturity securities that consisted of mortgage-backed securities issued and guaranteed by Fannie Mae and backed by multi-family residential loans. The Company funded the purchase of these securities with $158.9 million in term advances from the FHLB of Chicago. The securities had a weighted-average life of 7.7 years, a yield of 2.31%, and yield-maintenance fees that discourage the underlying borrowers from prepaying the underlying loans. The term advances have a weighted-average life of 5.5 years and cost of 1.47%. The purpose of this transaction was to supplement growth in the Company’s earning assets. The Company classified these securities as held-to-maturity because it has the ability and intent to hold them until they mature.

Loans Held-for-Sale Loans held-for-sale were $26.9 million at September 30, 2012, compared to $19.2 million at December 31, 2011. The Company’s policy is to sell most of the fixed-rate, one- to four-family mortgage loans that it originates in the secondary market. During 2012 interest rates on residential mortgage loans have declined to historically low levels, which has resulted in increased borrower refinance activity and loans held-for-sale. As previously noted, management expects that originations and sales of such loans could be elevated in the near term as borrowers are incented to refinance higher, fixed-rate mortgage loans at lower rates.

Loans Receivable Loans receivable increased by $65.2 million or 4.9% during the nine months ended September 30, 2012. 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 the Company’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 the Company in 2011. In the past two years the Company 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 the Company 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.

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

	Three Months Ended				Nine Months Ended
	September 30				September 30
	2012		2011		2012		2011
	(Dollars in thousands)
Mortgage loans:
One- to four-family (1)	$	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 loans		31,911		10,361		59,131		23,608
Total mortgage loans		83,086		60,062		204,638		148,726
Consumer loans		30,422		25,565		87,578		62,072
Commercial business loans		23,484		35,626		75,080		64,635
Total loans originated for portfolio	$	136,992	$	121,253	$	367,296	$	275,433

(1)

Excludes $96.5 million and $84.8 million in loans originated for sale during the three months ended September 30, 2012 and 2011, respectively, and $352.6 million and $139.6 million during the nine months ended as of the same dates, respectively.

Foreclosed Properties and Repossessed AssetsThe following table summarizes the Company’s foreclosed properties and repossessed assets as of the dates indicated:

	September 30		December 31
	2012		2011
Commercial real estate	$	6,362	$	13,115
Land		4,007		1,162
One- to four-family		3,031		6,557
Multi-family		146		3,890
Consumer		12		–
Total foreclosed properties and repossessed assets	$	13,558	$	24,724

The decrease in the Company’s foreclosed properties and repossessed assets during the nine months ended September 30, 2012, was caused by the 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. Management expects foreclosed properties and repossessed assets to remain elevated in the near term as the Company continues to work out its non-performing loans.

Mortgage Servicing Rights The carrying value of the Company’s MSRs was $6.3 million at September 30, 2012, and $7.4 million at December 31, 2011, net of valuation allowances of $2.8 million and $868,000 as of such dates, respectively. As of both September 30, 2012, and December 31, 2011, the Company serviced $1.1 billion in loans for third-party investors.

Other Assets As a condition of membership in the FHLB of Chicago, the Company holds shares of the common stock of the FHLB of Chicago, which is included as a component of other assets. The Company’s investment in the common stock of the FHLB of Chicago declined from $46.1 million at December 31, 2011, to $19.1 million at September 30, 2012. The FHLB of Chicago redeemed $27.0 million of excess common stock held by the Company 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 the Company and the FHLB of Chicago. As of September 30, 2012, Company 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.

As of September 30, 2012, and December 31, 2011, the Company’s net deferred tax asset, which is included as component of other assets, was $33.6 million and $37.5 million, respectively. Management evaluates this asset on an on-going basis to determine if a valuation allowance is required. Management determined that no valuation allowance was required as of these dates. The evaluation of the net deferred tax asset requires significant management judgment based on positive and negative evidence. Such evidence includes the Company’s cumulative three-year net loss, the nature of the components of such cumulative loss, recent trends in earnings, expectations for the Company’s future earnings, the duration of federal and state net operating loss carryforward periods, and other factors. There can be no assurance that future events, such as adverse operating results, court decisions, regulatory actions or interpretations, changes in tax rates and laws, or changes in positions of federal and state taxing authorities will not differ from management’s current assessments. The impact of these matters could be significant to the consolidated financial condition, results of operations, and capital of the Company.

Deposit LiabilitiesDeposit 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 while certificates of deposits declined by $153.0 million or 14.7%. The Company 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 re cent periods in response to management’s efforts to focus retail 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.

BorrowingsBorrowings, which consist of advances from the FHLB of Chicago, increased by $58.0 million or 37.9% during the nine months ended September 30, 2012. As previously noted, during the period the Company borrowed $158.9 million in term advances from the FHLB of Chicago to fund the purchase of held-to-maturity securities. This development was partially offset by the repayment of $100.0 million in borrowings from the FHLB of Chicago that had a rate of 4.52% and that matured during the third quarter.

The following table presents the Company’s FHLB of Chicago advances by contractual maturities as September 30, 2012.

	Amount		Rate
	(Dollars in thousands)
FHLB advances maturing in:
2013	$	221		4.17	%
2014		–		–
2015		23,450		0.80
2016		23,450		1.04
2017 and thereafter		163,981		2.74
Total FHLB advances	$	211,102		2.34	%

The Company’s advances from the FHLB of Chicago are subject to significant prepayment penalties if repaid by the Company prior to their stated maturity. Management believes that additional funds are available to be borrowed from the FHLB of Chicago or other sources in the future to fund maturing advances, loan originations, security purchases, and other corporate purposes, if needed or desirable. However, there can be no assurances of the future availability of borrowings or any particular level of future borrowings.

Advance Payments by Borrowers for Taxes and InsuranceAdvance payments by borrowers for taxes and insurance (i.e., escrow deposits) were $32.6 million at September 30, 2012, compared to $3.2 million at December 31, 2011. 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' Equity The Company’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 Company’s dividend payments during the three and nine months ended September 30, 2012, were 23.6% and 31.2% of net income, respectively. The book value of the Company’s common stock was $5.87 per share at September 30, 2012, compared to $5.75 per share at December 31, 2011.

On November 5, 2012, the Company’s board of directors announced that it had declared a $0.02 per share dividend payable on November 30, 2012, to shareholders of record on November 16, 2012. During the nine months ended September 30, 2012, the Company did not repurchase any shares of its common stock. For additional discussion relating to the Company’s ability to pay dividends or repurchase shares of its common stock, refer to “Liquidity and Capital Resources—Capital Resources,” below.

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

	At September 30			At December 31
	2012			2011
	(Dollars in thousands)
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		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 (1)		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	%
Interest income that would have been recognized if non-accrual loans had been current (2)	$	2,065		$	4,535
Interest income on non-accrual loans included in interest income (2)	$	911		$	1,850

(1)

Consists of student loans that are guaranteed under programs sponsored by the U.S. government.

(2)

Amounts shown are for the nine months ended September 30, 2012, and the twelve months ended December 31, 2011, respectively.

The Company’s non-performing loans were $33.9 million or 2.45% of loans receivable as of September 30, 2012, compared to $75.1 million or 5.69% of loans receivable as of December 31, 2011. Non-performing assets, which includes non-performing loans, were $47.5 million or 1.91% of total assets and $99.9 million or 4.00% of total assets as of these same dates, respectively. The decline in non-performing loans during the nine months ended September 30, 2012, was due principally to a $34.4 million or 61.1% aggregate decrease in non-performing commercial real estate, multi-family, and construction loans. This decrease was primarily attributable to six loans that aggregated $20.5 million that were paid off, four loans that aggregated $4.0 million that were transferred to foreclosed real estate, and one loan for $2.5 million that was returned to performing status due to the improved condition of the borrower. All of these loans were secured by commercial and multi-family real estate. In addition, non-performing one- to four-family loans declined by $5.9 million or 39.7% and non-performing commercial business loans declined by $962,000 or 58.6% during the nine months ended September 30, 2012. In addition, foreclosed properties and repossessed assets, which is a component of non-performing assets, declined by $11.2 million or 45.2% during the nine months ended September 30, 2012, for reasons previously described.

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, as well as an increasingly strict regulatory environment. In most cases, interest income is no longer being accrued on these loans and periodic payments are being applied against the recorded investment in the loan.

Non-performing assets are classified as “substandard” in accordance with the Company’s internal risk rating policy. In addition to non-performing assets, at September 30, 2012, management was closely monitoring $31.8 million in additional loans that were adversely classified as “substandard” and $36.9 million in additional loans that were classified as “special mention” in accordance with the Company’s internal risk rating policy. These amounts compared to $28.5 million and $51.6 million, respectively, as of December 31, 2011. These additional loans are primarily secured by commercial real estate, multi-family real estate, land, and certain commercial business assets. Although these additional loans were performing in accordance with their contractual terms and are not included in non-performing assets, management deemed their classification as “substandard” or “special mention” to be prudent in light of deterioration in the financial strength of the borrowers and/or the performance of the collateral, including an assessment of occupancy rates, lease rates, unit sales, and/or estimated changes in the value of the collateral. Further deterioration in the borrowers or related collateral could result in these additional loans becoming non-performing assets in future periods.

The Company’s classified loans and non-performing assets have trended lower in recent periods. However, this trend is subject to many factors that are outside of Company’s control, such as economic and market conditions. As such, there can be no assurances that Company’s classified loans and non-performing loans and assets will continue to trend lower in future periods or that its provision for loan losses will not increase.

In the third quarter of 2012 the OCC issued accounting and reporting guidance related to instances in which borrowers on one- to four-family mortgage loans have had non-mortgage debt discharged in bankruptcy and have not reaffirmed obligations related to their mortgage debt. The Company does not have a material exposure to one- to four-family mortgage loans that meet the criteria specified in the OCC guidance. Management continues to study the guidance, but does not believe this matter will have a material impact on the Company’s financial condition or results of operation.

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

	Nine Months Ended September 30
	2012			2011
	(Dollars in thousands)
Balance at the beginning of the period	$	27,928		$	47,985
Provision for loan losses:
One- to four-family		2,408			1,446
Multi-family		(2,268	)		617
Commercial real estate		1,198			577
Construction and development		597			897
Consumer loans		682			450
Commercial business loans		(179	)		1,092
Total 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		(2,545	)		(2,607	)
Consumer loans		(555	)		(724	)
Commercial business loans		(48	)		(551	)
Total charge-offs		(10,446	)		(18,154	)
Recoveries:
One- to four-family		3			49
Multi-family		568			19
Commercial real estate		428			4
Construction and development		–			550
Consumer loans		34			17
Commercial business loans		26			18
Total recoveries		1,059			657
Net charge-offs		(9,387	)		(17,497	)
Balance at the end of the period	$	20,979		$	35,566

	September 30			December 31
	2012			2011
Allowance as a percent of total loans		1.51	%		2.12	%
Allowance as a percent of non-performing loans		61.80	%		37.17	%
Net charge-offs to average loans (1)		0.90	%		1.96	%

(1)

The rate for the nine months ended September 30, 2012, is annualized.

The Company’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, the Company’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, the Company 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.

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

Liquidity The 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 sources of funds are deposit liabilities, scheduled payments, prepayments, and maturities of loans and securities, 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.

Scheduled payments and maturities of loans and securities available-for-sale are relatively predictable sources of funds. However, cash flows from customer deposits, 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. These factors increase the variability of cash flows from 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, 2012, the Bank exceeded each of the applicable regulatory capital requirements to which it is subject (refer to “Note 8. Shareholders’ Equity” in the Company’s Unaudited Condensed Consolidated Financial Statements). 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, 2012, the Bank had a Tier 1 capital ratio of 9.93% and a total risk-based capital ratio of 17.91%.

In 2011 the Company and the Bank agreed to address certain items identified by the OTS (their former regulator) by each entering into a separate MOU with the OTS. An MOU is an agreement between the regulator and a financial institution which requires the institution to exercise reasonable good faith efforts to comply with the requirements of the MOU, but the institution is not subject to direct judicial enforcement under the MOU as it would be under other forms of supervisory actions such as those required in formal consent orders or cease and desist orders. As a result of the elimination of the OTS under the Dodd-Frank Act, the FRB and OCC have succeeded the OTS as the administrators of the Company’s and Bank’s MOUs, respectively. Most of the requirements specified in the MOUs relate to administrative and reporting obligations, such as the development of business and capital plans and written workout plans for certain loans, the preparation of additional information for the board, and an outside review of various policies and procedures with a view to augmenting them. Although the Company has incurred some third party consulting expenses, and has hired additional personnel, management does not believe that compliance with these MOU requirements has had or will have a material adverse impact on the Company’s or Bank’s financial condition or results of operations. Management also believes that the Company and the Bank have substantially complied with the specific requirements of the MOU and remain in compliance. However, as a continuing obligation, under their respective MOUs the Company and the Bank are also required to obtain the prior written non-objection of the FRB and, in the Bank’s case, approval of the OCC, prior to declaring or paying cash dividends and, in the case of the Company, prior to repurchasing common shares, or incurring, issuing, increasing, modifying or redeeming any debt or lines of credit. As such, the Company cannot provide any assurances that it will continue to pay dividends to shareholders, that dividend payments to shareholders will not be reduced, or that shares will be repurchased in the future.

In June 2012 the OCC issued proposed rules that would implement certain revisions to regulatory capital requirements as specified by the Basel Committee on Banking Supervision (known as “Basel III”). The proposed rules, if adopted as proposed, are expected to have a significant impact on the minimum regulatory capital requirements of regulated financial institutions such as the Company and the Bank. Management’s analysis of the impact Basel III will have on the regulatory capital of the Company and the Bank is ongoing. However, management’s preliminary assessment is that the proposed rules will not have a significant adverse impact on the regulatory capital, financial condition, liquidity, or operations of the Company and the Bank.

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

Contractual ObligationsThe following table presents, as of September 30, 2012, 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	$	1,030,377		–		–		–	$	1,030,377
Certificates of deposits		671,977	$	201,549	$	16,453		–		889,979
Borrowed funds		221		23,450		61,279	$	126,152		211,102
Operating leases		982		1,768		1,236		2,757		6,743
Purchase obligations		1,680		3,360		3,360		3,360		11,760
Non-qualified retirement plans and deferred compensation plans		1,080		2,120		2,140		6,418		11,757

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” in the Company’s Unaudited Condensed Consolidated Financial Statements.

Commitments to Extend Credit The following table details the amounts and expected maturities of approved commitments as of September 30, 2012.

Payments Due In

One to

Three to

Over

One Year

Three

Five

Or Less

Years

Total

(Dollars in thousands)

One- to four-family mortgage loans

12,072

–

12,072

Multi-family mortgage loans

25,828

–

25,828

Commercial real estate loans

26,795

–

26,795

Commercial business loans

64,748

1,269

–

172

66,189

Home equity and credit card lines of credit

152,263

–

152,263

Approved commitments to extend credit do not necessarily represent future cash requirements, since these commitments often expire without being drawn upon.

Off-Balance Sheet Arrangements At September 30, 2012, the Company had forward commitments to sell one- to four-family mortgage loans of $74.0 million to Fannie Mae. As described in “Note 12. Financial Instruments with Off-Balance Sheet Risk” of 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, 2012.

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 specific 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 table on the next page presents the amounts of the Company’s interest-earning assets and interest-bearing liabilities outstanding at September 30, 2012, which management anticipates to reprice or mature in each of the future time periods shown. The information presented in the following table is based on the following assumptions:

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

Loans—based upon contractual maturities, repricing date, 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 substantially from these assumptions.

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

Borrowings—based upon final maturity.

	At September 30, 2012
	Within Three Months			Three to Twelve Months			More Than One Year To Three Years			More Than Three Years To Five Years			Over Five Years			Total
	(Dollars in thousands)
Interest-earning assets:
Loans receivable:
Mortgage loans:
Fixed	$	80,122		$	58,249		$	160,131		$	132,859		$	111,471		$	542,832
Adjustable		91,266			226,448			93,877			55,449			8,726			475,766
Consumer loans		99,165			46,068			47,356			26,290			24,429			243,308
Commercial business loans		74,424			22,577			26,365			20,906			415			144,687
Interest-earning deposits		45,743			–			–			–			–			45,743
Mortgage-related securities:
Fixed		56,267			154,679			238,482			81,583			177,446			708,457
Adjustable		56,894			–			–			–			–			56,894
Other interest-earning assets		19,071			–			–			–			–			19,071
Total interest-earning assets		522,952			508,021			566,211			317,087			322,487			2,236,758

Non-interest-bearing and interest-bearing liabilities:
Non-interest-bearing demand accounts		834			2,471			6,376			6,077			123,458			139,216
Interest-bearing liabilities:
Deposit liabilities:
Interest-bearing demand accounts		1,321			3,917			10,107			9,633			195,702			220,680
Savings accounts		1,460			4,319			11,087			10,488			192,170			219,524
Money market accounts		450,957			–			–			–			–			450,957
Certificates of deposit		330,046			435,781			107,699			16,453			–			889,979
Advance payments by borrowers for taxes and insurance		32,596			–			–			–			–			32,596
Borrowings		317			1,176			26,194			64,153			119,263			211,102
Total interest-bearing and non-interest-bearing liabilities		817,531			447,664			161,463			106,804			630,593			2,164,055
Interest rate sensitivity gap	$	(294,579	)	$	60,357		$	404,748		$	210,283		$	(308,106	)	$	72,703
Cumulative interest rate sensitivity gap	$	(294,579	)	$	(234,222	)	$	170,526		$	380,809		$	72,703
Cumulative interest rate sensitivity gap as a percentage of total assets		-11.85	%		-9.43	%		6.86	%		15.32	%		2.93	%
Cumulative interest-earning assets as a percentage of interest bearing liabilities		63.97	%		81.49	%		111.95	%		124.83	%		103.36	%

Based on the above gap analysis, at September 30, 2012, the Company’s interest-bearing liabilities maturing or repricing within one year exceeded its interest-earning assets maturing or repricing within the same period. Based on this information, over the course of the next year the Company’s net interest income could be adversely impacted by an increase in market interest rates. Alternatively, the Company’s net interest income could be favorably impacted 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 2011 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 mature or reprice in similar periods, the interest rates on such react by different degrees to changes in market interest rates, especially in instances where changes in rates are limited by contractual caps or floors or instances where rates are influenced by competitive forces. 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. For example, it is the Company’s past experience that rate changes on most of its deposit liabilities generally lag changes in market interest 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. Because of these shortcomings, management of the Company believes that gap analysis is a better indicator of the relative change in the Company’s interest rate risk exposure from period to period than it is an indicator of the direction of future change in net interest income.

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, 2012. 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	$	203,562	$	(135,827	)		(40.0	)%		8.87	%		(34.1	)%
+300		235,740		(103,649	)		(30.5	)%		10.03	%		(25.5	)%
+200		273,597		(65,792	)		(19.4	)%		11.36	%		(15.6	)%
+100		308,316		(31,073	)		(9.2	)%		12.50	%		(7.1	)%
0		339,389		–			–			13.46	%		–
-100		332,245		(7,144	)		(2.1	)%		12.94	%		(3.8	)%

Based on the above analysis, the Company’s PVE could be adversely affected by an increase in interest rates. The decline in the PVE as a result of an increase in rates is attributable to the combined effects of a decline in the present value of the Company’s earning assets (which is further impacted by an extension in duration in rising rate environments due to slower prepayments on loan and mortgage-related securities and reduced likelihood of calls on certain investment securities), partially offset by a decline in the present value of deposit liabilities and FHLB of Chicago advances. Also based on the above analysis, the Company’s PVE could be adversely impacted by a decrease in interest rates. However, 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 2011 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 immediate, sustained, and 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, it is the Company’s past experience that rate changes on most of its deposit liabilities generally lag changes in market interest rates. In addition, management makes assumptions regarding the rate of prepayment speeds of mortgage loans and securities. 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 most deposit liabilities lag behind market changes and/or may be limited by competition. 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, as well as changes in interest risk exposure relative to previous periods, 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 terms are 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.

PART II

Item 1A. Risk Factors

Refer to “Risk Factors” in Part I, Item 1A, of the Company’s 2011 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 6. Exhibits

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

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 6, 2012	/s/ Michael T. Crowley, Jr.
		Michael T. Crowley, Jr.
		Chairman and Chief Executive Officer


Date:	November 6, 2012	/s/ Michael W. Dosland
		Michael W. Dosland
		Senior Vice President and
		Chief Financial Officer

EXHIBIT INDEX

BANK MUTUAL CORPORATION

Form 10-Q for Quarter Ended September 30, 2012

Exhibit No.	Description	Incorporated Herein 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

101 *	The following materials are furnished from Bank Mutual Corporation’s Quarterly Report on Form 10-Q for the period ended September 30, 2012, formatted in Extensible Business Reporting Language (“XBRL”): (i) the Unaudited Condensed Consolidated Statements of Financial Condition, (ii) Unaudited Condensed Consolidated Statements of Income, (iii) Unaudited Condensed Consolidated Statements of Equity, (iv) Unaudited Condensed Consolidated Statements of Cash Flow, and (v) Notes to Unaudited Condensed Consolidated Financial Statements tagged as blocks of text.

101.INS *	XBRL Instance Document		X

101.SCH *	XBRL Taxonomy Extension Schema Document		X

101.CAL *	XBRL Taxonomy Extension Calculation Linkbase Document		X

Exhibit No.	Description	Incorporated Herein by Reference To	Filed Herewith

101.LAB *	XBRL Extension Labels Linkbase Document		X

101.PRE *	XBRL Taxonomy Extension Presentation Linkbase Document		X

101.DEF *	XBRL Taxonomy Extension Definition Linkbase Document		X

*In accordance with SEC rules, this interactive data file is deemed “furnished” and not “filed” for purposes of Sections 11 or 12 of the Securities Act of 1933 and Section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under those sections or acts.

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Bank Mutual (BKMU) Inactive 10-Q2012 Q3 Quarterly report

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