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BKMU > SEC Filings for BKMU > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for BANK MUTUAL CORP

Form 10-Q for BANK MUTUAL CORP


6-Nov-2012

Quarterly Report


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
interest rate 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
interest rate 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 LossesThe 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             Nine Months Ended
                                               September 30                   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.

. . .

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