##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 F O R M  1 0 - K ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 December 31, 2004
 Commission file number: 000-31207 BANK MUTUAL CORPORATION  Wisconsin
    
    39-2004336(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)4949 West Brown Deer Road, Milwaukee, WI
    
    53223(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code:(414) 354-1500 Securities registered pursuant to Section 12(b) of the Act: NONE  Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 Par Value 
  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 (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ   No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2
under the Exchange Act). Yes
þ   No o As of February 28, 2005, 68,964,713 shares of Common Stock were validly issued and outstanding. The
aggregate market value of the Common Stock (based upon the $10.90 last sale price quotation on The
Nasdaq Stock Market® on June 30, 2004, the end of our second fiscal quarter) held by non-affiliates
(excluding shares reported as beneficially owned by directors and executive officers and
unallocated shares of the Employee Stock Ownership Plan; does not constitute an admission as to
affiliate status) was approximately $694.0 million. DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K Into WhichDocument
    
    Portions of Document are IncorporatedProxy Statement for Annual Meeting ofShareholders on May 2, 2005
    
    Part III




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BANK MUTUAL CORPORATION FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 2004 TABLE OF CONTENTS 
 ITEM
    
    
    
    PAGEPART I1.
    
    Business
    
    3  322.
    
    Properties
    
    33 - 353.
    
    Legal Proceedings
    
    364.
    
    Submission of Matters to a Vote of Security Holders
    
    36Executive Officers of the Registrant
    
    36PART II5.
    
    Market for
Registrants Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities
    
    37 - 386.
    
    Selected Financial Data
    
    39 - 417.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    42  617A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    62  658.
    
    Financial Statements and Supplementary Data
    
    66  1009.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    1019A.
    
    Controls and Procedures(including Managements and Independent Auditors Report on Effectiveness of Internal Control Over      Financial Reporting)
    
    101  1029B.
    
    Other Information
    
    103PART III10.
    
    Directors and Executive Officers of the Registrant
    
    10411.
    
    Executive Compensation
    
    10412.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    10413.
    
    Certain Relationships and Related Transactions
    
    10414.
    
    Principal Accountant Fees and Services
    
    104PART IV15.
    
    Exhibits and Financial Statement Schedules
    
    105Signatures
    
    106List of SubsidiariesConsent of Independent Registered Public AccountantsCertificationCertificationCertificationCertification
    2




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Part 1 
 Item 1. Business General From November 1, 2000 until October 29, 2003, Bank Mutual Corporation was an OTS chartered United
States corporation which became the mid-tier holding company in the regulatory restructuring of
Mutual Savings Bank, into mutual holding company form. Until October 29, 2003, Bank Mutual
Bancorp, MHC (the MHC), a U.S.-chartered mutual holding company of which Mutual Savings Banks
depositors held all of the voting and membership rights, owned a majority of Bank Mutual
Corporations outstanding common stock. On November 1, 2000, Bank Mutual Corporation acquired First Northern Capital Corp., the parent of
First Northern Savings Bank. On March 16, 2003, Mutual Savings Bank and First Northern Savings
Bank combined to form a single OTS chartered savings bank subsidiary of Bank Mutual Corporation
named Bank Mutual (Bank Mutual or the Bank). On October 29, 2003, Bank Mutual Corporation completed a conversion and reorganization from a
mutual holding company form, established a new Wisconsin chartered Bank Mutual Corporation and, in
effect, sold the MHCs interest in Bank Mutual Corporation to the public. Existing Bank Mutual
Corporation shareholders exchanged each existing share for 3.6686 shares of the new Bank Mutual
Corporation (the Company). The total number of shares issued or exchanged in the offering was
78,707,669 shares. All share and per share numbers in this report on form 10-K have been adjusted to reflect the full
conversion transaction and related share exchange. As used herein, the Company and Bank Mutual
Corporation refer to Bank Mutual Corporation both before and after the full conversion
transaction, unless the context requires otherwise. The Bank is a community oriented financial institution, which emphasizes traditional financial
services to individuals and businesses within our market areas. Our principal business is
originating mortgage loans, consumer loans, commercial real estate loans, and commercial business
loans and attracting retail deposits from the general public. We also invest in various
mortgage-related securities and investment securities. The principal lending is on one-to
four-family, owner-occupied homes, home equity loans and lines of credit, automobile loans,
multi-family and commercial real estate loans, and commercial business loans. The Banks revenues are derived principally from interest on our loans and mortgage-related
securities, interest and dividends on our investment securities, and noninterest income (including
loan servicing fees, deposit servicing fees, gains on sales of loans and commissions on insurance,
security and annuity sales). Our primary sources of funds are deposits, borrowings, scheduled
amortization and prepayments of loan principal and mortgage-related securities, and maturities of
investment securities and funds provided by operations. The Company maintains a website at bankmutualcorp.com. We make available through that website,
free of charge, copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and amendments to those reports, as soon as reasonably practical after the Company
electronically files those materials with, or furnishes them to, the Securities and Exchange
Commission. You may access those reports by following the links under Financial Reports at the
Companys website. Cautionary Factors This Form 10-K contains or incorporates by reference various forward-looking statements concerning
the Banks prospects that are based on the current expectations and beliefs of management.
Forward-looking statements may also be made by the Company from time to time in other reports and
documents as well as oral presentations. When used in written documents or oral statements, the
words anticipate, believe, estimate, expect, objective and similar expressions and verbs
in the future tense, are intended to identify forward-looking statements. The statements contained
herein and such future statements involve or may involve certain assumptions, risks and 3




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uncertainties, many of which are beyond the Companys control, that could cause the Banks actual
results and performance to differ materially from what is expected. In addition to the assumptions
and other factors referenced specifically in connection with such statements, the following factors
could impact the business and financial prospects of the Company: general economic conditions;
legislative and regulatory initiatives; increased competition and other effects of the deregulation
and consolidation of the financial services industry; monetary and fiscal policies of the federal
government; deposit flows; disintermediation; the cost of funds; general market rates of interest;
interest rates or investment returns on competing investments; demand for loan products; demand for
financial services; changes in accounting policies or guidelines; general economic developments;
acts of terrorism and developments in the war on terrorism; and changes in the quality or
composition of loan and investment portfolios. See also the factors regarding future operations
discussed in Managements Discussion and Analysis of Financial Condition and Results of
Operations below, particularly those under the caption Risk Factors. Market Area At February 25, 2005, the Bank has 70 banking offices located in 28 counties in Wisconsin, in
addition to a Minnesota bank office. At June 30, 2004, The Bank had approximately a 2.32% share of
all Wisconsin bank, savings bank, and savings association deposits. Counties in which the Bank
operates include 67% of the population of the state. The Bank is the fourth largest financial
institution holding company headquartered in the state of Wisconsin, based on asset size. The largest concentration of our offices is in the Milwaukee metropolitan area, which includes
Milwaukee, Waukesha, Racine, Ozaukee, and Washington counties. There are 19 offices in this area,
and we are opening a 20th office in spring 2005. The Milwaukee metro area is the
largest population and commercial base in Wisconsin, representing approximately 28% of Wisconsins
population. The Milwaukee area has traditionally had an extensive manufacturing economic base,
which is diversifying into service and technology based businesses. We have four offices in the Madison area. Madison is the state capital of Wisconsin and is the
second largest metropolitan area in Wisconsin representing approximately 8% of the states
population. Our eight other south central and southeastern Wisconsin offices are located in
smaller cities that have economic concentrations ranging from manufacturing to agriculture. We operate 21 banking offices in nine northeastern counties that make up approximately 16% of the
states population including the city of Green Bay. The greater Green Bay area has an economic
base of paper and other manufacturing, health care, insurance and gaming, and is diversifying into
technology based businesses. Two of our offices in this region are near the Michigan border; we
are also developing customers in northern Michigan. We also have 19 offices in the northwestern part of the state. This part of the state has medium
sized to smaller cities and towns. Industry includes medium sized and small business, with a
significant agricultural component. The counties in which the northwest region offices are located
hold 8% of the states population. Our Minnesota office is located near the Wisconsin state border
on the eastern edge of the Minneapolis-St. Paul metropolitan area. Competition We face significant competition in making loans and attracting deposits. Wisconsin has many banks,
savings banks, and savings and loan associations, which offer the same types of banking products as
the Company. Wisconsin also has an extensive tax-exempt credit union industry, whose expanded
powers have resulted in increased competition to financial institutions. Many of our competitors have greater resources than we do. Similarly, many competitors offer
services that we do not provide. For example, the Bank does not provide trust or money management
services. However, the Banks subsidiary, Lake Financial and Insurance Services, Inc. offers
mutual funds and engages in the sale of tax deferred annuities, credit life and disability
insurance, and property and casualty insurance and brokerage services. In addition, the banking
business in the Milwaukee area, our largest market, tends to be dominated by the two largest
commercial banks in the state, which together held 51.44% of the Milwaukee areas deposits at June
30, 2004. 4




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Most of our competition for loans traditionally has come from commercial banks, savings banks,
savings and loan associations and credit unions. Increasingly, other types of companies, such as
mortgage banking firms, finance companies, insurance companies, and other providers of financial
services also compete for these products. For deposits, we also compete with traditional financial
institutions. However, competition for deposits now also includes mutual funds, particularly
short-term money market funds, and brokerage firms and insurance companies. The recent increase in
electronic commerce also increases competition from institutions and other entities outside of
Wisconsin. Lending Activities Loan Portfolio Composition.The Companys loan portfolio primarily consists of mortgage loans.
To a lesser degree, the loan portfolio includes consumer loans, including home equity lines of
credit and fixed and adjustable rate home equity loans, automobile loans, as well as commercial
business loans. At December 31, 2004, our total loans receivable was $1.9 billion, of which $1.4 billion, or 71.9%,
consisted of one to four family ($903.5 million or 46.3%) and other mortgage loans ($498.7 million
or 25.6%). The remainder of our loans at December 31, 2004, amounting to $547.4 million, or 28.1%
of total loans, consisted of consumer loans ($477.3 million or 24.5%) and commercial business loans
($70.2 million or 3.6%). We originate adjustable rate mortgage (ARM) loans primarily for our own portfolio. We also
originate fixed rate mortgage loans with terms of 10 to 30 years. Most of the 20 year and longer
fixed rate mortgage loans are immediately sold into the secondary market. At times, we may also
sell 15 year fixed rate mortgage loans depending on the percentage of fixed interest rate loans in
our portfolio and our tolerance for fixed interest rates in view of the interest rate environment
we are anticipating. We sold approximately $5.8 million of our 15 year fixed rate mortgage loan
originations in 2004. The loans that we originate and purchase are subject to federal and state laws and regulations. The
interest rates we charge on loans are affected principally by the demand for loans, the cost and
supply of money available for lending purposes and the interest rates offered by our competitors.
These factors are in turn affected by, among other things, economic conditions, monetary policies
of the federal government, including the Federal Reserve Board, legislative tax policies and
governmental budgetary matters. 5




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The following table presents the composition of our loan portfolio in dollar amounts and in
percentages of the total portfolio at the dates indicated. At December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    PercentOf
    
    
    
    
    
    
    Of
    
    
    
    
    
    
    Of
    
    
    
    
    
    
    Of
    
    
    
    
    
    
    OfAmount
    
    
    Total
    
    
    Amount
    
    
    Total
    
    
    Amount
    
    
    Total
    
    
    Amount
    
    
    Total
    
    
    Amount
    
    
    Total(Dollars in thousands)Mortgage loans:One- to four-family
    
    $
    903,498
    
    
    
    46.34
    %
    
    $
    793,247
    
    
    
    44.69
    %
    
    $
    827,648
    
    
    
    47.37
    %
    
    $
    992,126
    
    
    
    52.46
    %
    
    $
    1,207,912
    
    
    
    59.56
    %Multi-family
    
    
    161,641
    
    
    
    8.29
    
    
    
    124,494
    
    
    
    7.01
    
    
    
    112,189
    
    
    
    6.42
    
    
    
    131,925
    
    
    
    6.97
    
    
    
    105,925
    
    
    
    5.22Commercial real estate
    
    
    195,708
    
    
    
    10.04
    
    
    
    209,293
    
    
    
    11.79
    
    
    
    186,960
    
    
    
    10.70
    
    
    
    165,556
    
    
    
    8.75
    
    
    
    118,636
    
    
    
    5.85Construction and development
    
    
    141,394
    
    
    
    7.25
    
    
    
    122,436
    
    
    
    6.90
    
    
    
    127,174
    
    
    
    7.28
    
    
    
    125,611
    
    
    
    6.64

    
    
    
    94,235
    
    
    
    4.65Total mortgage loans
    
    
    1,402,241
    
    
    
    71.92
    
    
    
    1,249,470
    
    
    
    70.39
    
    
    
    1,253,971
    
    
    
    71.77
    
    
    
    1,415,218
    
    
    
    74.82
    
    
    
    1,526,708
    
    
    
    75.28Consumer loans:Fixed-term equity
    
    
    266,635
    
    
    
    13.67
    
    
    
    252,550
    
    
    
    14.22
    
    
    
    234,049
    
    
    
    13.40
    
    
    
    200,500
    
    
    
    10.61
    
    
    
    193,394
    
    
    
    9.54Home equity lines of credit
    
    
    88,444
    
    
    
    4.54
    
    
    
    78,567
    
    
    
    4.43
    
    
    
    77,697
    
    
    
    4.45
    
    
    
    76,472
    
    
    
    4.04
    
    
    
    80,447
    
    
    
    3.97Student
    
    
    20,519
    
    
    
    1.05
    
    
    
    20,546
    
    
    
    1.16
    
    
    
    22,636
    
    
    
    1.30
    
    
    
    25,410
    
    
    
    1.34
    
    
    
    27,076
    
    
    
    1.34Home improvement
    
    
    24,293
    
    
    
    1.25
    
    
    
    12,605
    
    
    
    0.71
    
    
    
    6,993
    
    
    
    0.40
    
    
    
    9,439
    
    
    
    0.50
    
    
    
    12,778
    
    
    
    0.63Automobile
    
    
    61,469
    
    
    
    3.15
    
    
    
    67,630
    
    
    
    3.81
    
    
    
    68,140
    
    
    
    3.90
    
    
    
    77,621
    
    
    
    4.10
    
    
    
    99,844
    
    
    
    4.92Other
    
    
    15,911
    
    
    
    0.82
    
    
    
    18,623
    
    
    
    1.05
    
    
    
    22,434
    
    
    
    1.28
    
    
    
    25,886
    
    
    
    1.37
    
    
    
    27,827
    
    
    
    1.37Total consumer loans
    
    
    477,271
    
    
    
    24.48
    
    
    
    450,521
    
    
    
    25.38
    
    
    
    431,949
    
    
    
    24.73
    
    
    
    415,328
    
    
    
    21.96
    
    
    
    441,366
    
    
    
    21.77Commercial business loans
    
    
    70,170
    
    
    
    3.60
    
    
    
    75,022
    
    
    
    4.23
    
    
    
    61,060
    
    
    
    3.50
    
    
    
    60,932
    
    
    
    3.22
    
    
    
    59,844
    
    
    
    2.95Total loans receivable
    
    
    1,949,682
    
    
    
    100.00
    %
    
    
    1,775,013
    
    
    
    100.00
    %
    
    
    1,746,980
    
    
    
    100.00
    %
    
    
    1,891,748
    
    
    
    100.00
    %
    
    
    2,027,918
    
    
    
    100.00
    %Less:Undisbursed loan proceeds
    
    
    60,653
    
    
    
    
    
    
    
    47,743
    
    
    
    
    
    
    
    46,048
    
    
    
    
    
    
    
    44,467
    
    
    
    
    
    
    
    37,490Allowance for loan losses
    
    
    13,923
    
    
    
    
    
    
    
    13,771
    
    
    
    
    
    
    
    12,743
    
    
    
    
    
    
    
    12,245
    
    
    
    
    
    
    
    12,238Deferred fees and discounts
    
    
    (779
    )
    
    
    
    
    
    
    1,221
    
    
    
    
    
    
    
    2,527
    
    
    
    
    
    
    
    3,611
    
    
    
    
    
    
    
    5,554Total loans receivable, net
    
    $
    1,875,885
    
    
    
    
    
    
    $
    1,712,278
    
    
    
    
    
    
    $
    1,685,662
    
    
    
    
    
    
    $
    1,831,155
    
    
    
    
    
    
    $
    1,972,636
 At December 31, 2004, our one- to four-family first mortgage loans were pledged as
collateral under a blanket pledge to the Federal Home Loan Bank (FHLB) of Chicago. As
of December 31, 2004, there were no other significant concentrations of loans such as
loans to a number of borrowers engaged in similar activities. The Companys mortgage
loans, fixed equity, home equity lines of credit and home improvement loans are
primarily secured by properties housing one- to four-families which are generally
located in our local lending areas in Wisconsin. 6




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Loan Maturity.The following table presents the contractual maturity of our loans at December
31, 2004. The table does not include the effect of prepayments or scheduled principal amortization. At December 31, 2004CommercialMortgage Loans
    
    
    Consumer Loans
    
    
    Business Loans
    
    
    Total(In thousands)Amounts Due:Within one year
    
    $
    54,988
    
    
    $
    38,341
    
    
    $
    26,653
    
    
    $
    119,982After one yearOne to two years
    
    
    79,333
    
    
    
    29,305
    
    
    
    16,560
    
    
    
    125,198Two to three years
    
    
    37,258
    
    
    
    34,138
    
    
    
    11,570
    
    
    
    82,966Three to five years
    
    
    52,058
    
    
    
    46,862
    
    
    
    9,420
    
    
    
    108,340Five to ten years
    
    
    129,476
    
    
    
    256,015
    
    
    
    4,995
    
    
    
    390,486Ten to twenty years
    
    
    492,343
    
    
    
    72,101
    
    
    
    972
    
    
    
    565,416Over twenty years
    
    
    556,785
    
    
    
    509
    
    
    
    
    
    
    
    557,294Total due after one year
    
    
    1,347,253
    
    
    
    438,930
    
    
    
    43,517
    
    
    
    1,829,700Total loans receivable
    
    $
    1,402,241
    
    
    $
    477,271
    
    
    $
    70,170
    
    
    
    1,949,682Less:Undisbursed loan proceeds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,653Allowance for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,923Deferred loan fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (779
    )Net loans receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,875,885
 The following table presents, as of December 31, 2004, the dollar amount of all loans due after
December 31, 2005, and whether these loans have fixed interest rates or adjustable interest rates. Due after December 31, 2005Fixed
    
    
    Adjustable
    
    
    Total(In thousands)Mortgage loans
    
    $
    513,564
    
    
    $
    833,689
    
    
    $
    1,347,253Consumer loans
    
    
    299,857
    
    
    
    139,073
    
    
    
    438,930Commercial business loans
    
    
    34,057
    
    
    
    9,460
    
    
    
    43,517Total loans due after one year
    
    $
    847,478
    
    
    $
    982,222
    
    
    $
    1,829,700
 7




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The following table presents a summary of our lending activity. For the year ended December 31,2004
    
    
    2003
    
    
    2002(In thousands)Balance outstanding at beginning of period
    
    $
    1,779,069
    
    
    $
    1,793,951
    
    
    $
    1,923,799Originations:Mortgage loans
    
    
    479,814
    
    
    
    899,766
    
    
    
    752,771Consumer loans
    
    
    268,521
    
    
    
    301,665
    
    
    
    293,320Commercial business loans
    
    
    41,018
    
    
    
    49,646
    
    
    
    27,141789,353
    
    
    
    1,251,077
    
    
    
    1,073,232Purchases:One-to four-family mortgage loans
    
    
    148,951
    
    
    
    41,214
    
    
    
    4,042Less:Principal payments and repayments:Mortgage loans
    
    
    349,951
    
    
    
    525,853
    
    
    
    533,407Consumer loans
    
    
    241,771
    
    
    
    283,093
    
    
    
    276,699Commercial business loans
    
    
    45,395
    
    
    
    35,684
    
    
    
    27,013Total principal payments
    
    
    637,117
    
    
    
    844,687
    
    
    
    837,119Transfers to foreclosed properties, real estate owned
and repossessed assets
    
    
    5,045
    
    
    
    1,461
    
    
    
    1,406Loan sales:Mortgage loans
    
    
    120,067
    
    
    
    461,082
    
    
    
    368,597Commercial loans
    
    
    475
    
    
    
    
    
    
    
    Total loan sales
    
    
    120,542
    
    
    
    461,082
    
    
    
    368,597Total loans receivable and loans held for sale
    
    $
    1,954,669
    
    
    $
    1,779,069
    
    
    $
    1,793,951
 Residential Mortgage Lending.Our primary lending activity has been the origination and
purchases of first mortgage loans secured by one- to four-family properties, within our primary
lending area. Most of these loans are owner-occupied; however, we do originate first mortgage loans
on second homes, seasonal homes, and investment properties. In addition to our loan originations,
we have purchased one- to four-family first mortgage loans of $149.0 million in 2004, $41.2 million
in 2003, and $4.0 million in 2002. We review each purchased loan for compliance with our
underwriting standards, and generally only invest in loans which are located in the midwestern
United States. We offer conventional fixed rate mortgage loans and ARM loans with maturity dates up to 30 years.
Residential mortgage loans generally are underwritten to Federal National Mortgage Association
(Fannie Mae) standards. All ARM mortgage loans and some fixed rate mortgage loans with
maturities of up to 20 years are held in our portfolio. Fixed rate mortgage loans with maturities
greater than 15 years typically are sold without recourse, servicing retained, into the secondary
market. As a result of market competition, during the past few years, we have generally not charged
loan origination fees. The interest rates charged on mortgage loan originations at any given date
will vary, depending upon conditions in the local and secondary markets. We also originate jumbo single family mortgage loans in excess of the Fannie Mae maximum loan
amount, which was $333,700 for single family homes in 2004. Effective for 2005, the maximum loan
amount increased to $359,650. Fannie Mae has higher limits for two-, three- and four-family homes.
Fixed rate jumbo mortgage loans generally are sold servicing released without recourse to secondary
market purchasers of such loans. ARM jumbo mortgage loans are underwritten in accordance with our
underwriting guidelines and are retained in our loan portfolio. All jumbo mortgage loans
originated in 2004 were ARMs. Mortgage loan originations are solicited from real estate brokers, builders, existing customers,
community groups, other referral sources, and residents of the local communities located in our
primary market area through our loan origination staff. We also advertise our mortgage loan
products through local newspapers, periodicals, internal customer communications and our website. 8




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In addition to offering loans that conform to underwriting standards that are based on standards
specified by Fannie Mae (conforming loans), we also originate a limited amount of non-conforming
loans, due to size or underwriting considerations, for our own portfolio or for sale. Loans may be
fixed rate one- to four-family mortgage loans or adjustable rate one- to four-family mortgage loans
with maturities of up to 30 years. The average size of our one- to four-family mortgage loans
originated in 2004 was $135,965, and in 2003 and 2002 was approximately $113,723 and $114,000,
respectively. We are an approved seller/servicer for Fannie Mae, Freddie Mac, the FHLB of Chicagos
Mortgage Partnership Finance Program, Wisconsin Housing and Economic Development Authority
(WHEDA) and Wisconsin Department of Veterans Affairs (WDVA). The focus of our residential mortgage loan portfolio is the origination of 30 year ARM loans with
interest rates adjustable in one, two, three, or five years. ARM loans typically are adjusted by a
maximum of 200 basis points per adjustment period. The adjustments are usually annual, after the
initial interest rate lock period. Prior to the merger of the subsidiary banks, there was a
lifetime cap of 6% above the origination rate for First Northern Savings Bank and a lifetime
interest rate cap of 12.9% for Mutual Savings Bank. Since March 2003, the Bank is originating ARM
loans with a lifetime cap of 6% above the origination rate. Monthly payments of principal and
interest are adjusted when the interest rate adjusts. We do not offer ARM loans which provide for
negative amortization. The initial rates offered on ARM loans fluctuate with general interest rate
changes and are determined by competitive conditions and our yield requirements. We currently
utilize the monthly average yield on United States treasury securities, adjusted to a constant
maturity of one year (constant treasury maturity index) as the index to determine the interest
rate payable upon the adjustment date of our ARM loans. Some of the ARM loans are granted with
conversion options which provide terms under which the borrower may convert the mortgage loan to a
fixed rate mortgage loan for a limited period early in the term (normally in the first five years)
of the ARM loan. The terms at which the ARM loan may be converted to a fixed rate loan are
established at the date of loan origination and are set at a level allowing us to sell the loan
into the secondary market upon conversion. ARM loans may pose credit risks different from the risks inherent in fixed rate loans, primarily
because as interest rates rise, the underlying payments from the borrowers rise, thereby increasing
the potential for payment default. At the same time, the marketability of the underlying property
may be adversely affected by higher interest rates. The volume and types of ARM loans we originate have been affected by the level of market interest
rates, competition, consumer preferences and the availability of funds. Although we will continue
to offer ARM loans, we cannot guarantee that we will be able to originate a sufficient volume of
ARM loans to increase or maintain the proportion that these loans bear to our total loans. In addition to conventional fixed rate and ARM loans, we are authorized to originate mortgages
utilizing various government programs, primarily the Guaranteed Rural Housing Program. We also
participate in two state-sponsored mortgage programs operated by WHEDA and WDVA. We originate these
state-sponsored loans as an agent and assign them to the agency immediately after closing.
Servicing is retained by us on both WHEDA and WDVA loans. Most residential mortgage loans are processed under the Fannie Mae alternative documentation
programs. For reduced documentation loans, we require applicants to complete a Fannie Mae loan
application and request income, asset and debt information from the borrower. In addition to
obtaining outside vendor credit reports on all borrowers, we also look at other information to
ascertain the creditworthiness of the borrower. In most instances, we utilize Fannie Maes Desktop
Underwriter automated underwriting process to further reduce the necessary documentation. For
example, a simplified appraisal or inspection may be used to verify the value of the property.
Loans that are processed with reduced documentation conform to secondary market standards and
generally may be sold on the secondary market. Normally, an appraisal of the real estate to secure the loan is required, which must be performed
by a certified appraiser approved by the board of directors; however, we utilize a streamline
process on certain existing mortgage loans which will be refinanced. On such loans we do not
require an appraisal and in essence the only items that are modified are the rate and term. A title
insurance policy is required on all real estate first mortgage loans. Evidence of adequate hazard
insurance and flood insurance, if applicable, is required prior to closing. Borrowers are required
to make monthly payments to fund principal and interest (except on a few interest only mortgage
loans) as well as private mortgage insurance and flood insurance, if applicable. With some
exceptions for lower loan-to-value ratio loans, borrowers also generally are required to escrow in
advance for real estate taxes. We make disbursements for these items from the escrow account as the
obligations become due. 9




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Our Underwriting Department reviews all pertinent information prior to making a credit decision to
approve or deny an application. All recommendations to deny are reviewed by a designated senior
officer of the Bank, in addition to the Underwriting Department, prior to the final disposition of
the loan application. Our lending policies generally limit the maximum loan-to-value ratio on one-
to four-family mortgage loans secured by owner-occupied properties to 100% of the lesser of the
appraised value or purchase price of the property. Loans above 80% loan-to-value ratios are subject
to the availability of private mortgage insurance. Coverage is required to reduce our exposure to
less than 80% of value. Our originations of residential mortgage loans amounted to $326.8 million in 2004, $790.7 million
in 2003, and $695.0 million in 2002. A number of our mortgage loan originations have been the
result of refinancing of our existing loans due to the relatively low interest rate levels over the
past three years. Total refinancings of our existing mortgage loans were as follows: Percentage ofmortgage loanAmount
    
    
    originationsPeriod
    
    (Dollars in millions)Year ended December 31, 2004
    
    $
    121.8
    
    
    
    37.0
    %Year ended December 31, 2003
    
    
    381.1
    
    
    
    53.1Year ended December 31, 2002
    
    
    278.6
    
    
    
    40.1
 In addition to our standard mortgage products, we have developed mortgage programs designed to
specifically address the credit needs of low- to moderate-income home mortgage applicants and
first-time home buyers. Among the features of the low- to moderate-income home mortgage and
first-time home buyers programs are lower down payments, no mortgage insurance, and generally less
restrictive requirements for qualification compared to our traditional one- to four-family mortgage
loans. For instance, certain of these programs currently provide for loans with up to 97%
loan-to-value ratios without private mortgage insurance. Consumer Loans.We have been expanding our consumer loan originations because higher yields can
be obtained, there is strong consumer demand for such products, and we have experienced relatively
low delinquency and few losses on such products. In addition, we believe that offering consumer
loan products helps to expand and create stronger ties to our existing customer base by increasing
the number of customer relationships and providing cross-marketing opportunities. At December 31,
2004, $477.3 million, or 24.5%, of our gross loan portfolio was in consumer loans. Consumer loan
products offered within our market areas include home equity loans, home equity lines of credit,
home improvement loans, automobile loans, recreational vehicle loans, marine loans, deposit account
loans, overdraft protection lines of credit, unsecured consumer loans and also to a lesser extent,
unsecured consumer loans through the Visa credit card programs (offered through Elan Financial
Services) and federally guaranteed student loans. Our focus in consumer lending has been the origination of home equity loans, home improvement
loans, home equity lines of credit and automobile loans. At December 31, 2004, we had $440.8
million or 92.4% of the consumer loan portfolio in such loans. Underwriting procedures for the home
equity and home equity lines of credit loans include a comprehensive review of the loan
application, an acceptable credit rating, verification of the value of the equity in the home and
verification of the borrowers income. The loan-to-value ratio and the total debt-to-income ratio
are two of the determining factors in the underwriting process. Home equity loan and home
improvement loan originations are developed through the use of direct mail, cross-sales to existing
customers, radio advertisement, and advertisements in local newspapers. We make indirect automobile, boat and recreational vehicle loans through applications taken by
selected dealers on application forms approved by us. The applications are delivered to Savings
Financial Corporation (SFC), a 50% owned subsidiary of the Bank, for underwriting. If an
application is approved, money is funded to the dealer and the loan becomes a part of the SFC
portfolio. The SFC paper is then sold to either of the parent companies of SFC or to the Banks
subsidiary First Northern Investments Inc. We originate both fixed rate and variable rate home equity loans and home improvement loans with
combined loan-to-value ratios to 100%. Pricing on fixed rate home equity and home improvement loans
is reviewed by management, and generally terms are in the three to fifteen year range in order to
minimize interest rate risk. During 2004, we originated $121.4 million of fixed rate home equity or
home improvement loans; these loans carry a 10




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weighted average written term of approximately 9.8 years and a fixed rate ranging from 3.99% to
9.99%. During 2003 we originated approximately $163.3 million of fixed rate home equity or home
improvement loans, carrying a weighted average written term of approximately 9.8 years and a fixed
rate ranging from 3.25% to 10.25%. We also offer adjustable rate home equity and home improvement
loans. At December 31, 2004, $37.6 million or 12.9% of our fixed term home equity and home
improvement loan portfolio carried an adjustable rate. The adjustable rate loans have an initial
fixed rate for one to three years then adjust annually or monthly depending upon the offering, with
terms of up to twenty years. Our home equity credit line loans, which totaled $88.4 million, or 18.5% of total consumer loans at
December 31, 2004, are adjustable rate loans secured by a first or second mortgage on
owner-occupied one- to four-family residences primarily located in the state of Wisconsin. Current
interest rates on home equity credit lines are tied to the prime rate, adjust monthly after an
initial interest rate lock period, and range from prime rate to 300 basis points over the prime
rate, depending on the loan-to-value ratio. Home equity line of credit loans are made for terms up
to 10 years and require a minimum monthly payment of interest only with a minimum payment of $50
and on home equity line of credit loans with loan-to-value of 90% or greater require a minimum
payment of $50 or 11/2% of the month end balance. An annual fee is charged on home equity lines of
credit. At December 31, 2004, student loans amounted to $20.5 million, or 4.3% of our consumer loan
portfolio. These loans are serviced by Great Lakes Higher Education Servicing Corporation. Multi-family and Commercial Real Estate Loans.At December 31, 2004, our multi-family and
commercial real estate loan portfolio was $357.3 million or 18.3% of our total loans receivable.
The multi-family and commercial real estate loan portfolios consist of fixed rate, ARM and balloon
loans originated at prevailing market rates. This portfolio generally consists of loans secured by
apartment buildings, office buildings, warehouses, industrial buildings and retail centers. These
loans typically do not exceed 80% of the lesser of the purchase price or an appraisal by an
appraiser designated by us. Balloon loans generally are amortized on a 15 to 30 year basis with a
typical loan term of 3 to 10 years. Loans secured by multi-family and commercial real estate are granted based on the income producing
potential of the property and the financial strength of the borrower. The net operating income,
which is the income derived from the operation of the property or from the business in an
owner-occupied property, must be sufficient to cover the payments relating to the outstanding debt.
In most cases, we obtain joint and several personal guarantees from the principals involved. We
generally require an assignment of rents or leases in order to be assured that the cash flow from
the property will be used to repay the debt. Appraisals on properties securing multi-family and
larger commercial real estate loans are performed by independent state certified fee appraisers
approved by the board of directors. Title and hazard insurance are required as well as flood
insurance, if applicable. Environmental assessments are performed on certain multi-family and
commercial real estate loans in excess of $1.0 million. In addition, an annual review is performed
by us on non-owner-occupied multi-family and commercial real estate loans over $1.0 million. At December 31, 2004, the largest outstanding loan on a multi-family property was $14.2 million on
a 113 unit apartment project (including 12,000 feet of retail space) located in Madison, Wisconsin.
At the same date, the largest outstanding loan on a commercial real estate property was $6.7
million on a retail building located in Kenosha, Wisconsin. At December 31, 2004, these loans were
current and performing in accordance with their terms. These loans are substantially below the
legal lending limit to a single borrower, which was approximately $77.9 million at December 31,
2004. Loans secured by multi-family and commercial real estate properties are generally larger and
involve a greater degree of credit risk than one- to four-family residential mortgage loans. Such
loans typically involve large balances to single borrowers or groups of related borrowers. Because
payments on loans secured by multi-family and commercial real estate properties are often dependent
on the successful operation or management of the properties, repayment of such loans may be subject
to adverse conditions in the real estate market or the economy. If the cash flow from the project
decreases, or if leases are not obtained or renewed, the borrowers ability to repay the loan may
be impaired. Construction and Development Loans.At December 31, 2004, our construction and development
mortgage loan portfolio was $141.4 million, or 7.3% of our total loans receivable. At that date,
commercial real estate loans were $94.3 million or 66.7% and multi-family mortgage loans were $47.1
million or 33.3% of the total construction and development loans. As a general matter, construction
and development loans convert to permanent loans on our 11




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books. These types of credits carry special repayment risk because if a borrower defaults the
construction project needs to be completed before the full value of the collateral can be realized. Commercial Business Loans.At December 31, 2004, our commercial business loan portfolio
consisted of loans totaling $70.2 million or 3.6% of our total loans receivable. The commercial
loan portfolio consists of loans to businesses for equipment purchases, working capital lines of
credit, debt refinancing, SBA loans and domestic stand-by letters of credit. Typically, these loans
are secured by business assets and personal guarantees. We offer variable, adjustable and fixed
rate loans. Approximately 29.1% of the commercial business loans have an interest rate adjusted
monthly or immediately, with the majority based on the prevailing prime rate. We also have
commercial business loans that have an initial period where interest rates are fixed, generally one
to five years, and thereafter are adjustable based on various indexes. Fixed rate loans are priced
at either a margin over the yield on US Treasury issues with maturities that correspond to the
maturities of the notes or to match competitive conditions and yield requirements. Term loans are
generally amortized over a three to seven year period and line-of-credit commercial business loans
generally have a term of one year, at which point they mature. All borrowers having an exposure to
the Bank of $500,000 or more are reviewed annually. The largest commercial business loan at
December 31, 2004 had an outstanding balance of $25.5 million and was secured by equipment and
chattel paper. Loan Approval Authority For one- to four-family residential loans intended for sale into the secondary market, the
underwriters are authorized by the board of directors to approve loans processed through the Fannie
Mae Desktop Underwriter automated underwriting system up to the Fannie Mae conforming loan limits
loan limits ($359,650 for a single family residential units; higher limits for two-, three-, and
four-family units). For one- to eight-family residential loans intended to be held in the Banks
portfolio, the underwriters are authorized to approve loans processed through the Fannie Mae
Desktop Underwriter automated underwriting system up to $359,650, provided the loan-to-value is
80% or less and the loan meets other specific underwriting criteria. All portfolio loans in excess
of $359,650, with a loan-to-value greater than 80%, or failing to meet other specific underwriting
criteria must be approved by a senior officer. Consumer loan underwriters have individual approval authority for secured loans ranging from
$20,000 to $100,000 provided the loan-to-value on real estate does not exceed 80% or 90% on
personal property and that the loan meets other specific underwriting criteria. All consumer loans
in excess of $100,000, with a loan-to-value greater than 80% on real estate, 90% on personal
property, or failing to meet other specific underwriting criteria must be approved by a senior
officer. Consumer loan underwriters have individual approval authority for unsecured loans ranging
from $2,000 to $15,000 provided the loan meets other specific underwriting criteria. All unsecured
consumer loans in excess of $15,000, or not meeting specific underwriting criteria, must be
approved by a senior officer. Individual lenders and senior officers in the investment real estate department have lending
authority of $250,000 for multi-family and commercial loan proposals for both existing and proposed
construction of investment real estate properties. Two senior officers together have lending
authority of $500,000 for investment real estate loans. All investment real estate loans over
$500,000 require approval of the executive committee of the board of directors. Individual lenders in the commercial banking department have individual lending authority ranging
from $50,000 to $150,000 for secured commercial business loans. Senior officers have individual
lending authority of $250,000 and two senior officers together have lending authority of $500,000
for secured commercial business loans. All secured business loans over $500,000 require approval of
the executive committee of the board of directors. Individual lenders in the commercial banking
department have individual lending authority ranging from $10,000 to $25,000 for unsecured
commercial business loans. Senior officers have individual lending authority of $50,000 and two
senior officers together have lending authority of $150,000 for unsecured commercial business
loans. All unsecured business loans over $150,000 require approval of the executive committee of
the board of directors. All loans approved by individuals and senior officers must be ratified by the board of directors at
the next meeting following the approval. 12




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##### Table of Contents



Asset Quality One of our key operating objectives has been and continues to be to maintain a high level of asset
quality. Through a variety of strategies, including, but not limited to, borrower workout
arrangements and aggressive marketing of foreclosed properties and repossessed assets, we have been
proactive in addressing problem and non-performing assets. These strategies, as well as our
emphasis on quality loan underwriting, our maintenance of sound credit standards for new loan
originations, annual evaluation of large credits and relatively favorable economic and real estate
market conditions have resulted in historically low delinquency ratios. Delinquent Loans and Foreclosed Assets.When a borrower fails to make required payments on a
loan, we take a number of steps to induce the borrower to cure the delinquency and restore the loan
to a current status. In the case of one- to four-family mortgage loans, our loan servicing
department is responsible for collection procedures from the 15th day of delinquency through the
completion of foreclosure. Specific procedures include a late charge notice being sent at the time
a payment is over 15 days past due with a second notice (in the form of a billing coupon) being
sent before the payment becomes 30 days past due. Once the account is 30 days past due, we attempt
telephone contact with the borrower. Letters are sent if contact has not been established by the
45th day of delinquency. On the 60th day of delinquency, attempts at telephone contact continue and
stronger letters, including foreclosure notices, are sent. If telephone contact cannot be made, we
send either our property inspector, a qualified third party inspector, or a loan officer to the
property in an effort to contact the borrower. When contact is made with the borrower, we attempt to obtain full payment or work out a repayment
schedule to avoid foreclosure. All properties are inspected prior to foreclosure approval. Most
borrowers pay before the deadline given and it is not necessary to start a foreclosure action. If
it is, action starts when the loan is between the 90th and 120th day of delinquency following
review by a senior officer. In conjunction with commencing a foreclosure action, we perform a
property evaluation or in some cases, we do a loan file analysis to determine any potential loss.
If there is a potential loss, an appropriate charge-off is taken to bring the loan balance in line
with the value of the liquidated real estate. Charge-offs are reported to the board of directors.
If the loan is deemed to be uncollectible, we seek the shortest redemption period possible thus
waiving our right to collect any deficiency from the borrower. If we obtain the property at the
foreclosure sale, we hold the property as real estate owned. We obtain a market evaluation of the
property to determine that the carrying balance of the owned real estate is consistent with the
market value of the property. Marketing of the property begins immediately following the Bank
taking title to the property. The marketing is usually undertaken by a realtor knowledgeable of the
particular market. Mortgage insurance claims are filed if the loan had mortgage insurance coverage.
It is marketed after a market evaluation is obtained and any mortgage insurance claims are filed.
The collection procedures and guidelines as outlined by Fannie Mae, Freddie Mac, Veterans
Administration (VA), WHEDA, and Guaranteed Rural Housing are followed. The collection procedures for consumer loans, excluding student loans, indirect consumer loans and
credit card loans, include sending periodic late notices to a borrower once a loan is 5 to 15 days
past due depending upon the grace period associated with a loan. We attempt to make direct contact
with a borrower once a loan becomes 30 days past due. Supervisory personnel review loans 90 days or
more delinquent on a regular basis. If collection activity is unsuccessful after 90 days, we may
pursue legal remedies ourselves or refer the matter to our legal counsel for further collection
effort or charge-off a loan. Loans we deem to be uncollectible, or partially uncollectible are
charged off so that the carrying balance approximates the value of the collateral. Charge-offs of
consumer loans require the approval of a senior officer and are reported to the board of directors.
All student loans are serviced by the Great Lakes Higher Education Servicing Corporation which
guarantees their servicing to comply with all Department of Education Guidelines. Our student loan
portfolio is guaranteed by the Great Lakes Higher Education Guaranty Corporation, which is
reinsured by the U.S. Department of Education. Credit card loans are serviced by Elan Financial
Services. The collection procedures for multi-family, commercial real estate and commercial business loans
include sending periodic late notices to a borrower once a loan is past due. We attempt to make
direct contact with a borrower once a loan becomes 15 days past due. Our managers of the
multi-family and commercial real estate loan areas review loans 10 days or more delinquent on a
regular basis. If collection activity is unsuccessful, we may refer the matter to our legal counsel
for further collection effort. Within 90 days, loans we deem to be uncollectible are proposed for
repossession or foreclosure and partial or full charge-offs are taken to bring the loan balance in
line with the expected collectibility of the loans. This legal action requires the approval of our
board of directors, and charge offs are reported to the board. 13




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##### Table of Contents



Our policies require that management continuously monitor the status of the loan portfolio and
report to the board of directors on a monthly basis. These reports include information on
delinquent loans and foreclosed real estate. The following table presents information regarding non-accrual mortgage, consumer loans, commercial
business loans, accruing loans delinquent 90 days or more, and foreclosed properties and
repossessed assets as of the dates indicated. At December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Non-accrual mortgage loans
    

    $
    1,485
    
    
    $
    2,894
    
    
    $
    1,399
    
    
    $
    1,814
    
    
    $
    730Non-accrual consumer loans
    
    
    619
    
    
    
    961
    
    
    
    527
    
    
    
    444
    
    
    
    383Non-accrual commercial business loans
    
    
    3,579
    
    
    
    5,433
    
    
    
    5,357
    
    
    
    346
    
    
    
    750Accruing loans delinquent 90 days or more
    
    
    586
    
    
    
    1,084
    
    
    
    1,108
    
    
    
    936
    
    
    
    1,258Total non-performing loans
    
    
    6,269
    
    
    
    10,372
    
    
    
    8,391
    
    
    
    3,540
    
    
    
    3,121Foreclosed properties, real estate owned
and repossessed assets, net
    
    
    1,621
    
    
    
    630
    
    
    
    750
    
    
    
    383
    
    
    
    2,281Total non-performing assets
    
    $
    7,890
    
    
    $
    11,002
    
    
    $
    9,141
    
    
    $
    3,923
    
    
    $
    5,402Non-performing loans to total loans
    
    
    0.33
    %
    
    
    0.61
    %
    
    
    0.50
    %
    
    
    0.19
    %
    
    
    0.16
    %Non-performing assets to total assets
    
    
    0.23
    %
    
    
    0.35
    %
    
    
    0.32
    %
    
    
    0.14
    %
    
    
    0.19
    %Interest income that would have been
recognized if non-accrual loans had been
current
    
    $
    831
    
    
    $
    384
    
    
    $
    375
    
    
    $
    139
    
    
    $
    77
 There were no significant loans, which were considered to be impaired as defined in Statement of
Financial Accounting Standards (SFAS) No. 114 at December 31, 2002, 2001 or 2000. At December
31, 2004, there were loans totaling $8.7 million that are considered to be impaired as compared to
$17.0 million at December 31, 2003. The average impaired loans for the year ended December 31,
2004 was $8.7 million and the interest received and recognized on the impaired loans was $29,073. There are no restructured loans at the dates presented. Total non-performing loans decreased as of December 31, 2004, as compared to December 31, 2003,
primarily as a result of a decrease in non-accrual mortgage and commercial business loans. The
decrease resulted primarily from the transfer of $3.1 million of commercial non-performing loans to
real estate owned and $1.3 million of mortgage loans to foreclosure. Total non-performing loans
increased as of December 31, 2003, as compared to December 31, 2002, primarily as a result of an
increase in non-accrual business loans. Of the increase during 2002, $3.2 million related to a
single commercial business borrower with the remaining portion of the increase a result of the
general decline in economic conditions affecting the borrowers cash flow. We believe
non-performing loans and assets, expressed as a percentage of total loans and assets, are below
national averages for financial institutions, due in part to our loan underwriting standards. The ultimate results with these and other commercial loans will depend on the success of the
related business or projects, economic performance and other factors affecting loans and borrowers. With the exception of mortgage loans insured or guaranteed by the FHA, VA, Guaranteed Rural Housing
and student loans, we stop accruing income on loans when interest or principal payments are greater
than 90 days in arrears or earlier when the timely collectibility of such interest or principal is
doubtful. We designate loans on which we stop accruing income as non-accrual loans and generally,
we reverse outstanding interest that we previously credited to income. We may recognize income in
the period that we collect it when the ultimate collectibility of principal is no longer in doubt.
We return a non-accrual loan to accrual status when factors indicating doubtful collection no
longer exist. We had $5.7 million, $9.3 million and $7.3 million of non-accrual loans at December
31, 2004, 2003 and 2002, respectively. Interest income that would have been recognized had such
loans been performing in accordance with their contractual terms totaled approximately $831,000,
$384,000 and $375,000 for the years ended December 31, 2004, 2003 and 2002, respectively. A total
of approximately $83,000, $381,000 and $499,000 of interest income was actually recorded on such
loans in 2004, 2003 and 2002, respectively. All commercial business and commercial real estate loans which are greater than 90 days past due
are considered to be potentially impaired. In addition, we may declare a loan impaired prior to a
loan being 90 days past due, if we determine there is a question as to the collectibility of
principal. Impaired loans are individually assessed to 14




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determine whether a loans carrying value is in excess of the fair value of the collateral or the
present value of the loans cash flows discounted at the loans effective interest rate and if the
carrying value is in excess, a loan loss allowance will be established. Foreclosed real estate consists of property we acquired through foreclosure or deed in lieu of
foreclosure. Foreclosed properties increased in 2004 as compared to 2003 primarily as a result of
the transfer of non-performing commercial loans and mortgage loans to foreclosed properties, real
estate owned or repossessed assets. During the year, we transferred $4.4 million of these loans.
Foreclosed real estate properties are initially recorded at the lower of the recorded investment in
the loan or fair value. Thereafter, we carry foreclosed real estate at fair value less estimated
selling costs. Foreclosed real estate is inspected periodically. Additional outside appraisals are
obtained as deemed necessary. Additional write-downs may occur if the property value deteriorates.
These additional write-downs are charged directly to current operations. Charge-offs.The Company will charge off a loan when the fair market value of the underlying
collateral or anticipated cash flow discounted at the contract rate, is less than the loan amount.
Charge-offs of commercial loans increased in 2004 as compared to 2003 primarily as a result of one
large commercial loan. Allowance for Loan Losses.The following table presents the activity in our allowance for
loan losses at or for the periods indicated. At or for the Years Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Dollars in thousands)Balance at beginning of period
    
    $
    13,771
    
    
    $
    12,743
    
    
    $
    12,245
    
    
    $
    12,238
    
    
    $
    6,948Provision for loan losses
    
    
    1,330
    
    
    
    1,304
    
    
    
    760
    
    
    
    723
    
    
    
    423Purchase of First Northern
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,028Charge-offs:Mortgage loans
    
    
    (64
    )
    
    
    (67
    )
    
    
    (14
    )
    
    
    (65
    )
    
    
    (38
    )Consumer loans
    
    
    (373
    )
    
    
    (415
    )
    
    
    (428
    )
    
    
    (337
    )
    
    
    (156
    )Commercial business loans
    
    
    (816
    )
    
    
    (19
    )
    
    
    (39
    )
    
    
    (415
    )
    
    
    Total charge-offs
    
    
    (1,253
    )
    
    
    (501
    )
    
    
    (481
    )
    
    
    (817
    )
    
    
    (194
    )Recoveries:Mortgage loans
    
    
    9
    
    
    
    113
    
    
    
    66
    
    
    
    26
    
    
    
    1Consumer loans
    
    
    66
    
    
    
    107
    
    
    
    40
    
    
    
    57
    
    
    
    32Commercial business loans
    
    
    
    
    
    
    5
    
    
    
    113
    
    
    
    18
    
    
    
    Total recoveries
    
    
    75
    
    
    
    225
    
    
    
    219
    
    
    
    101
    
    
    
    33Net (charge-offs) recoveries
    
    
    (1,178
    )
    
    
    (276
    )
    
    
    (262
    )
    
    
    (716
    )
    
    
    (161
    )Balance at end of period
    
    $
    13,923
    
    
    $
    13,771
    
    
    $
    12,743
    
    
    $
    12,245
    
    
    $
    12,238Net charge-offs to average loans
    
    
    (0.07
    %)
    
    
    (0.02
    %)
    
    
    (0.01
    %)
    
    
    (0.04
    %)
    
    
    (0.01
    %)Allowance for loan losses to total
loans
    
    
    0.74
    %
    
    
    0.80
    %
    
    
    0.76
    %
    
    
    0.67
    %
    
    
    0.62
    %Allowance for loan losses to
non-performing loans
    
    
    222.09
    %
    
    
    132.77
    %
    
    
    151.87
    %
    
    
    345.90
    %
    
    
    392.12
    %
 The allowance for loan losses has been determined in accordance with generally accepted accounting
principles. We are responsible for the timely and periodic determination of the amount of the
allowance required. We believe that our allowance for loan losses is adequate to cover specifically
identifiable loan losses, as well as estimated losses inherent in our portfolio for which certain
losses are probable but not specifically identifiable. Loan loss allowances are reviewed monthly. General allowances are maintained by the following
categories for performing loans to provide for unidentified inherent losses in the portfolios:  
    One- to four-family
    Consumer
    Multi-family and commercial real estate 15




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##### Table of Contents




    Commercial business Various factors are taken into consideration in establishing the loan loss allowance including:
historical loss experience, economic factors, loans without escrow accounts and other factors,
that, in managements judgment would affect the collectibility of the portfolio as of the
evaluation date. Adjustments to the allowance for loan losses are charged against operations as
provision for loan losses. The appropriateness of the allowance is reviewed by senior management based upon its evaluation of
then-existing economic and business conditions affecting the key lending areas of the Bank. Other
outside factors such as credit quality trends, collateral values, loan volumes and concentrations,
specific industry conditions within portfolio segments and recent loss experience in particular
segments of the portfolio that existed as of the balance sheet date and the impact that such
conditions were believed to have had on the collectibility of the loan are also considered. Non-performing and Delinquent Loans.One- to four-family loans delinquent more than 90 days,
multi-family and commercial real estate loans delinquent more than 30 days, consumer loans
delinquent more than 90 days and commercial business loans delinquent more than 30 days are
reviewed and analyzed by senior officers on an individual basis. Any loss is charged against the
allowance by establishing a corresponding specific allowance for that loan from the general
allowance. In such an event, the loan is then reduced by the amount of the specific allowance and a
corresponding amount is charged off to the allowance for losses on loans. By following careful underwriting guidelines, we have historically maintained low levels of
non-performing loans to total loans. Our ratio of non-performing loans to total loans at December
31, 2000 was 0.16%, after which it increased somewhat. At December 31, 2004, the ratio was 0.33%.
This recent decrease as compared to December 31, 2003 and 2002 was the result of decreased
delinquencies on the entire loan portfolio and the foreclosure or acquisition of the collateral by
the Bank and subsequent liquidation of a large commercial loan. At December 31, 2004, the recorded
investment in loans that are considered to be impaired under SFAS No. 114 was $8.7 million. We believe the primary risks inherent in our portfolio are possible increases in interest rates, a
possible weak economy, generally, and a possible decline in real estate market values. Any one or a
combination of these events may adversely affect our loan portfolio resulting in increased
delinquencies and loan losses. Accordingly, and because of the increased dollar amount of consumer
loans and composition of the loan portfolio, we have taken steps to increase our level of loan loss
allowances over the last 5 years. At December 31, 2004, the allowance for loan losses as a
percentage of total loans was 0.74% compared with 0.62% at December 31, 2000. Furthermore, the
increase in the allowance for loan losses each year from 2000 to 2004 reflects our strategy of
providing allowances for inherent losses in the portfolio, identifying potential losses in a timely
manner, and providing an allowance to reflect changes in the components of the portfolio during
that period. Although we have established and maintained the allowance for loan losses at an amount that
reflects managements best estimate of the amount necessary to provide for probable and estimable
losses on loans, future additions may be necessary if economic and other conditions in the future
differ substantially from the current operating environment and as the loan portfolio grows and its
composition changes. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review our loan and foreclosed real estate portfolios and the
related allowance for loan losses and valuation allowance for foreclosed real estate. One or more
of these agencies, specifically the OTS or the Federal Deposit Insurance Corporation (FDIC), may
require us to increase the allowance for loan losses or the valuation allowance for foreclosed real
estate based on their judgments of information available to them at the time of their examination,
thereby adversely affecting our results of operations. 16




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##### Table of Contents



See Managements Discussion and Analysis of Financial Condition and Results of
OperationsComparison of Operating Results for the Years Ended December 31, 2004 and 2003Provision
for Loan Losses. The following table represents our allocation of allowance for loan losses by
loan category on the dates indicated: At December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Percentage
    
    
    
    
    
    
    Percentage
    
    
    
    
    
    
    Percentage
    
    
    
    
    
    
    Percentage
    
    
    
    
    
    
    Percentageof Loans
    
    
    
    
    
    
    of Loans
    
    
    
    
    
    
    of Loans
    
    
    
    
    
    
    of Loans
    
    
    
    
    
    
    of Loansin Category
    
    
    
    
    
    
    in Category
    
    
    

    
    
    
    in Category
    
    
    
    
    
    
    in Category
    
    
    
    
    
    
    in Categoryto Total
    
    
    
    
    
    
    to Total
    
    
    
    
    
    
    to Total
    
    
    
    
    
    
    to Total
    
    
    
    
    
    
    to TotalLoan Category
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    LoansMortgage loansOne- to four-family
    
    $
    2,488
    
    
    
    46.34
    %
    
    $
    4,001
    
    
    
    44.69
    %
    
    $
    4,701
    
    
    
    47.37
    %
    
    $
    5,608
    
    
    
    52.46
    %
    
    $
    6,279
    
    
    
    59.56
    %Other
    
    
    3,222
    
    
    
    25.58
    
    
    
    3,150
    
    
    
    25.70
    
    
    
    3,160
    
    
    
    24.40
    
    
    
    2,875
    
    
    
    22.36
    
    
    
    2,173
    

    
    
    15.72Total mortgage loans
    
    
    5,710
    
    
    
    71.92
    
    
    
    7,151
    
    
    
    70.39
    
    
    
    7,861
    
    
    
    71.77
    
    
    
    8,483
    
    
    
    74.82
    
    
    
    8,452
    
    
    
    75.28Home equity lines
    
    
    663
    
    
    
    4.54
    
    
    
    481
    
    
    
    4.43
    
    
    
    496
    
    
    
    4.45
    
    
    
    490
    
    
    
    4.04
    
    
    
    519
    
    
    
    3.97Consumer
    
    
    2,929
    
    
    
    19.94
    
    
    
    2,398
    
    
    
    20.95
    
    
    
    2,380
    
    
    
    20.28
    
    
    
    2,320
    
    
    
    17.92
    
    
    
    2,483
    
    
    
    17.80Commercial business loans
    
    
    4,416
    
    
    
    3.60
    
    
    
    3,741
    
    
    
    4.23
    
    
    
    1,507
    
    
    
    3.50
    
    
    
    952
    
    
    
    3.22
    
    
    
    784
    
    
    
    2.95Unallocated
    
    
    205
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    499
    
    
    
    0.00
    
    
    
    
    
    
    
    0.00
    
    
    
    
    
    
    
    0.00Total allowance for
loan losses
    
    $
    13,923
    
    
    
    100.00
    %
    
    $
    13,771
    
    
    
    100.00
    %
    
    $
    12,743
    
    
    
    100.00
    %
    
    $
    12,245
    
    
    
    100.00
    %
    
    $
    12,238
    
    
    
    100.00
    %
 Investment Activities Investment Securities.The Banks board of directors reviews and approves its investment policy
on an annual basis. Senior officers, as authorized by the board of directors, implement this
policy. The board of directors reviews investment activity on a monthly basis. Our investment objectives are to meet liquidity requirements, generate a favorable return on
investments without undue compromise to our other business objectives and our levels of interest
rate risk, credit risk and investment portfolio concentrations. Federally chartered savings banks
have authority to invest in various types of assets, including U.S. Treasury obligations,
securities of various federal agencies, state and municipal obligations, mortgage-related
securities, mortgage derivative securities, certain time deposits of insured banks and savings
institutions, certain bankers acceptances, repurchase agreements, loans of federal funds, and,
subject to certain limits, corporate debt and equity securities, commercial paper and mutual funds. The Banks investment policy allows participation in hedging strategies such as the use of
financial futures, options or forward commitments or interest rate swaps but only with prior
approval of the board of directors. We did not have any investment hedging transactions in place at
December 31, 2004. Our investment policy prohibits the purchase of non-investment grade bonds. Our
investment policy also provides that we will not engage in any practice that the Federal Financial
Institutions Examination Council considers to be an unsuitable investment practice. For information
regarding the carrying values, yields and maturities of our investment securities and
mortgage-related securities, see Carrying Values, Yields and Maturities. At December 31, 2004, we had not invested funds in any single mutual fund in excess of 10% of our
capital. All of our mutual fund investments are permissible investments under our investment policy
and applicable laws and regulations. We carry our mutual fund investments at market value. At
December 31, 2004, our mutual fund investments were in funds which invested primarily in
mortgage-related securities. We classify securities as trading, held-to-maturity, or available-for-sale at the date of purchase.
At December 31, 2004, all investment securities are classified as available-for-sale. These
securities are carried at fair value with the change in fair value recorded as a component of

shareholders equity. Mortgage-related Securities.Most of our mortgage-related securities are directly or indirectly
insured or guaranteed by the Government National Mortgage Association (GNMA), Freddie Mac or
Fannie Mae. The rest of the securities are investment-grade private placement collateralized
mortgage obligations (CMOs). Private placement CMOs carry higher credit risks and higher yields
than mortgage-related securities insured or guaranteed by agencies of the U.S. Government. We
classify our entire mortgage-related securities portfolio as available-for-sale. 17




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##### Table of Contents



At December 31, 2004, mortgage-related securities available-for-sale totaled $1.3 billion, or 36.8%
of total assets. At December 31, 2004, the mortgage-related securities portfolio had a weighted
average yield of 4.31%. Of the mortgage-related securities we held at December 31, 2004, $1.2
billion, or 95.5%, had fixed rates and $57.4 million, or 4.5%, had adjustable-rates.
Mortgage-related securities at December 31, 2004 included real estate mortgage investment conduits
(REMICs), which are securities derived by reallocating cash flows from mortgage pass-through
securities or from pools of mortgage loans held by a trust. REMICs are a form of, and are often
referred to as CMOs. Our CMOs have fixed and variable coupon rates ranging from 2.25% to 6.00% and a weighted average
yield of 4.24% at December 31, 2004. At December 31, 2004, CMOs totaled $1.1 billion, which
constituted 89.9% of the mortgage-related securities portfolio, or 33.0% of total assets. Our CMOs
had an expected average life of 3.1 years at December 31, 2004. For a further discussion of our
investment policies, including those for mortgage-related securities, see Investment Securities.
Purchases of mortgage-related securities may decline in the future to offset any significant
increase in demand for one- to four-family mortgage loans and other loans. Mortgage-related securities generally yield less than the loans that underlie such securities
because of the cost of payment guarantees or credit enhancements that reduce credit risk. However,
mortgage-related securities are more liquid than individual mortgage loans. In general, mortgage-related securities issued or guaranteed by GNMA, Freddie Mac and Fannie Mae
are weighted at no more than 20% for risk-based capital purposes, compared to the 50% risk
weighting assigned to most non-securitized residential mortgage loans. While mortgage-related securities carry a reduced credit risk as compared to whole loans, they
remain subject to the risk of a fluctuating interest rate environment. Along with other factors,
such as the geographic distribution of the underlying mortgage loans, changes in interest rates may
alter the prepayment rate of those mortgage loans and affect the value of mortgage-related
securities. The following table presents our investment securities and mortgage-related securities activities
for the periods indicated. For the Year Ended December 31,2004
    
    
    2003
    
    
    2002(In thousands)Investment securities available-for-sale:Carrying value at beginning of period
    
    $
    67,854
    
    
    $
    73,247
    
    
    $
    93,080Purchases
    
    
    26,480
    
    
    
    128,501
    
    
    
    36,390Sales
    
    
    
    
    
    
    (8,076
    )
    
    
    Calls
    
    
    
    
    
    
    (700
    )
    
    
    (4,023
    )Maturities
    
    
    (27,000
    )
    
    
    (124,051
    )
    
    
    (50,960
    )Principal payments
    
    
    
    
    
    
    
    
    
    
    (937
    )Premium amortization and discount accretion, net
    
    
    20
    
    
    
    122
    
    
    
    134(Decrease) increase in unrealized gains
    
    
    1,399
    
    
    
    (1,189
    )
    
    
    (437
    )Net increase (decrease) in investment securities
    
    
    899
    
    
    
    (5,393
    )
    
    
    (19,833
    )Carrying value at end of period
    
    $
    68,753
    
    
    $
    67,854
    
    
    $
    73,247Mortgage-related securities available-for-sale:Carrying value at beginning of period
    
    $
    1,053,349
    
    
    $
    618,123
    
    
    $
    521,084Purchases
    
    
    523,334
    
    
    
    923,451
    
    
    
    365,312Principal payments
    
    
    (302,848
    )
    
    
    (470,994
    )
    
    
    (275,518
    )Premium amortization and discount accretion, net
    
    
    (375
    )
    
    
    (2,229
    )
    
    
    (253
    )Increase (decrease) in unrealized gains
    
    
    (7,236
    )
    
    
    (15,002
    )
    
    
    7,498Net increase in mortgage-related securities
    
    
    212,875
    
    
    
    435,226
    
    
    
    97,039Carrying value at end of period
    
    $
    1,266,224
    
    
    $
    1,053,349
    
    
    $
    618,123
 The following table presents the fair value of our money market investments, investment securities
and mortgage-related securities portfolios at the dates indicated. It also presents the coupon type
for the mortgage-related securities portfolio. For all securities and for all periods presented,
the carrying value is equal to fair value. 18




---



##### Table of Contents



At December 31,2004
    
    
    2003
    
    
    2002Carrying/
    
    
    Carrying/
    
    
    Carrying/Fair Value
    
    
    Fair Value
    
    
    Fair Value(Dollars in thousands)Money market investmentsInterest-earning deposits
    
    $
    707
    
    
    $
    20,119
    
    
    $
    36,462Federal funds sold
    
    
    
    
    
    
    30,000
    
    
    
    165,000Total money market investments
    
    $
    707
    
    
    $
    50,119
    
    
    $
    201,462Investment securities available-for-saleMutual funds
    
    $
    45,390
    
    
    $
    44,697
    
    
    $
    34,034United States government and federal agency obligations.
    
    
    19,831
    
    
    
    21,736
    
    
    
    28,212Corporate issue securities
    
    
    
    
    
    
    
    
    
    
    9,563Stock in federal agencies
    
    
    3,532
    
    
    
    1,421
    
    
    
    1,438Total investment securities available-for-sale
    
    $
    68,753
    
    
    $
    67,854
    
    
    $
    73,247Mortgage-related securities available-for-sale by issuer:Freddie Mac
    
    $
    631,024
    
    
    $
    518,172
    
    
    $
    288,113Fannie Mae
    
    
    542,803
    
    
    
    445,496
    
    
    
    296,604Private placement CMOs
    
    
    9,928
    
    
    
    543
    
    
    
    8,406GNMA
    
    
    82,469
    
    
    
    89,138
    
    
    
    25,000Total mortgage-related securities
    
    $
    1,266,224
    
    
    $
    1,053,349
    
    
    $
    618,123Total investment portfolio
    
    $
    1,335,684
    
    
    $
    1,171,322
    
    
    $
    892,832
 19




---



##### Table of Contents



Carrying Values, Yields and Maturities.The table below presents information regarding the
carrying values, weighted average yields and contractual maturities of our investment securities
and mortgage-related securities at December 31, 2004. Mortgage-related securities are presented by
issuer and by coupon type. At December 31, 2004More than One Year
    
    
    More than FiveOne Year or Less
    
    
    to Five Years
    
    
    Years to Ten Years
    
    
    More than Ten Years
    
    
    TotalWeighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedCarrying
    
    
    Average
    
    
    Carrying
    
    
    Average
    
    
    Carrying
    
    
    Average
    
    
    Carrying
    
    
    Average
    
    
    Carrying
    
    
    AverageValue
    
    
    Yield
    
    
    Value
    
    
    Yield
    
    
    Value
    
    
    Yield
    
    
    Value
    
    
    Yield
    
    
    Value
    
    
    Yield(Dollars in thousands)Investment securities
available-for-sale:Mutual funds
    
    $
    45,390
    
    
    
    2.59
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    45,390
    
    
    
    2.59
    %United States government and
agencies
    
    
    5,294
    
    
    
    5.3
    
    
    
    14,537
    
    
    
    2.19
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,831
    
    
    
    3.01Corporate issues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Taxable municipal
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock in Federal Agencies
    
    
    3,532
    
    
    
    3.77
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,532
    
    
    
    3.77Total investment securities
    
    $
    54,216
    
    
    
    2.93
    
    
    $
    14,537
    
    
    
    2.19
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    68,753
    
    
    
    2.77Mortgage-related securities
available-for-sale:By issuer:GNMA pass-through
certificates
    
    $
    3
    
    
    
    8.00
    
    
    $
    61
    
    
    
    8.34
    
    
    $
    
    
    
    
    
    
    
    $
    1,836
    
    
    
    4.02
    
    
    $
    1,900Fannie Mae pass-through
certificates
    
    
    
    
    
    
    
    
    
    
    1,281
    
    
    
    5.90
    
    
    
    54,440
    
    
    
    5.41
    
    
    
    67,620
    
    
    
    4.59
    
    
    
    123,341
    
    
    
    4.96Freddie Mac pass-through
certificates
    
    
    89
    
    
    
    6.48
    
    
    
    
    
    
    
    
    
    
    
    1,177
    
    
    
    5.84
    
    
    
    1,224
    
    
    
    6.61
    
    
    
    2,490
    
    
    
    6.34Private CMOs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81
    
    
    
    6.15
    
    
    
    9,847
    
    
    
    5.48
    
    
    
    9,928
    
    
    
    5.49Freddie Mac, Fannie Mae and
GNMA-REMICs
    
    
    
    
    
    
    
    
    
    
    1,211
    
    
    
    5.17
    
    
    
    91,755
    
    
    
    3.65
    
    
    
    1,035,599
    
    
    
    4.27
    
    
    
    1,128,565
    
    
    
    4.23Total mortgage-related
securities
    
    $
    92
    
    
    
    6.52
    
    
    $
    2,553
    
    
    
    5.61
    
    
    $
    147,453
    
    
    
    4.31
    
    
    
    1,116,126
    
    
    
    4.31
    
    
    $
    1,266,224
    
    
    
    4.31By coupon type:Adjustable rate
    
    
    
    
    
    
    
    
    
    
    1,211
    
    
    
    5.17
    
    
    
    
    
    
    
    
    
    
    
    56,154
    
    
    
    4.43
    
    
    
    57,365
    
    
    
    4.45Fixed rate
    
    
    92
    
    
    
    6.52
    
    
    
    1,342
    
    
    
    6.01
    
    
    
    147,453
    
    
    
    4.31
    
    
    
    1,059,972
    
    
    
    4.30
    
    
    
    1,208,859
    
    
    
    4.30Total mortgage-related
securities
    
    $
    92
    
    
    
    6.52
    %
    
    $
    2,553
    
    
    
    5.61
    %
    
    $
    147,453
    
    
    
    4.31
    %
    
    $
    1,116,126
    
    
    
    4.31
    %
    
    $
    1,266,224
    
    
    
    4.31
    %Total investment and
mortgage-related securities
portfolio
    
    $
    54,308
    
    
    
    2.94
    %
    
    $
    17,090
    
    
    
    2.70
    %
    
    $
    147,453
    
    
    
    4.31
    %
    
    $
    1,116,126
    
    
    
    4.31
    %
    
    $
    1,334,977
    
    
    
    4.23
    %
 Deposits We offer a variety of deposit accounts having a range of interest rates and terms. We currently
offer regular savings accounts (consisting of passbook and statement savings accounts),
interest-bearing demand accounts, non-interest-bearing demand accounts, money market accounts, and
time deposits. We also offer IRA time deposit accounts. Deposit flows are influenced significantly by general and local economic conditions, changes in
prevailing interest rates, pricing of deposits and competition. Our deposits are primarily obtained
from areas surrounding our bank offices and we rely primarily on paying competitive rates, service,
and long-standing relationships with customers to attract and retain these deposits. We have, from
time to time, used brokers to obtain wholesale deposits to a limited extent. Early in 2005, we
joined a wholesale deposit program called CDARs which could increase the amount of wholesale
deposits. At December 31, 2004, we had approximately $14.6 million of brokered wholesale deposits. When we determine our deposit rates, we consider local competition, U.S. Treasury securities
offerings and the rates charged on other sources of funds. Core deposits (defined as regular
savings accounts, money market accounts and demand accounts) represented 42.4% of total deposits on
December 31, 2004. At December 31, 2004, time deposits with remaining terms to maturity of one year
or less amounted to $584.2 million. See Managements Discussion and Analysis of Financial
Condition and Results of OperationsGap Analysis. 20




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##### Table of Contents



The following table presents our deposit activity for the periods indicated: For the Year Ended December 31,2004
    
    
    2003
    
    
    2002(Dollars in thousands)Total deposits at beginning of period
    
    $
    2,052,290
    
    
    $
    2,126,655
    
    
    $
    2,090,440Net deposits (withdrawals)
    
    
    (112,771
    )
    
    
    (127,283
    )
    
    
    (26,619
    )Interest credited, net of penalties
    
    
    43,362
    
    
    
    52,918
    
    
    
    62,834Total deposits at end of period
    
    $
    1,982,881
    
    
    $
    2,052,290
    
    
    $
    2,126,655Net increase (decrease)
    
    $
    (69,409
    )
    
    $
    (74,365
    )
    
    $
    36,215Percentage increase (decrease)
    
    
    (3.38
    %)
    
    
    (3.50
    %)
    
    
    1.73
    %
 At December 31, 2004, we had $155.1 million in time deposits with balances of $100,000 and over
maturing as follows: Maturity Period
    
    Amount(In thousands)Three months or less
    
    $
    33,011Over three months through six months
    
    
    15,146Over six months through 12 months
    
    
    28,636Over 12 months through 24 months
    
    
    26,690Over 24 months through 36 months
    
    
    36,741Over 36 months
    
    
    14,893Total
    
    $
    155,117
 The following table presents the distribution of our deposit accounts at the dates indicated by
dollar amount and percent of portfolio, and the weighted average rate. At December 31,2004
    
    
    
    
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    2002Weighted
    
    
    
    
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedPercent
    
    
    average
    
    
    
    
    
    
    Percent
    
    
    average
    
    
    
    
    
    
    Percent
    
    
    averageof total
    
    
    nominal
    
    
    
    
    
    
    of total
    
    
    nominal
    
    
    
    
    
    
    of total
    
    
    nominalAmount
    
    
    deposits
    
    
    rate
    
    
    Amount
    
    
    deposits
    
    
    rate
    
    
    Amount
    
    
    deposits
    
    
    rate(Dollars in thousands)Savings
    
    $
    247,439
    
    
    
    12.48
    %
    
    
    0.43
    %
    
    $
    240,543
    
    
    
    11.72
    %
    
    
    0.43
    %
    
    $
    230,170
    
    
    
    10.82
    %
    
    
    0.63
    %Interest-bearing demand
    
    
    171,565
    
    
    
    8.65
    
    
    
    0.22
    
    
    
    157,231
    
    
    
    7.66
    
    
    
    0.22
    
    
    
    149,008
    
    
    
    7.01
    
    
    
    0.37Money market
    
    
    309,531
    
    
    
    15.61
    
    
    
    0.97
    
    
    
    358,003
    
    
    
    17.44
    
    
    
    1.05
    
    
    
    351,433
    
    
    
    16.53
    
    
    
    1.62Non-interest bearing demand
    
    
    111,855
    
    
    
    5.64
    
    
    
    0.00
    
    
    
    110,099
    
    
    
    5.36
    
    
    
    0.00
    
    
    
    98,941
    
    
    
    4.65
    
    
    
    0.00Total
    
    
    840,390
    
    
    
    42.38
    
    
    
    0.53
    
    
    
    865,876
    
    
    
    42.18
    
    
    
    0.59
    
    
    
    829,552
    
    
    
    39.01
    
    
    
    0.93Certificates:Time deposits with original
maturities of:Three months or less
    
    
    86,259
    
    
    
    4.35
    
    
    
    1.28
    
    
    
    136,756
    
    
    
    6.66
    
    
    
    1.22
    
    
    
    125,771
    
    
    
    5.91
    
    
    
    2.06Over three months to twelve months
    
    
    114,032
    
    
    
    5.75
    
    
    
    1.45
    
    
    
    172,181
    
    
    
    8.39
    
    
    
    1.48
    
    
    
    248,269
    
    
    
    11.67
    
    
    
    2.53Over twelve months to
twenty-four months
    
    
    199,174
    
    
    
    10.04
    
    
    
    2.25
    
    
    
    215,428
    
    
    
    10.50
    
    
    
    2.88
    
    
    
    336,919
    
    
    
    15.84
    
    
    
    3.83Over twenty-four months to
thirty-six months
    
    
    209,038
    
    
    
    10.54
    
    
    
    3.12
    
    
    
    183,880
    
    
    
    8.96
    
    
    
    3.75
    
    
    
    167,574
    
    
    
    7.88
    
    
    
    5.12Over thirty-six months to
forty-eight months
    
    
    204,096
    
    
    
    10.29
    
    
    
    4.29
    
    
    
    202,155
    
    
    
    9.85
    
    
    
    4.29
    
    
    
    188,180
    
    
    
    8.85
    
    
    
    4.34Over forty-eight months to sixty
months
    
    
    329,855
    
    
    
    16.65
    
    
    
    4.84
    
    
    
    274,756
    
    
    
    13.40
    
    
    
    4.98
    
    
    
    227,265
    
    
    
    10.69
    
    
    
    5.31Over sixty months
    
    
    37
    
    
    
    0.00
    
    
    
    7.19
    
    
    
    1,258
    
    
    
    0.06
    
    
    
    6.66
    
    
    
    3,125
    
    
    
    0.15
    
    
    
    5.90Total time deposits
    
    
    1,142,491
    
    
    
    57.62
    
    
    
    3.37
    
    
    
    1,186,414
    
    
    
    57.82
    
    
    
    3.35
    
    
    
    1,297,103
    
    
    
    60.99
    
    
    
    3.91Total deposits
    
    $
    1,982,881
    
    
    
    100.00
    %
    
    
    2.17
    %
    
    $
    2,052,290
    
    
    
    100.00
    %
    
    
    2.19
    %
    
    $
    2,126,655
    
    
    
    100.00
    %
    
    
    2.75
    %
 21




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##### Table of Contents



Borrowings We borrow funds to finance our lending and investing activities. Substantially all of our
borrowings take the form of advances from the FHLB of Chicago, on terms and conditions generally
available to member institutions. At December 31, 2004, we had borrowings totaling $305.6 million
with maturities of less than one year; of the notes payable to the FHLB at year end, $150.0 million
were fixed rate short term borrowings due within 30 days and the balance were overnight borrowings.
We have pledged all of our residential mortgage loans and some investment securities as blanket
collateral for these advances and future advances. The FHLB of Chicago offers a variety of
borrowing options with fixed or variable rates, flexible repayment options, and fixed or callable
terms. We choose the rate, repayment option, and term to fit the purpose of the borrowing. See
Notes to Consolidated Financial StatementsNote 7. Borrowings. The following table sets forth certain information regarding our borrowings at the end of and
during the periods indicated: At or For the Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Dollars in thousands)Balance outstanding at end of year:Notes payable to FHLB
    
    $
    623,925
    
    
    $
    299,491
    
    
    $
    332,299
    
    
    $
    442,025
    
    
    $
    546,489Overnight borrowings from FHLB
    
    
    137,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,225Other borrowings
    
    
    
    
    
    
    
    
    
    
    22,679
    
    
    
    23,335
    
    
    
    910Weighted average interest rate at end of year:Notes payable to FHLB
    
    
    2.89
    %
    
    
    5.52
    %
    
    
    5.57
    %
    
    
    5.75
    %
    
    
    6.31
    %Overnight borrowings from FHLB
    
    
    2.47
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.85
    %Other borrowings
    
    
    
    
    
    
    
    
    
    
    0.99
    %
    
    
    1.39
    %
    
    
    5.74
    %Maximum amount outstanding during the year:Notes payable to FHLB
    
    $
    623,925
    
    
    $
    332,398
    
    
    $
    445,414
    
    
    $
    547,653
    
    
    $
    546,760Overnight borrowings from FHLB
    
    
    289,800
    
    
    
    15,000
    
    
    
    5,480
    
    
    
    29,275
    
    
    
    120,900Other borrowings
    
    
    
    
    
    
    22,679
    
    
    
    19,835
    
    
    
    60,720
    
    
    
    2,820Average amount outstanding during the year:Notes payable to FHLB
    
    $
    325,861
    
    
    $
    318,942
    
    
    $
    395,351
    
    
    $
    491,248
    
    
    $
    289,032Overnight borrowings from FHLB
    
    
    75,106
    
    
    
    72
    
    
    
    25
    
    
    
    6,348
    
    
    
    20,145Other borrowings
    
    
    
    
    
    
    430
    
    
    
    3,309
    
    
    
    5,285
    
    
    
    84Weighted average interest rate during the year:Fixed interest rate notes payable to FHLB
    
    
    5.23
    %
    
    
    5.61
    %
    
    
    5.68
    %
    
    
    5.91
    %
    
    
    6.56
    %Overnight borrowings from FHLB
    
    
    2.03
    %
    
    
    1.38
    %
    
    
    1.53
    %
    
    
    5.74
    %
    
    
    6.56
    %Other borrowings
    
    
    
    
    
    
    0.98
    %
    
    
    1.45
    %
    
    
    3.38
    %
    
    
    6.29
    %
 Borrowings increased to $761.5 million at December 31, 2004, as compared to $299.5 million at
December 31, 2003, primarily to fund the growth in the loan and mortgage-related securities
portfolios, a decrease in the deposit portfolio and the repurchase of shares. See Managements
Discussion and Analysis of Financial Condition and Results of Operations-Comparisons of Financial
Condition at December 31, 2004 and 2003. Average Balance Sheet and Rate Yield Analysis See Managements Discussion and Analysis of Financial Condition and Results of Operations-Average
Balance Sheet and Yield/Rate Analysis. Average Equity to Average Assets The ratio of average equity to average assets measures a financial institutions financial
strength. At December 31, 2004, 2003, 2002, 2001, and 2000 our average equity to average assets
ratio was 22.6%, 14.0%, 10.9%, 10.4%, and 9.7%, respectively. 22




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##### Table of Contents



Cash Dividends We paid cash dividends of $0.18 per share in 2004, $0.12 per share in 2003, $0.093 per share in
2002, and $0.076 per share in 2001. We did not pay any cash dividends in 2000 because our initial
conversion was not completed until late in the year. We increased our quarterly dividend to $0.06
per share in the first quarter of 2005, from $0.05 in the fourth quarter of 2004. Subsidiaries Lake Financial and Insurance Services, Inc., a wholly owned subsidiary of the Bank, provides
investment, brokerage and insurance services to the Banks customers and the general public.
Investment services include tax deferred and tax free investments, mutual funds, and government
securities. Personal insurance, business insurance, life and disability insurance and mortgage
protection products are also offered by Lake Financial. Mutual Investment Corporation, a wholly owned subsidiary of the Bank, owns and manages part of the
investment portfolio. First Northern Investment Inc. (FNII), a wholly owned subsidiary of the
Bank, also owns and manages investments and purchases indirect automobile, recreational vehicle and
boat loans from our SFC subsidiary. MC Development LTD, a wholly owned subsidiary of the Bank, is involved in land development and
sales. It owns one parcel of undeveloped land consisting of 15 acres in Brown Deer, Wisconsin. In
addition, in the third quarter of 2004, MC Development LTD established Arrowood Development, LLC
with an independent third party to develop 318 acres in Oconomowoc, Wisconsin. In the initial
transaction, the third party purchased approximately one-half interest in that land, all of which
previously had been owned by MC Development. It is anticipated that development of the land will
begin in the spring of 2005 and that sales of the developed lots will begin in late 2005 or early
2006. See Properties. SFC, 50% owned by the Bank and 50% owned by another financial institution, originates, sells, and
services the indirect automobile, recreational vehicles and boat loans. SFC sells the loans on a
regular basis to FNII or the Bank, but retains the servicing rights in the loans. In addition, the Bank has five wholly owned subsidiaries that are inactive but will continue to be
wholly owned subsidiaries for possible future use in a related or other area. Employees At December 31, 2004, we employed 702 full time and 98 part time associates. Management considers
its relations with its associates to be good. 23




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##### Table of Contents



Regulation Set forth below is a brief description of certain laws and regulations that relate to the
regulation of the Bank and the Company. General The Bank is a federally chartered stock savings association, chartered as a savings bank, whose
primary regulator is the OTS. The FDIC, under the Savings Association Insurance Fund (SAIF),
insures its deposit accounts up to applicable limits. The Bank is currently subject to extensive
regulation, examination and supervision by the OTS as its chartering agency, and by the FDIC as its
deposit insurer. The Bank must file reports with the OTS and the FDIC concerning its activities and
financial condition, and must obtain regulatory approval prior to entering into certain
transactions, such as mergers with, or acquisitions of, other depository institutions and acquiring
branch offices. In addition, the Banks relationship with its depositors and borrowers also is
regulated to a great extent by both federal and state laws, especially in such matters as the
ownership of deposit accounts and the form and content of the Banks mortgage documents. The OTS currently conducts periodic examinations to assess the Banks compliance with various
regulatory requirements. In addition, the FDIC has the right to perform examinations of the Bank
should the OTS or the FDIC determine the Bank is in a weakened financial condition or a failure is
foreseeable. This regulation and supervision establishes a comprehensive framework of activities in
which a savings bank can engage and is intended primarily for the protection of the deposit
insurance fund and depositors rather than the shareholders of the Company. The regulatory structure
also gives the regulatory authorities extensive discretion in connection with their supervisory and
enforcement activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves for regulatory
purposes. The Company is a Wisconsin corporation registered with the OTS as a unitary savings and loan
holding company. It files reports with the OTS and is subject to regulation and examination by the
OTS. The Company also is required to file certain reports with, and otherwise comply with, the
rules and regulations of the Securities and Exchange Commission under the federal securities laws. Any change in these laws and regulations, whether by the OTS, the FDIC, the SEC, or through
legislation, could have a material adverse impact on the Bank and the Company, and their operations
and shareholders. Certain of the laws and regulations applicable to the Bank and the Company are summarized below.
These summaries do not purport to be complete and are qualified in their entirety by reference to
such laws and regulations. Federal Regulation of the Bank General.As a federally chartered, FDIC-insured savings bank, the Bank is subject to extensive
regulation by the OTS and the FDIC. Lending activities and other investments must comply with
federal statutory and regulatory requirements. This federal regulation and supervision establishes
a comprehensive framework of activities in which a savings bank can engage and is intended
primarily for the protection of the FDIC and depositors rather than the shareholders of the
Company. This regulatory structure gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination policies, including
policies regarding the classification of assets and the establishment of adequate loan loss
reserves. The OTS regularly examines the Bank and issues a report on its examination findings to the Banks
board of directors. The Banks relationships with its depositors and borrowers is also regulated by
federal law, especially in such matters as the ownership of savings accounts and the form and
content of the Banks mortgage documents. The Bank must file reports with the OTS and the FDIC concerning its activities and financial
condition, and must obtain regulatory approvals prior to entering into transactions such as mergers
with or acquisitions of other financial institutions. Regulatory Capital Requirements. OTS capital regulations require savings associations such as
the Bank to meet three capital standards. The minimum standards are tangible capital equal to at
least 1.5% of adjusted total assets, core capital equal to at least 3% of adjusted total assets,
and risk-based capital equal to at least 8% of total risk- 24




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##### Table of Contents



weighted assets. These capital standards are in addition to the capital standards promulgated by
the OTS under its prompt corrective action regulations, as described below under the heading
Prompt Corrective Action. Tangible capital is defined as core capital less all intangible assets and certain mortgage
servicing rights. Core capital is defined as common shareholders equity, noncumulative perpetual
preferred stock, related surplus and minority interests in the equity accounts of fully
consolidated subsidiaries, nonwithdrawable accounts and pledged deposits of mutual savings
associations and qualifying supervisory goodwill, less nonqualifying intangible assets, mortgage
servicing rights and investments in certain non-includable subsidiaries. The risk-based capital standard for savings institutions requires the maintenance of total
risk-based capital of at least 8% of risk-weighted assets. Risk-based capital is comprised of core
and supplementary capital. The components of supplementary capital include, among other items,
cumulative perpetual preferred stock, perpetual subordinated debt, mandatory convertible
subordinated debt, intermediate-term preferred stock, up to 45% of unrealized gains on
available-for-sale equity securities with readily determinable fair values, and the portion of the
allowance for loan losses not designated for specific loan losses. The portion of the allowance for
loan and lease losses includible in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, supplementary capital is limited to 100% of core capital. A savings
association must calculate its risk-weighted assets by multiplying each asset and off-balance sheet
item by various risk factors as determined by the OTS, which range from 0% for cash to 100% for
delinquent loans, property acquired through foreclosure, commercial loans, and other assets. OTS rules require a deduction from capital for institutions that have unacceptable levels of
interest rate risk. The OTS calculates the sensitivity of an institutions net portfolio value
based on data submitted by the institution in a schedule to its quarterly Thrift Financial Report
and using the interest rate risk measurement model adopted by the OTS. The amount of the interest
rate risk component, if any, is deducted from an institutions total capital in order to determine
if it meets its risk-based capital requirement. Dividend and Other Capital Distribution Limitations. The OTS imposes various restrictions or
requirements on the ability of savings associations to make capital distributions, including
dividend payments. OTS regulations require the Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends, and the OTS has the authority under its supervisory powers to prohibit
the payment of dividends. OTS regulations impose uniform limitations on the ability of all savings banks and associations to
engage in various distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, the regulation utilizes a three-tiered approach permitting various levels of
distributions based primarily upon a savings banks capital level. The Bank currently meets the criteria to be designated a Tier 1 association and, consequently,
could at its option (after prior notice to, and no objection made by, the OTS) distribute up to
100% of its net income during the calendar year plus its retained net income for the preceding two
years, less any distributions previously paid during the year. Additional dividends or
distributions would require further OTS approval. Qualified Thrift Lender Test. Federal savings associations must meet a qualified thrift lender
(QTL) test or they become subject to operating restrictions. The Bank met the QTL test as of
December 31, 2004 and anticipates that it will maintain an appropriate level of investments
consisting primarily of residential mortgages, mortgage-backed securities and other
mortgage-related investments, and otherwise qualify as a qualified thrift lender. The required
percentage of these mortgage-related investments is 65% of portfolio assets. Portfolio assets are
all assets minus goodwill and other intangible assets, property used by the institution in
conducting its business and liquid assets equal to 20% of total assets. Compliance with the
qualified thrift lender test is determined on a monthly basis in nine out of every twelve months. Liquidity Standard. Each federal savings association is required to maintain sufficient
liquidity to ensure its safe and sound operations. Federal Home Loan Bank System. The Bank is a member of the FHLB of Chicago, which is one of 12
regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank
for its members within its assigned region. It is funded primarily from funds deposited by member
financial institutions and proceeds derived from the sale of consolidated obligations of the
Federal Home Loan Bank System. It makes loans to members pursuant to policies and procedures
established by the board of directors of the FHLB of Chicago. 25




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##### Table of Contents



As a member, the Bank is required to purchase and maintain stock in the FHLB of Chicago in an
amount equal to the greatest of $500, 1% of its aggregate unpaid residential mortgage loans, home
purchase contracts or similar obligations at the beginning of each year, or 5% of its outstanding
advances. The Bank is currently in compliance with this requirement. The FHLB of Chicago also
imposes various limitations on advances made to member banks, which limitations relate to the
amount and type of collateral, the amounts of advances, and other items. Under the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the GLB Act), the Bank
is a voluntary member of the FHLB of Chicago. The Bank could withdraw or reduce its stock ownership
in the FHLB of Chicago, although it has no current intention to do so. The FHLB of Chicago
contributes to affordable housing programs through direct loans, interest subsidies on advances,
and grants targeted for community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of dividends paid by the FHLB of Chicago and could
continue to do so in the future. Federal Reserve System. The Federal Reserve System requires all depository institutions to
maintain non-interest-bearing reserves at specified levels against their checking, NOW, and Super
NOW checking accounts and non-personal time deposits. Savings institutions have authority to borrow
from the Federal Reserve System discount window, but Federal Reserve System policy generally
requires savings institutions to exhaust all other sources before borrowing from the Federal
Reserve System. Deposit Insurance. The deposit accounts held by customers of the Bank are insured by the SAIF to
a maximum of $100,000 as permitted by law. Insurance on deposits may be terminated by the FDIC if
it finds that the Bank has engaged in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the OTS as the Banks primary regulator. The management of the
Bank does not know of any practice, condition, or violation that might lead to termination of the
Banks deposit insurance. The FDIC sets deposit insurance premiums based upon the risks a particular bank or savings
association posed to its deposit insurance funds. Under the risk-based deposit insurance assessment
system, the FDIC assigns an institution to one of three capital categories based on the
institutions financial information, as of the reporting period ending six months before the
assessment period. The three capital categories are (1) well capitalized, (2) adequately
capitalized and (3) undercapitalized. The FDIC also assigns an institution to one of three
supervisory subcategories within each capital group. With respect to the capital ratios,
institutions are classified as well capitalized, adequately capitalized or undercapitalized using
ratios that are substantially similar to the prompt corrective action capital ratios discussed
below. The FDIC also assigns an institution to a supervisory subgroup based on a supervisory
evaluation provided to the FDIC by the institutions primary federal regulator and information that
the FDIC determines to be relevant to the institutions financial condition and the risk posed to
the deposit insurance funds (which may include, if applicable, information provided by the
institutions state supervisor). An institutions assessment rate depends on the capital category and supervisory category to which
it is assigned. Under the final risk-based assessment system, there are nine assessment risk
classifications (i.e., combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied. Assessment rates for deposit insurance currently range from 0 basis
points to 27 basis points. The capital and supervisory subgroup to which an institution is assigned
by the FDIC is confidential and may not be disclosed. A banks rate of deposit insurance
assessments will depend upon the category and subcategory to which the bank is assigned by the
FDIC. Any increase in insurance assessments could have an adverse effect on the earnings of insured
institutions, including the Bank. Transactions with Affiliates. Sections 23A and 23B of the Federal Reserve Act govern
transactions between an insured federal savings association, such as the Bank, and any of its
affiliates, such as the Company. The Federal Reserve Board has adopted Regulation W, which
comprehensively implements and interprets Sections 23A and 23B, in part by codifying prior Federal
Reserve Board interpretations under Sections 23A and 23B. An affiliate of a bank is any company or entity that controls, is controlled by or is under common
control with the bank. A subsidiary of a bank that is not also a depository institution or a
financial subsidiary under the GLB Act is not treated as an affiliate of the bank for the
purposes of Sections 23A and 23B; however, the OTS has the discretion to treat subsidiaries of a
savings association as affiliates on a case-by-case basis. Sections 23A and 23B limit the extent to
which a bank or its subsidiaries may engage in covered transactions with any one affiliate to an
amount equal to 10% of such banks capital stock and surplus, and limit all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus. The statutory sections
also require that all such transactions be on 26




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terms that are consistent with safe and sound banking practices. The term covered transaction
includes the making of loans, purchase of assets, issuance of guarantees and other similar types of
transactions. Further, most loans by a bank to any of its affiliates must be secured by collateral
in amounts ranging from 100 to 130 percent of the loan amounts. In addition, any covered
transaction by an association with an affiliate and any purchase of assets or services by an
association from an affiliate must be on terms that are substantially the same, or at least as
favorable, to the bank as those that would be provided to a non-affiliate. Acquisitions and Mergers. Under the federal Bank Merger Act, any merger of the Bank with or into
another institution would require the approval of the OTS, or the primary federal regulator of the
resulting entity if it is not an OTS-regulated institution. See also Acquisition of Bank Mutual
Corporation below for a discussion of factors relating to acquisitions of the Company. Prohibitions Against Tying Arrangements. Savings associations such as the Bank are subject to
the prohibitions of 12 U.S.C. Section 1972 on certain tying arrangements. A savings association is
prohibited, subject to certain exceptions, from extending credit to or offering any other service,
or fixing or varying the consideration for such extension of credit or service, on the condition
that the customer obtain some additional service from the institution or certain of its affiliates
or not obtain services of a competitor of the institution. Customer Privacy. Savings associations such as the Bank are required to develop and maintain
privacy policies relating to information on the customers and establish procedures to protect
customer data. Applicable privacy regulations further restrict the sharing of non-public customer
data with non-affiliated parties if the customer requests. Uniform Real Estate Lending Standards. The federal banking agencies adopted uniform regulations
prescribing standards for extensions of credit that are secured by liens on interests in real
estate or made for the purpose of financing the construction of a building or other improvements to
real estate. Under the joint regulations adopted by the federal banking agencies, all insured
depository institutions must adopt and maintain written policies that establish appropriate limits
and standards for extensions of credit that are secured by liens or interests in real estate or are
made for the purpose of financing permanent improvements to real estate. These policies must
establish loan portfolio diversification standards, prudent underwriting standards (including
loan-to-value limits) that are clear and measurable, loan administration procedures, and
documentation, approval and reporting requirements. The real estate lending policies must reflect
consideration of the Interagency Guidelines for Real Estate Lending Policies that have been adopted
by the federal bank regulators. The Interagency Guidelines, among other things, require a depository institution to establish
internal loan-to-value limits for real estate loans that are not in excess of the following
supervisory limits:  
    for loans secured by raw land, the supervisory loan-to-value limit is 65% of the value of the collateral;
    for land development loans (i.e., loans for the purpose of improving unimproved property prior to the erection of
structures), the supervisory limit is 75%;
    for loans for the construction of commercial, multi-family or other non-residential property, the supervisory limit is 80%;
    for loans for the construction of one- to four-family properties, the supervisory limit is 85%; and
    for loans secured by other improved property (e.g., farmland, completed commercial property and other income-producing
property, including non-owner occupied, one- to four-family property), the limit is 85%. Although no supervisory loan-to-value limit has been established for owner-occupied, one- to
four-family and home equity loans, the Interagency Guidelines state that for any such loan with a
loan-to-value ratio that equals or exceeds 90% at origination, an institution should require
appropriate credit enhancement in the form of either mortgage insurance or readily marketable
collateral. Community Reinvestment Act. Under the Community Reinvestment Act (CRA), any insured depository
institution, including the Bank, has a continuing and affirmative obligation consistent with its
safe and sound operation to help meet the credit needs of its entire community, including low and
moderate income neighborhoods. The CRA does not establish specific lending requirements or programs
for financial institutions nor does it limit an 27




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##### Table of Contents



institutions discretion to develop the types of products and services that it believes are best
suited to its particular community. The CRA requires the OTS, in connection with its examination of
a savings association, to assess the savings associations record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain applications by
such association, including applications for additional branches and acquisitions. Among other things, the CRA regulations contain an evaluation system that would rate an institution
based on its actual performance in meeting community needs. In particular, the evaluation system
focuses on three tests:  
    a lending test, to evaluate the institutions record of making loans in its service areas;
    affordable housing, and programs benefiting low or moderate income individuals and businesses; and
    a service test, to evaluate the institutions delivery of services through its
branches, ATMs and other offices. The CRA requires the OTS, in the case of the Bank, to provide a written evaluation of a savings
associations CRA performance utilizing a four-tiered descriptive rating system and requires public
disclosure of an associations CRA rating. The Bank received a satisfactory overall rating in its
most recent CRA examination. Safety and Soundness Standards. Each federal banking agency, including the OTS, has adopted
guidelines establishing general standards relating to internal controls, information and internal
audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset
quality, earnings and compensation, fees and benefits. In general, the guidelines require, among
other things, appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and
unsound practice and describe compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee, director, or
principal shareholder. Prompt Corrective Action. FDICIA also established a system of prompt corrective action to
resolve the problems of undercapitalized insured institutions. The OTS, as well as the other
federal banking regulators, adopted the FDICs regulations governing the supervisory actions that
may be taken against undercapitalized institutions. These regulations establish and define five
capital categories, in the absence of a specific capital directive, as follows: Total Capital to Risk
    
    
    Tier 1 Capital to Risk
    
    
    Tier 1 Capital toCategory
    
    
    Weighted Assets
    
    
    Weighted Assets
    
    
    Total AssetsWell capitalized
    
    
    3 10%
    
    
    3 6%
    
    
    3 5%Adequately capitalized
    
    
    3 8%
    
    
    3 4%
    
    
    3 4%*Under capitalized
    
    
    < 8%
    
    
    < 4%
    
    
    < 4%*Significantly undercapitalized
    
    
    < 6%
    
    
    < 3%
    
    
    < 3%Critically undercapitalized
    
    
    Tangible assets to capital of < 2%
   *
    
    3% if the bank receives the highest rating under the uniform system The severity of the action authorized or required to be taken under the prompt corrective action
regulations increases as a banks capital decreases within the three undercapitalized categories.
All savings associations are prohibited from paying dividends or other capital distributions or
paying management fees to any controlling person if, following such distribution, the association
would be undercapitalized. The FDIC or the OTS, in the case of the Bank, is required to monitor
closely the condition of an undercapitalized bank and to restrict the growth of its assets. An
undercapitalized savings association is required to file a capital restoration plan within 45 days
of the date the association receives notice that it is within any of the three undercapitalized
categories, and the plan must be guaranteed by any parent holding company. The aggregate liability
of a parent holding company is limited to the lesser of:  
    an amount equal to five percent of the banks total assets at the time it became undercapitalized; and 28




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
    the amount that is necessary (or would have been necessary) to bring the bank into compliance with all capital standards
applicable with respect to such bank as of the time it fails to comply with the plan. If a savings association fails to submit an acceptable plan, it is treated as if it were
significantly undercapitalized. Banks that are significantly or critically undercapitalized are
subject to a wider range of regulatory requirements and restrictions. The FDIC has a broad range of grounds under which it may appoint a receiver or conservator for an
insured savings association. If one or more grounds exist for appointing a conservator or receiver
for a savings association, the FDIC may require the association to issue additional debt or stock,
sell assets, be acquired by a depository bank or savings association holding company or combine
with another depository savings association. Under FDICIA, the FDIC is required to appoint a
receiver or a conservator for a critically undercapitalized savings association within 90 days
after the association becomes critically undercapitalized or to take such other action that would
better achieve the purposes of the prompt corrective action provisions. Such alternative action can
be renewed for successive 90-day periods. However, if the savings association continues to be
critically undercapitalized on average during the quarter that begins 270 days after it first
became critically undercapitalized, a receiver must be appointed, unless the FDIC makes certain
findings that the association is viable. Loans to Insiders. A savings associations loans to its executive officers, directors, any owner
of more than 10% of its stock (each, an insider) and any of certain entities affiliated with any
such person (an insiders related interest) are subject to the conditions and limitations imposed
by Section 22(h) of the Federal Reserve Act and the Federal Reserve Boards Regulation O
thereunder. Under these restrictions, the aggregate amount of the loans to any insider and the
insiders related interests may not exceed the loans-to-one-borrower limit applicable to national
banks, which is comparable to the loans-to-one-borrower limit applicable to the Banks loans. All
loans by a savings association to all insiders and insiders related interests in the aggregate may
not exceed the banks unimpaired capital and unimpaired surplus. With certain exceptions, loans to
an executive officer, other than loans for the education of the officers children and certain
loans secured by the officers residence, may not exceed the greater of $25,000 or 2.5% of the
savings associations unimpaired capital and unimpaired surplus, but in no event more than
$100,000. Regulation O also requires that any proposed loan to an insider or a related interest of
that insider be approved in advance by a majority of the board of directors of the savings
association, with any interested director not participating in the voting, if such loan, when
aggregated with any existing loans to that insider and the insiders related interests, would
exceed either $500,000 or the greater of $25,000 or 5% of the savings associations unimpaired
capital and surplus. Generally, such loans must be made on substantially the same terms as, and
follow credit underwriting procedures that are no less stringent than, those that are prevailing at
the time for comparable transactions with other persons and must not present more than a normal
risk of collectibility. An exception is made for extensions of credit made pursuant to a benefit or compensation plan of a
bank that is widely available to employees of the savings association and that does not give any
preference to insiders of the association over other employees of the association. The USA PATRIOT Act. In response to the terrorist attacks of September 11, 2001, Congress
adopted the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act. The USA PATRIOT Act gives the federal
government new powers to address terrorist threats through enhanced domestic security measures,
expanded surveillance powers, increased information sharing, and broadened anti-money laundering
requirements. By means of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act
takes measures intended to encourage information sharing among bank regulatory agencies and law
enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a
broad range of financial institutions, including banks and savings associations. Among other requirements, Title III of the USA PATRIOT Act imposes the following requirements with
respect to financial institutions:  
    All financial institutions must establish anti-money laundering
programs that include, at minimum; (a) internal policies, procedures,
and controls; (b) specific designation of an anti-money laundering
compliance officer; (c) ongoing employee training programs, and (d) an
independent audit function to test the anti-money laundering program. 29




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##### Table of Contents




    The Secretary of the Treasury, in conjunction with other bank
regulators, may issue regulations that provide for minimum standards
with respect to customer identification at the time new accounts are
opened.
    Financial institutions that establish, maintain, or manage private banking accounts or
correspondent accounts in the United States for non-United States persons or their
representatives (including foreign individuals visiting the United States) must establish
appropriate, specific, and, where necessary, enhanced due diligence policies, procedures,
and controls designed to detect and report money laundering.
    Financial institutions are prohibited from establishing, maintaining,
administering or managing correspondent accounts for foreign shell
banks (foreign banks that do not have a physical presence in any
country), and will be subject to certain recordkeeping obligations
with respect to correspondent accounts of foreign banks.
    Bank regulators are directed to consider a holding companys
effectiveness in combating money laundering when ruling on Federal
Reserve Act and bank merger applications. Bank Mutual Corporation Regulation Holding Company Regulation Bank Mutual Corporation is registered with the Office of Thrift Supervision as a savings and loan
holding company and therefore, is subject to regulation and supervision by the OTS. The OTS has
enforcement authority over the Company and its non-savings institution subsidiaries. Among other
things, this authority permits the OTS to restrict or prohibit activities that are determined to be
a risk to the Bank. Non-grandfathered unitary savings and loan holding companies are limited to those activities
permissible for financial holding companies or for multiple savings and loan holding companies. The
Company is not a grandfathered unitary savings and loan holding company and, therefore, is limited
to the activities permissible for financial holding companies or for multiple savings and loan
holding companies. A financial holding company may engage in activities that are financial in
nature, including underwriting equity securities and insurance, incidental to financial activities
or complementary to a financial activity. A multiple savings and loan holding company is generally
limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank
Holding Company Act, subject to the prior approval of the Office of Thrift Supervision, and certain
additional activities authorized by OTS regulations. Federal law prohibits a savings and loan holding company, directly or indirectly, from acquiring
control of another savings institution or holding company thereof, without prior written approval
of the Office of Thrift Supervision. It also prohibits the acquisition or retention of, with
specified exceptions, more than 5% of the equity securities of a company engaged in activities that
are not closely related to banking or financial in nature or acquiring or retaining control of an
institution that is not federally insured. In evaluating applications by holding companies to
acquire savings institutions, the OTS must consider the financial and managerial resources, future
prospects of the savings institution involved, the effect of the acquisition on the risk to the
insurance fund, the convenience and needs of the community and competitive factors. Federal Securities Laws Bank Mutual Corporation common stock is registered with the Securities and Exchange Commission
under the Securities Exchange Act of 1934. The Company is therefore subject to the information,
proxy solicitation, insider trading restrictions and other requirements under the Securities
Exchange Act. Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 was adopted in response to public
concerns regarding corporate accountability in connection with the accounting and corporate
governance scandals at several prominent companies. The stated goals of the Sarbanes-Oxley Act are
to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies and to protect investors by improving the accuracy and
reliability of corporate disclosures pursuant to the securities laws. 30




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##### Table of Contents



The Sarbanes-Oxley Act is the most far-reaching U.S. securities legislation enacted in some time.
It applies to all public companies, including the Company, that file periodic reports with the SEC,
under the Securities Exchange Act. The Sarbanes-Oxley Act includes very specific additional disclosure requirements and new corporate
governance rules, requires the SEC and national securities exchanges and associations to adopt
extensive additional disclosure, corporate governance and other related rules and mandates further
studies of certain issues by the SEC, and increases penalties for violation. The Sarbanes-Oxley Act
represents significant federal involvement in matters traditionally left to state regulatory
systems, such as the regulation of the accounting profession, and to state corporate law, such as
the relationship between a board of directors and management and between a board of directors and
its committees. The Sarbanes-Oxley Act addresses, among other matters:  
    audit committees and auditor independence;
    certification of financial statements by the chief executive officer and the chief financial officer;
    management reporting, and auditor attestation, of internal control over financial reporting;
    the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuers securities if the
issuers financial statements later require restatement;
    a prohibition on insider trading during retirement plan black out periods;
    further disclosure of off-balance sheet transactions;
    a prohibition on many personal loans to directors and officers (with exceptions for financial institutions);
    expedited filing requirements for reporting of insiders transactions; and
    disclosure of a code of ethics and disclosure of a change or waiver of such code. Because some OTS accounting and governance regulations also refer to the SECs regulations, the
Sarbanes-Oxley Act also may affect the Bank. The Securities and Exchange Commission has been delegated the task of enacting rules to implement
various of the provisions with respect to, among other matters, disclosure in filings pursuant to
the Exchange Act, which rulemaking is substantially complete. Acquisition of Bank Mutual Corporation Under federal law, no person may acquire control of Bank Mutual Corporation or the Bank without
first obtaining, as summarized below, the approval of such acquisition of control by the Office of
Thrift Supervision. Under the federal Change in Bank Control Act and the Savings and Loan Holding
Company Act, any person, including a company, or group acting in concert, seeking to acquire 10% or
more of the outstanding shares of the Company must file a notice with the OTS. In addition, any
person or group acting in concert seeking to acquire more than 25% of the outstanding shares of the
Companys common stock will be required to obtain the prior approval of the OTS. Under regulations,
the OTS generally has 60 days within which to act on such applications, taking into consideration
certain factors, including the financial and managerial resources of the acquiror, the convenience
and needs of the communities served by the Company and the Bank, and the antitrust effects of the
acquisition. Office of Thrift Supervision conversion regulations prohibit, without the prior written approval of
the OTS, any person from making an offer, announcing an intent to make an offer or participating in
any other arrangement to purchase stock or acquiring stock in an institution or its holding company
from another person, or actually acquiring
shares in the converting institution or its holding company, for a period of three years from the
date of the completion of the conversion if, upon the completion of such offer, announcement or
acquisition, that person would become the beneficial owner of more than 10% of the outstanding
stock of the institution or its holding company. The OTS has defined person to include any
individual, group acting in concert, corporation, partnership, 31




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##### Table of Contents



association, joint stock company,
trust, unincorporated organization or similar company, a syndicate or any other group formed for
the purpose of acquiring, holding or disposing of securities of an insured institution. However,
offers made exclusively to a bank or its holding company, or an underwriter or member of a selling
group acting on the converting institutions or its holding companys behalf for resale to the
general public are excepted. The Companys conversion was completed on October 29, 2003. The
regulation also provides civil penalties for willful violation or assistance in any such violation
of the regulation by any person connected with the management of the converting institution or its
holding company or who controls more than 10% of the outstanding shares or voting rights of a
converted institution or its holding company. Federal and State Taxation Federal Taxation.The Company and its subsidiaries file a calendar year consolidated federal
income tax return, reporting income and expenses using the accrual method of accounting. Bad Debt Reserves. The Small Business Job Protection Act of 1996 (the Job Protection Act)
repealed the reserve method of accounting for bad debts by most thrift institutions effective for
the taxable years beginning after 1995. Larger thrift institutions such as the Bank are now
required to use the specific charge-off method. The Job Protection Act also granted partial
relief from reserve recapture provisions, which are triggered by the change in method. This
legislation did not have a material impact on our financial condition or results of operations. The federal income tax returns for the Companys subsidiaries have been examined and audited or
closed without audit by the IRS for tax years through 1999. Depending on the composition of its items of income and expense, the Company may be subject to
alternative minimum tax (AMT) to the extent AMT exceeds the regular tax liability. AMT is
calculated at 20% of alternative minimum taxable income (AMTI). AMTI equals regular taxable
income increased by certain tax preferences, including depreciation deductions in excess of
allowable AMT amounts, certain tax-exempt interest income and 75% of the excess of adjusted current
earnings (ACE) over AMTI. ACE equals AMTI adjusted for certain items, primarily accelerated
depreciation and tax-exempt interest. The payment of AMT would create a tax credit, which can be
carried forward indefinitely to reduce the regular tax liability in future years. State Taxation. Under current law, the state of Wisconsin imposes a corporate franchise tax of
7.9% on the separate taxable incomes of the members of our consolidated income tax group except our
Nevada subsidiaries. Presently, the income of the Nevada subsidiaries is only subject to taxation
in Nevada, which currently does not impose a corporate income or franchise tax. However, see
Managements Discussion and Analysis of Financial ConditionComparisons of Operating Results for
the Years Ended December 31, 2004 and 2003Income Taxes for a discussion of Wisconsin tax
developments relating to these subsidiaries. 32




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##### Table of Contents



Item 2. Properties The Company and its subsidiaries conducts its business through its executive office, an operations
center and 71 banking offices, which had an aggregate net book value of $39.9 million as of
December 31, 2004. The following table shows the location of our offices, whether they are owned or
leased, and the expiration date of the leases for the leased offices. Original
    
    
    
    
    
    OriginalDate
    
    Leased
    
    
    
    Date
    
    LeasedLeased or
    
    or
    
    
    
    Leased or
    
    orLocation
    
    Acquired
    
    Owned*
    
    Location
    
    Acquired
    
    Owned*Executive Office:4949 West Brown Deer Road
    
    1991
    
    OwnedBrown Deer, WI 53223Southeast Region:Milwaukee Metro Area:Bayshore Mall
    
    1971
    
    Leased
    
    Brookfield
    
    1973**
    
    Owned5900 N. Port Washington Road
    
    
    
    (2009)
    
    17100 W. Capitol DriveGlendale, WI 53217
    
    
    
    
    
    Brookfield, WI 53005Brookfield Square
    
    1975
    
    Leased
    
    Brown Deer
    
    1979
    
    Owned400 N. Moorland Road
    
    
    
    (2006)
    
    4801 W. Brown Deer RoadBrookfield, WI 53005
    
    
    
    
    
    Brown Deer, WI 53223Capitol Drive
    
    1976
    
    Owned
    
    Cedarburg
    
    1978**
    
    Leased8050 W. Capitol Drive
    
    
    
    
    
    W62 N248 Washington Avenue
    
    
    
    (2006)Milwaukee, WI 53222
    
    
    
    
    
    Cedarburg, WI 53012Downtown
    
    1955
    
    Owned
    
    Grafton
    
    1978
    
    Owned510 E. Wisconsin Avenue
    
    
    
    
    
    2030 Wisconsin AvenueMilwaukee, WI 53202
    
    
    
    
    
    Grafton, WI 53024Howell Avenue
    
    1977
    
    Owned
    
    Mayfair Mall
    
    2001
    
    Leased3847 S. Howell Avenue
    
    
    
    
    
    2600 N. Mayfair Road
    
    
    
    (2011)Milwaukee, WI 53207
    
    
    
    
    
    Wauwatosa, WI 53226Menomonee Falls
    
    2003
    
    Owned
    
    Mequon
    
    1970**
    
    OwnedW178 N9379 Water Tower Place
    
    
    
    
    
    11249 N. Port Washington RoadMenomonee Falls, WI.53051
    
    
    
    
    
    Mequon, WI 53092Oak Creek
    
    1972
    
    Owned
    
    Oklahoma Avenue
    
    1982
    
    Owned8780 S. Howell Avenue
    
    
    
    
    
    6801 W. Oklahoma AvenueOak Creek, WI 53154
    
    
    
    
    
    Milwaukee, WI 53219Sherman Park
    
    1950**
    
    Owned
    
    Southgate
    
    1967
    
    Owned4812 W. Burleigh Street
    
    
    
    
    
    3340 S. 27th StreetMilwaukee, WI 53210
    
    
    
    
    
    Milwaukee, WI 53215Southridge Mall
    
    1978
    
    Leased
    
    Thiensville
    
    1960**
    
    Owned5300 S. 76th Street
    
    
    
    (2006)
    
    208 N. Main StreetGreendale, WI 53129
    
    
    
    
    
    Thiensville, WI 53092West Allis
    
    1976
    
    Owned
    
    Racine
    
    Opening
    
    Owned10296 W. National Avenue
    
    
    
    
    
    5133 Douglas Ave.
    
    in 2005West Allis, WI 53227
    
    
    
    
    
    Racine, WI 53402Madison Area:Downtown
    
    1980
    
    Leased
    
    West
    
    1982
    
    Leased23 S. Pinckney Street
    
    
    
    (2008)
    
    5521 Odana Road
    
    
    
    (2011)Madison, WI 53703
    
    
    
    
    
    Madison, WI 53719Middleton
    
    1978
    
    Owned
    
    Monona
    
    1981
    
    Owned6209 Century Avenue
    
    
    
    
    
    5320 Monona DriveMiddleton, WI 53562
    
    
    
    
    
    Monona, WI 53716Sheboygan Area:Sheboygan
    
    1973
    
    Owned
    
    Sheboygan Motor Bank
    
    1984
    
    Owned801 N. 8th Street
    
    
    
    
    
    730 N. 9th StreetSheboygan, WI 53081
    
    
    
    
    
    Sheboygan, WI 53081
 33




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##### Table of Contents



Original
    
    
    
    
    
    OriginalDate
    
    Leased
    
    
    
    Date
    
    LeasedLeased or
    
    Or
    
    
    
    Leased or
    
    OrLocation
    
    Acquired
    
    Owned
    
    Location
    
    Acquired
    
    OwnedAdditional Southeast Locations:Beaver Dam:
    
    1975
    
    Owned
    
    Beloit:
    
    1971
    
    Leased130 W. Maple Avenue
    
    
    
    
    
    3 Beloit Mall Shopping Center
    
    
    
    (2012)Beaver Dam, WI 53916
    
    
    
    
    
    Beloit, WI 53511Berlin:
    
    1973
    
    Owned
    
    Fond du Lac:
    
    2000
    
    Owned103 E. Huron Street
    
    
    
    
    
    W6606A Highway 23Berlin, WI 54923
    
    
    
    
    
    Fond du Lac, WI 54937Janesville:
    
    1973
    
    Owned
    
    Portage:
    
    1976
    
    Owned2111 Holiday Drive
    
    
    
    
    
    145 E. Cook StreetJanesville, WI 53545
    
    
    
    
    
    Portage, WI 53901Northeast Region:Greater Green Bay Area:201 N. Monroe Avenue
    
    1975**
    
    Owned
    
    2255 University Avenue
    
    1970**
    
    OwnedGreen Bay, WI 54301-4995
    
    
    
    
    
    Green Bay, WI 54308-80462357 S. Oneida Street
    
    1971**
    
    Owned
    
    2603 Glendale Avenue
    
    1986**
    
    OwnedGreen Bay, WI 54304-5286
    
    
    
    
    
    Green Bay, WI 54313-68232370 East Mason Street
    
    1985**
    
    Owned
    
    2424 West Mason Street
    
    1992**
    
    OwnedGreen Bay, WI 54302-3347
    
    
    
    
    
    Green Bay, WI 54303-4711749 Main Avenue
    
    1972**
    
    Owned
    
    330 North Broadway
    
    1979**
    
    OwnedDe Pere, WI 54115-5190
    
    
    
    
    
    De Pere, WI 54115-5250201 West Walnut St. (Operations Center)
    
    1999**
    
    LeasedGreen Bay, WI 54303
    
    
    
    (2009)Fox Valley Area:Appleton
    
    1985
    
    Leased
    
    Neenah
    
    1974
    
    Owned4323 W. Wisconsin Avenue
    
    
    
    (2009)
    
    101 W. Wisconsin AvenueFox River Mall
    
    
    
    
    
    Neenah, WI 54956Appleton, WI 54915Marinette Area:830 Pierce Avenue
    
    1972**
    
    Owned
    
    Pine Tree Mall
    
    1978**
    
    LeasedMarinette, WI 54143-0318
    
    
    
    
    
    2314 Roosevelt Road
    
    
    
    (2006)Marinette, WI 54143-0345Brillion:
    
    
    
    
    
    Crivitz:314 N. Main Street
    
    1973**
    
    Owned
    
    315 Highway 141
    
    1985**
    
    OwnedBrillion, WI 54110-1198
    
    
    
    
    
    Crivitz, WI 54114-0340Hortonville:
    
    
    
    
    
    Kiel:209 South Nash Street
    
    1979**
    
    Owned
    
    622 Fremont Street
    
    1970**
    
    OwnedHortonville, WI 54944
    
    
    
    
    
    Kiel, WI 53042-1321New Holstein:
    
    
    
    
    
    New London:2205 Wisconsin Avenue
    
    1976**
    
    Owned
    
    101 Park Street
    
    1969**
    
    OwnedNew Holstein, WI 53061-1291
    
    
    
    
    
    New London, WI 54961Peshtigo:
    
    
    
    
    
    Shawano:616 French Street
    
    1975**
    
    Owned
    
    835 E. Green Bay Avenue
    
    1981**
    
    OwnedPeshtigo, WI 54157-0193
    
    
    
    
    
    Shawano, WI 54166-0396Sturgeon Bay:1227 Egg Harbor Road
    
    1978**
    
    OwnedSturgeon Bay, WI 54235-0068
 34




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##### Table of Contents



Original
    
    
    
    
    
    OriginalDate
    
    Leased
    
    
    
    Date
    
    LeasedLeased or
    
    Or
    
    
    
    Leased or
    
    OrLocation
    
    Acquired
    
    Owned
    
    Location
    
    Acquired
    
    OwnedNorthwest Region:Eau Claire:Downtown
    
    1968**
    
    Owned
    
    Mall
    
    1972**
    
    Owned319 E. Grand Avenue
    
    
    
    
    
    2812 Mall DriveEau Claire, WI 54701
    
    
    
    
    
    Eau Claire, WI 54701Cub Foods
    
    1996**
    
    Leased
    
    Pinehurst
    
    1986**
    
    Owned2717 Birch Street
    
    
    
    (2010)
    
    2722 Eddy LaneEau Claire, WI 54703
    
    
    
    
    
    Eau Claire, WI 54703Chippewa Falls Area:Downtown
    
    1975**
    
    Owned
    
    Falls PickN Save
    
    1995**
    
    Leased35 W. Columbia
    
    
    
    
    
    303 Prairie View Road
    
    
    
    (2010)Chippewa Falls, WI 54729
    
    
    
    
    
    Chippewa Falls, WI 54729Menomonie Area:Downtown
    
    1967**
    
    Owned
    
    North
    
    1978**
    
    Owned717 Main Street
    
    
    
    
    
    2409 Hills Ct. N.EMenomonie, WI 54751
    
    
    
    
    
    Menomonie, WI 54751Barron:
    
    1995**
    
    Owned
    
    Bloomer:
    
    1995**
    
    Owned1512 E. Division Ave. (Hwy. 8)
    
    
    
    
    
    1203 17th AvenueBarron, WI 54812
    
    
    
    
    
    Bloomer, WI 54724Cornell:
    
    1980**
    
    Leased
    
    Ellsworth:
    
    1975**
    
    Owned422 Main Street
    
    
    
    (month to
    
    385 W. Main StreetCornell, WI 54732
    
    
    
    month)
    
    Ellsworth, WI 54011Hayward:
    
    1984**
    
    Owned
    
    Hudson:
    
    1979**
    
    Owned10562 Kansas Avenue
    
    
    
    
    
    2000 Crestview DriveHayward, WI 54843
    
    
    
    
    
    Hudson, WI 54016Rice Lake:
    
    1979**
    
    Owned
    
    Spooner:
    
    1995**
    
    Owned2850 Pioneer Avenue
    
    
    
    
    
    500 Front StreetRice Lake, WI 54868
    
    
    
    
    
    Spooner, WI 54801St. Croix Falls:
    
    1980**
    
    Owned
    
    Stanley:144 Washington Street N
    
    
    
    
    
    118 N. Broadway
    
    1978**
    
    OwnedSt. Croix Falls, WI 54024
    
    
    
    
    
    Stanley, WI 54768Woodbury, Minnesota:8420 City Centre Drive
    
    1995**
    
    OwnedWoodbury, MN 55125
   *
    
    If a leased property, the chart also shows year of lease expiration.**
    
    Date originally opened by an institution which was acquired by the Bank. In addition, the Bank owns one parcel of undeveloped land in Brown Deer, Wisconsin through its MC
Development subsidiary and one parcel of undeveloped land in Oconomowoc, Wisconsin. The 15 acre
Brown Deer parcel is comprised of four lots consisting of 2.9 to 4.3 acres and was part of a larger
property that was acquired in 1988 to accommodate the construction of a new corporate headquarters
building. Each of the lots is available for sale and is designed to accommodate 60,000 to 75,000
square foot office buildings. The net book value of the four lots is $1.6 million. MC Developments owned Oconomowoc property consists of 318 acres of undeveloped land of which a
one-half interest was sold in 2004 to a third party. Simultaneously in 2004, MC Development and
that third party formed a
joint venture, Arrowhead Development, LLC, to develop the entire 318 acre site. We anticipate that
Arrowhead Development will begin to develop this land in 2005, and that residential lot sales will
begin by late 2005 or in 2006. 35




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##### Table of Contents



Item 3. Legal Proceedings The Bank is not involved in any pending legal proceedings other than routine legal proceedings
occurring in the ordinary course of business. We believe that these routine legal proceedings, in
the aggregate, are immaterial to our financial condition and results of operations. 
 Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 
 Executive Officers of the Registrant The table below sets forth certain information regarding the persons who have been determined, by
our board of directors, to be executive officers of the Company. These persons will continue in the
same positions with the successor the Company. ExecutiveOfficerName and Age
    
    Offices and Positions with Bank Mutual Corporation and the Bank*
    
    Since (1)Michael T. Crowley, Jr., 62
    
    Chairman, President and Chief Executive Officer of Bank Mutual
Corporation; President and Chief Executive Officer of the Bank(2)
    
    
    1968Eugene H. Maurer, Jr., 59
    
    Senior Vice President and Secretary of Bank Mutual Corporation;
Senior Vice President, Chief Financial Officer, Treasurer and
Secretary of the Bank
    
    
    1982Rick B. Colberg, 52
    
    Chief Financial Officer of Bank Mutual Corporation; Vice
President of the Bank (3)
    
    
    1980Marlene M. Scholz, 59
    
    Senior Vice President and principal accounting officer of Bank
Mutual Corporation; Senior Vice President and Controller of the
Bank
    
    
    1981P. Terry Anderegg, 54
    
    Senior Vice PresidentRetail Operations of the Bank (4)
    
    
    1993Christopher J. Callen, 61
    
    Senior Vice PresidentLending of the Bank (4)
    
    
    1998
   *
    
    Excluding directorships and excluding positions with Bank subsidiaries. Those positions do
not constitute a substantial part of the officers duties.(1)
    
    Indicates date when individual first held an executive officer position with the Bank or
First Northern Savings. Each of these persons, other than Mr. Anderegg and Mr. Callen, became
a Bank Mutual Corporation executive officer in 2000.(2)
    
    Michael Crowley, Jr. became president of Bank Mutual Corporation in 2003.(3)
    
    Rick Colberg is the chief financial officer of Bank Mutual Corporation. He is also Vice
President of the Bank since 2003, when First Northern Savings merged into it. Previously he
was senior vice president, chief financial officer, and treasurer of First Northern Savings.(4)
    
    This position has been considered to be an executive officer position of Bank Mutual
Corporation since May 2003, as a result of the merger of the subsidiary banks. 36




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##### Table of Contents



Part II 
 Item 5. Market for Registrants Common Equity and Related Stockholder Matters and
Issuer Purchase ofEquity Securities The common stock of the Company is traded on The Nasdaq Stock Market® under the symbol BKMU. As of February 28, 2005, there were 68,964,713 shares of common stock outstanding and approximately
6,423 shareholders of record. Bank Mutual Corporation became a publicly held corporation on
November 1, 2000 and we did not pay a cash dividend in 2000. We paid a cash dividend of $0.18 per
share in 2004. We increased our cash dividend to $0.06 per share to shareholders of record on
February 17, 2005 which was paid March 1, 2005. We anticipate that we will continue to pay quarterly cash dividends on our common stock, although
there can be no assurance that payment of such dividends will continue or that they will not be
reduced. The payment of dividends in the future is discretionary with our board of directors and
will depend on our operating results and financial condition, regulatory limitations, tax
considerations and other factors. Interest on deposits will be paid prior to payment of dividends on Bank Mutual Corporations common
stock. Earnings appropriated to bad debt reserves and deducted for federal income tax purposes
cannot be used to pay cash dividends without the payment of federal income taxes on the amounts
removed from the reserves for such purpose at the then current income tax rate. Our common stock trades on The Nasdaq Stock Market®. The high and low trading prices from January
1, 2002 through December 31, 2004, by quarter, and the dividends paid in each quarter, were as
follows: COMMON STOCK TRADING PRICE RANGE
(High and Low Sales Price) 2004
    
    
    2003*
    
    
    2002*High
    
    
    Low
    
    
    High
    
    
    Low
    
    
    High
    
    
    Low1st Quarter
    
    $
    11.55
    
    
    $
    10.90
    
    
    $
    6.937
    
    
    $
    6.259
    
    
    $
    4.770
    
    
    $
    4.1512nd Quarter
    
    $
    11.35
    
    
    $
    9.65
    
    
    $
    9.625
    
    
    $
    8.723
    
    
    $
    5.681
    
    
    $
    4.6343rd Quarter
    
    $
    12.40
    
    
    $
    10.50
    
    
    $
    11.846
    
    
    $
    10.075
    
    
    $
    5.931
    
    
    $
    4.7844th Quarter
    
    $
    12.59
    
    
    $
    11.80
    
    
    $
    12.600
    
    
    $
    11.000
    
    
    $
    6.951
    
    
    $
    5.469
 CASH DIVIDENDS PAID 2004
    
    
    2003*
    
    
    2002*1st Quarter
    
    $
    0.040
    
    
    $
    0.027
    
    
    $
    0.0222ndQuarter
    
    $
    0.040
    
    
    
    0.027
    
    
    
    0.0223rd Quarter
    
    $
    0.050
    
    
    
    0.030
    
    
    
    0.0254th Quarter
    
    $
    0.050
    
    
    
    0.035
    
    
    
    0.025$
    0.180
    
    
    $
    0.120
    
    
    $
    0.093
  *
    Trading prices and per share cash dividends have been rounded and reflect the October 2003
exchange of 3.6686 shares of Bank Mutual Corporation for every share of the old Bank Mutual
Corporation. A cash dividend of $0.06 per share, a 20.0% increase over the fourth quarter of 2004 cash
dividend of $0.05 per share, was paid on March 1, 2005 to shareholders of record on February
17, 2005. During the first two months of 2005, Bank Mutuals common stock sales price ranged between $12.30
to $11.50 per share, and closed on February 28, 2005 at $12.09 per share 37




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##### Table of Contents



During 2004, Bank Mutual Corporation repurchased 6,642,521 shares at an average price of $11.87 per
share. In addition, in December 2004, we announced another stock repurchase program, for 5.0
million shares; we did not begin purchases under this program until January 2005. In February
2005, we announced an amendment to this plan to increase the total number of shares to be
repurchased under it to 10.0 million. As of February 28, 2005 Bank Mutual Corporation has
repurchased 4.5 million shares at an average price of $12.17 per share. The following table provides the specified information about the repurchases of shares by the
Company during the fourth quarter of 2004. Total number
    
    Maximum number ofof shares purchased
    
    shares that may beAverage
    
    
    as part of publicly
    
    purchased under theTotal number
    
    
    price paid
    
    
    announced plans or
    
    recent plans orPeriod
    
    of shares purchased
    
    
    per share
    
    
    programs
    
    programs*October 1 to 31,
2004
    
    
    
    
    
    $
    
    
    


    

November 1 to 30,
2004
    
    
    3,879,344
    
    
    
    12.28
    
    
    3,878,000
    
    1,122,000December 1 to 31,
2004
    
    
    1,123,930
    
    
    
    12.29
    
    
    1,122,000
    
    5,000,000Total
    
    
    5,003,274
    
    
    $
    12.28
    
    
    5,000,000
   *
    At period end. The above table does not reflect the February 2005 amendment of the previously-announced stock
repurchase plan to permit repurchase of an additional 5.0 million shares. The shares not purchased
as part of the publicly announced program were existing owned Company shares used by option holders
in payment of the purchase price and/or tax withholding obligations in connection with their
exercise of stock options under the Companys 2001 Stock Incentive Plan. The price used for
these purposes is the deemed value of those shares under the 2001 Plan. 38




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##### Table of Contents



Item 6.Selected Financial Data Selected Financial Highlights The following table provides selected financial data for Bank Mutual Corporation for its past five
fiscal years. The data is derived from the Companys audited financial statements, although the
table itself is not audited. The following data should be read together with the Companys
consolidated financial statements and related notes and Managements Discussion and Analysis of
Financial Condition and Results of Operations later in this report. On November 1, 2000, Mutual Savings Bank converted from a mutual to stock form of organization,
completing a restructuring that resulted in the creation of Bank Mutual Corporation as its
publicly-held holding company. The transactions included the Companys stock offering and the
Companys related acquisition of First Northern. Under the purchase accounting method, First
Northerns results are included from the date of acquisition, and results prior to those dates are
those of Mutual Savings Bank. On October 29, 2003, the Company completed a conversion and reorganization from a mutual holding
company form, established a new Wisconsin chartered company and in effect sold the MHCs investment
in the Company to the public. Approximately $404.8 million of net new capital was obtained in the
October 29, 2003 conversion. At December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(In thousands except number of shares and per share amounts)Selected Financial Condition Data:Total assets
    
    $
    3,445,299
    
    
    $
    3,108,527
    
    
    $
    2,843,328
    
    
    $
    2,905,790
    
    
    $
    2,789,532Loans receivable, net
    
    
    1,875,885
    
    
    
    1,712,278
    
    
    
    1,685,662
    
    
    
    1,831,155
    
    
    
    1,972,636Loans held for sale
    
    
    4,987
    
    
    
    4,056
    
    
    
    46,971
    
    
    
    32,321
    
    
    
    7,469Securities available-for-sale, at fair value:Investment securities
    
    
    68,753
    
    
    
    67,854
    
    
    
    73,226
    
    
    
    93,059
    
    
    
    94,129Mortgage-related securities
    
    
    1,266,224
    
    
    
    1,053,349
    
    
    
    618,123
    
    
    
    521,084
    
    
    
    464,873Foreclosed properties and repossessed assets
    
    
    1,621
    
    
    
    630
    
    
    
    750
    
    
    
    382
    
    
    
    2,281Goodwill
    
    
    52,570
    
    
    
    52,570
    
    
    
    52,570
    
    
    
    52,570
    
    
    
    55,967Other intangible assets
    
    
    4,412
    
    
    
    5,073
    
    
    
    5,734
    
    
    
    6,396
    
    
    
    7,057Mortgage servicing rights
    
    
    4,542
    
    
    
    4,698
    
    
    
    3,060
    
    
    
    4,251
    
    
    
    3,442Deposits
    
    
    1,982,881
    
    
    
    2,052,290
    
    
    
    2,126,655
    
    
    
    2,090,440
    
    
    
    1,894,820Borrowings
    
    
    761,525
    
    
    
    299,491
    
    
    
    354,978
    
    
    
    465,360
    
    
    
    567,624Shareholders equity
    
    
    670,454
    
    
    
    731,080
    
    
    
    323,075
    
    
    
    304,098
    
    
    
    284,397Tangible shareholders equity
    
    
    610,698
    
    
    
    670,771
    
    
    
    264,011
    
    
    
    243,486
    
    
    
    220,757Number of shares outstanding  net of
treasury
stock(1)
    
    
    73,485,113
    
    
    
    78,775,779
    
    
    
    79,802,950
    
    
    
    81,946,124
    
    
    
    81,962,632Book value per share(1)
    
    
    9.12
    
    
    
    9.28
    
    
    
    4.05
    
    
    
    3.71
    
    
    
    3.47Tangible book value per share(1)
    
    
    8.31
    
    
    
    8.51
    
    
    
    3.31
    
    
    
    2.97
    
    
    
    2.69
 39




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##### Table of Contents



For the Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(In thousands except per share amount)Selected Operating Data:Total interest income
    
    $
    148,921
    
    
    $
    141,070
    
    
    $
    165,432
    
    
    $
    190,986
    
    
    $
    135,711Total interest expense
    
    
    58,498
    
    
    
    69,482
    
    
    
    87,678
    
    
    
    119,372
    
    
    
    84,980Net interest income
    
    
    90,423
    
    
    
    71,588
    
    
    
    77,754
    
    
    
    71,614
    
    
    
    50,731Provision for loan losses
    
    
    1,330
    
    
    
    1,304
    
    
    
    760
    
    
    
    723
    
    
    
    423Net interest income after provision for
loan losses
    
    
    89,093
    
    
    
    70,284
    
    
    
    76,994
    
    
    
    70,891
    
    
    
    50,308Total noninterest income
    
    
    16,175
    
    
    
    19,618
    
    
    
    16,676
    
    
    
    16,480
    
    
    
    9,250Noninterest expense:Amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,098
    
    
    
    1,066Amortization of other intangible assets
    
    
    661
    
    
    
    661
    
    
    
    662
    
    
    
    662
    
    
    
    331Total noninterest expense
    
    
    60,082
    
    
    
    55,608
    
    
    
    54,169
    
    
    
    55,004
    
    
    
    36,144Income before income taxes
    
    
    45,186
    
    
    
    34,294
    
    
    
    39,501
    
    
    
    32,367
    
    
    
    23,414Income tax expense
    
    
    15,632
    
    
    
    11,695
    
    
    
    12,956
    
    
    
    12,084
    
    
    
    8,709Net income
    
    $
    29,554
    
    
    $
    22,599
    
    
    $
    26,545
    
    
    $
    20,283
    
    
    $
    14,705Earnings per share-basic(1)
    
    $
    0.39
    
    
    $
    0.30
    
    
    $
    0.34
    
    
    $
    0.26
    
    
    $
    0.04
    (2)Earnings per share-diluted(1)
    
    $
    0.38
    
    
    $
    0.29
    
    
    $
    0.34
    
    
    $
    0.26
    
    
    $
    0.04
    (2)Cash dividends paid per share(1)
    
    $
    0.18
    
    
    $
    0.12
    
    
    $
    0.093
    
    
    $
    0.076
    
    
    
    n/a
 At or for the Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Selected Financial Ratios:Net interest margin (3)
    
    
    3.00
    %
    
    
    2.58
    %
    
    
    2.88
    %
    
    
    2.67
    %
    
    
    2.76
    %Net interest rate spread
    
    
    2.44
    
    
    
    2.17
    
    
    
    2.52
    
    
    
    2.22
    
    
    
    2.26Return on average assets
    
    
    0.93
    
    
    
    0.76
    
    
    
    0.92
    
    
    
    0.71
    
    
    
    0.76Return on assets, excluding amortization
of goodwill(4)
    
    
    0.93
    
    
    
    0.76
    
    
    
    0.92
    
    
    
    0.82
    
    
    
    0.82Return on average shareholders equity
    
    
    4.10
    
    
    
    5.45
    
    
    
    8.44
    
    
    
    6.85
    
    
    
    7.86Return on average shareholders equity
excluding amortization of goodwill(4)
    
    
    4.10
    
    
    
    5.45
    
    
    
    8.44
    
    
    
    7.89
    
    
    
    8.43Efficiency ratio, excluding amortization
of goodwill (4)(5)
    
    
    56.36
    
    
    
    60.97
    
    
    
    57.36
    
    
    
    58.92
    
    
    
    58.48Noninterest expense (excluding amortization
of goodwill) as a percent of adjusted
average assets(4)
    
    
    1.88
    
    
    
    1.88
    
    
    
    1.88
    
    
    
    1.82
    
    
    
    1.82Shareholders equity to total assets
    
    
    19.46
    
    
    
    23.52
    
    
    
    11.36
    
    
    
    10.47
    
    
    
    10.20Tangible shareholders equity to adjusted
total assets (6)
    
    
    18.04
    
    
    
    22.01
    
    
    
    9.48
    
    
    
    8.57
    
    
    
    8.11Selected Asset Quality Ratios:Non-performing loans to loans receivable, net
    
    
    0.33
    %
    
    
    0.61
    %
    
    
    0.50
    %
    
    
    0.19
    %
    
    
    0.16
    %Non-performing assets to total assets
    
    
    0.23
    
    
    
    0.35
    
    
    
    0.32
    
    
    
    0.14
    
    
    
    0.19Allowance for loan losses to
non-performing loans
    
    
    222.09
    
    
    
    132.77
    
    
    
    151.87
    
    
    
    345.90
    
    
    
    392.12Allowance for loan losses to
non-performing assets
    
    
    176.46
    
    
    
    125.17
    
    
    
    139.40
    
    
    
    312.13
    
    
    
    226.55Allowance for loan losses to total loans
receivable, net
    
    
    0.74
    
    
    
    0.80
    
    
    
    0.76
    
    
    
    0.67
    
    
    
    0.62Charge-offs to average loans
    
    
    0.07
    
    
    
    0.02
    
    
    
    0.01
    
    
    
    0.04
    
    
    
    0.01
   (1)
    Per share and share information prior to October 29, 2003 has been adjusted to reflect
the full conversion transaction and related 3.6686-for-one share exchange on that date.(2)
    From date of restructuring (November 1, 2000) to December 31, 2000 based upon
79,134,648 weighted-average shares outstanding. No shares were outstanding prior to
November 1, 2000.(3)
    Net interest margin is calculated by dividing net interest income by average earnings
assets. 40




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(4)
    In 2002, accounting rules concerning the amortization of goodwill changed. These
ratios are being presented excluding goodwill so as to make them comparable among the
years presented.(5)
    Efficiency ratio is calculated by dividing noninterest expense by the sum of net
interest income and noninterest income.(6)
    The ratio is calculated by dividing total shareholders equity minus goodwill, other
intangible assets net of deferred taxes and mortgage servicing rights by the sum of total
assets minus goodwill, other intangible assets net of deferred taxes and mortgage servicing
rights. 41




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations Overview From November 1, 2000 until October 29, 2003, Bank Mutual Corporation was an OTS chartered United
States corporation which became the mid-tier holding company in the regulatory restructuring of
Mutual Savings Bank into mutual holding company form. Until October 29, 2003, Bank Mutual Bancorp,
MHC (the MHC), a U.S.-chartered mutual holding company of which Mutual Savings Banks depositors
held all of the voting and membership rights, owned 52.2% of Bank Mutual Corporations outstanding
common stock. On November 1, 2000, Bank Mutual Corporation also acquired First Northern Capital Corp., the parent
of First Northern Savings Bank. On March 16, 2003, Mutual Savings Bank and First Northern Savings
Bank combined to form a single OTS chartered savings bank subsidiary of Bank Mutual Corporation
called Bank Mutual herein called (the Bank). On October 29, 2003, Bank Mutual Corporation completed a conversion and reorganization from a
mutual holding company form, established a new Wisconsin chartered Bank Mutual Corporation and, in
effect, sold the MHCs interest in Bank Mutual Corporation to the public. Existing Bank Mutual
Corporation shareholders exchanged each existing share for 3.6686 shares of the new Bank Mutual
Corporation shares. The total number of shares issued or exchanged in the offering was
approximately 78,707,669 shares. All share and per share numbers in this discussion have been adjusted to reflect the full
conversion transaction and related share exchange. As used herein, the Company and Bank Mutual
Corporation refer to Bank Mutual Corporation both before and after the full conversion
transaction, unless the context requires otherwise. Significant Accounting Policies There are a number of accounting policies that we established which require us to use our judgment.
Some of the more significant policies are as follows:  
    Establishing the amount of the allowance for loan losses requires the use of our
judgment. The allowance for loan losses is maintained at a level believed adequate by
management to absorb probable losses inherent in the loan portfolio and is based on the
size and current risk characteristics of the loan portfolio, an assessment of individual
problem loans and actual loss experience, current economic events in specific industries
and geographical areas, including unemployment levels, and other pertinent factors,
including regulatory guidance and general economic conditions. Determination of the
allowance is inherently subjective as it requires significant estimates, including the
amounts and timing of expected future cash flows on impaired loans, estimated losses on
pools of homogeneous loans based on historical loss experience, and consideration of
current economic trends, all of which may be susceptible to significant change. Loan
losses are charged off against the allowance, while recoveries of amounts previously
charged off are credited to the allowance. A provision for loan losses is charged to
operations based on managements periodic evaluation of the factors previously mentioned,
as well as other pertinent factors. Evaluations are conducted at least quarterly and more
often if deemed necessary. If we misjudge a major component and experience a loss, it will
likely affect our earnings. Developments affecting loans can also cause the allowance to
vary significantly between quarters. We consistently challenge ourselves in the review of
the risk components to identify any changes in trends and their cause.
    Another valuation that requires our judgment relates to mortgage servicing rights.
Mortgage servicing rights are recorded as an asset when loans are sold with servicing
rights retained. The total cost of loans sold is allocated between the loan balance and
the servicing asset based on their relative fair values. The capitalized value of mortgage
servicing rights is amortized in proportion to, and over the period of, estimated net
future servicing revenue. Mortgage servicing rights are carried at the lower of the
initial carrying value, adjusted for amortization, or estimated fair value. The carrying
values are periodically evaluated for impairment. For purposes of measuring impairment,
the servicing rights are stratified into pools based on term and interest rate. Impairment
represents the excess of the remaining capitalized cost of a stratified pool over its fair
value, and is recorded through a valuation allowance. The fair value of each servicing
rights pool is calculated based on the present value of estimated future cash flows using a
discount rate, given current
market conditions. Estimates of fair value include assumptions about prepayment speeds,
interest rates and other factors which are subject to change over time. Changes in these
underlying assumptions could cause 42




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the fair value of mortgage servicing rights, and the
related valuation allowance, if any, to change significantly in the future.
    We also use our judgment in the valuation of other intangible assets (core deposit base

intangibles). Core deposit base intangible assets have been recorded for core deposits
(defined as checking, money market and savings deposits) that have been acquired in
acquisitions that were accounted for as purchase business combinations. The core deposit
base intangible assets have been recorded using the assumption that they provide a more
favorable source of funding than more expensive wholesale borrowings. An intangible asset
has been recorded for the present value of the difference between the expected interest to
be incurred on these deposits and interest expense that would be expected if these deposits
were replaced by wholesale borrowings, over the expected lives of the core deposits. We
currently estimate the underlying core deposits have lives of seven to fifteen years. If
we find these deposits have a shorter life, we will have to write down the asset by
expensing the amount that is impaired.
    We review goodwill at least annually for impairment, which requires the use of our
judgment. Goodwill has been recorded as a result of two acquisitions in which the purchase
price exceeded the fair value of tangible net assets acquired. If goodwill is determined
to be impaired, it would be expensed in the period in which it became impaired.
    The assessment of our tax assets and liabilities involves the use of estimates,
assumptions, interpretations, and judgments concerning certain accounting pronouncements
and federal and state tax codes. There can be no assurance that future events, such as
court decisions, regulatory actions or interpretations, or changes in positions of federal
and state taxing authorities will not differ from managements current assessment. The
impact of these matters could be significant to the consolidated results of operations and
reported earnings. Comparisons of Financial Condition at December 31, 2004 and 2003 Bank Mutual Corporations total assets at December 31, 2004, were $3.45 billion as compared to
$3.11 billion at December 31, 2003. Total assets increased $336.8 million or 10.8% primarily as a
result of investment of $200.0 million into mortgage-related securities funded by borrowing. Cash and cash equivalents decreased $48.9 million in 2004 primarily as a result of using federal
funds sold and interest-earning deposits to purchase mortgage-related securities, fund loans and
deposit outflows. Investment securities available-for-sale increased $899,000 during 2004 as a result of the
increased fair market value in 2004. Mortgage-related securities available-for-sale increased $212.9 million in 2004 primarily as a
result of the reinvestment of principle and interest payments received from the mortgage-related
securities portfolio and $200.0 million of mortgage-related securities purchased as a result of the
additional borrowings. We intend to use the repayments and prepayments on these securities to fund
loans and, therefore, reduce the dollar amount of the mortgage-related securities portfolio over
time. The current portfolio has a weighted average yield of approximately 4.31% at December 31,
2004; however, the average yield earned for the year on the average portfolio was 4.35% as compared
to 4.38% for the year of 2003. At December 31, 2004, we had $9.9 million of private placement
collateralized mortgage obligations (CMOs) in our investment portfolio. Private placement CMOs
have more credit risk than government agency CMOs and therefore, have a higher risk of impairment.
If permanent impairment would occur, a related impairment would reduce earnings. See Item 1.
Business  Investment Activities. 43




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The following table sets forth our mortgage, consumer and commercial loan originations and
purchases: During the year ended December 31,2004
    
    
    2003(In thousands)Originations:Mortgage loans
    
    $
    479,814
    
    
    $
    899,766Consumer loans
    
    
    268,521
    
    
    
    301,665Commercial business loans
    
    
    41,018
    
    
    
    49,646Total loans originated
    
    
    789,353
    
    
    
    1,251,077Purchases:Mortgage loans
    
    
    148,951
    
    
    
    41,214Total loans purchased
    
    
    148,951
    
    
    
    41,214Total loans originated and purchased
    
    $
    938,304
    
    
    $
    1,292,291
 Loan originations decreased $461.7 million in 2004 as compared to originations in 2003, primarily
as a result of relatively stable interest rates which prompted consumers to reduce the refinancing
of their existing loans. Mortgage loan originations decreased $420.0 million or 46.7% and consumer
loans decreased $33.1 million or 11.0% in 2004 as a result of the reduced refinancing of existing
loans. A majority of the consumer loan originations continued to be first and second mortgage
loans. We significantly increased our purchases of mortgage loans during 2004 to augment our loan
originations. Each mortgage loan that is purchased is underwritten by us and conforms to our
underwriting standards. Most of these purchased mortgage loans are in Wisconsin or in states
adjacent to Wisconsin. Commercial business loan originations decreased $8.6 million or 17.4 % in 2004 primarily as a
result of reduced demand for commercial loans in our market area. In 2004, we hired an additional
four experienced commercial loan originators in our continued efforts to emphasize commercial loan
originations. Most of the new commercial loan originators were hired in the last six months of
2004. We anticipate that we will continue our emphasis not only on commercial loans but also on
consumer loan originations to aid our asset and liability management and to aid in our overall
profitability, although at somewhat more risk than traditional mortgage products. Loans held for sale at December 31, 2004 as compared to December 31, 2003 increased $931,000 as a
result of a temporary decrease in market interest rates in the fourth quarter of 2004, which
resulted in more fixed rate mortgage loan originations and ultimately sales of fixed rate mortgage
loans. Currently, we sell all of our 30 year fixed rate mortgage loan originations and some of our
20 and 15 year fixed rate mortgage loan originations in the secondary mortgage market. Loans receivable increased $163.6 million in 2004 as a result of growth in all loan products except
commercial real estate and commercial business loans. The one-to four-family mortgage loan
portfolio increased $110.3 million or 13.9% primarily as a result of reduced fixed rate mortgage
loan sales, reduced refinancing of existing loans, increased mortgage loans purchases from third
parties and increased adjustable interest rate mortgage loan originations which are retained in the
portfolio. The multi-family portfolio increased $37.1 million or 29.8% and the consumer loan
portfolio increased $26.8 million or 5.9% both primarily as a result of reduced payoffs of existing
loans. The commercial real estate portfolio decreased $13.6 million or 6.5% primarily as a result of
payoffs of related loans made to finance large apartment complexes. These loans were refinanced by
the borrower with another company. The commercial business loan portfolio decreased $4.9 million
or 6.5% primarily as a result of reduced originations and the transfer of $3.1 million of
commercial non-performing loans to real estate owned and repossessed assets and ultimate disposal
of the collateral or write-off of the loans. Management expects to continue to emphasize consumer, non-residential mortgage loan and commercial
business loan originations, as we believe they will continue to add to the overall profitability
and aid in the management of interest rate risk. However, these loans can present higher credit
risks than residential mortgage loans. 44




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Goodwill resulted from the acquisitions of First Northern in 2000 and First Federal Bancshares of
Eau Claire (First Federal) in 1997. Under the Financial Accounting Standards Board (FASB)
Statement No. 142 Goodwill and Other Intangible Assets goodwill is tested at least annually for
impairment. If goodwill is determined to be impaired, it will be expensed in the period in which it
became impaired. No impairment of goodwill occurred in 2004, 2003 or 2002. Other intangible assets are composed of core deposit base intangibles which were also the result of
the First Northern and First Federal Eau Claire acquisitions. Other intangible assets are amortized
over their expected life and tested for impairment at least annually. Mortgage servicing rights are established on mortgage loans that we originate and sell. See
Significant Accounting Policies above and Comparisons of Operating Results for Years Ended
December 31, 2004 and 2003Noninterest Income below for a further discussion of mortgage servicing
rights. Other assets are comprised of the following: At December 31,2004
    
    
    2003(In thousands)Accrued Interest:Mortgage-related securities
    
    $
    4,581
    
    
    $
    4,034Investment securities
    
    
    172
    
    
    
    200Loans receivable
    
    
    6,599
    
    
    
    6,586Total accrued interest
    
    
    11,352
    
    
    
    10,820Foreclosed properties and repossessed assets
    
    
    1,621
    
    
    
    630Premises and equipment
    
    
    43,966
    
    
    
    45,196Federal Home Loan Bank stock, at cost
    
    
    38,186
    
    
    
    35,498Bank owned life insurance
    
    
    19,324
    
    
    
    18,268Other
    
    
    15,902
    
    
    
    11,734$
    130,351
    
    
    $
    122,146
 Our foreclosed properties and repossessed assets increased $991,000 to $1.6 million at December 31,
2004 as a result of foreclosures on commercial business loans. We believe that we continue to have
good asset quality, particularly in our residential portfolio, and the homes, boats, recreational
vehicles and other items that have been repossessed, are small in dollar amount in comparison to
the size of our loan portfolio. Premises and equipment decreased $1.2 million in 2004 primarily as a result of normal depreciation
of these assets. We anticipate that two or three new bank office buildings will be established in
2005. The effect of these new bank offices will be an increase to our premises and equipment
depreciation expense. Federal Home Loan Bank (FHLB) of Chicago stock increased $2.7 million primarily as a result of
stock dividends paid by the FHLB of Chicago. The FHLB of Chicago requires that its members own FHLB
of Chicago stock as a condition for borrowing. The FHLB of Chicago generally pays dividends and had
targeted a rate of return for their stock of 1% over the 1 year constant maturity Treasury note
yield. Recently, the FHLB of Chicago modified its dividend payout policy to a dividend payout
ratio not to exceed 90% of its adjusted core income, which is net income excluding gains or losses
from non-recurring events. Historically, the FHLB of Chicago stock has met or exceeded its
targeted returns but we cannot assure that will continue. See Notes to Consolidated Financial
StatementsNote 7. Borrowings. Bank owned life insurance (BOLI) is an asset that is used to partially offset the future cost of
employee benefits. BOLI is long-term life insurance on the lives of certain current and past
employees where the insurance policy benefits and ownership are retained by us. We value BOLI at
the amount which we could obtain if we cashed in the policies at the current time. The cash value
accumulation on BOLI is permanently tax deferred if the policy is held to the insured persons
death. 45




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Deposits decreased $69.4 million in 2004 primarily as a result of our decision to offer interest
rates on longer-term deposits at interest rates that approximate market average interest rates
rather than offering higher promotional deposit rates. We believe that deposit growth (or
shrinkage) for future periods will continue to depend, in a significant part, on the performance of
other investment alternatives and world events. Early in 2005, we contracted with a wholesale
deposit program which has the potential to increase the amount of our wholesale deposits. Our borrowings increased $462.0 million in 2004, as a result of the increase in the securities and
loan portfolio, the decrease in the deposit portfolio and the repurchase of our shares. In 2004,
we refinanced two Federal Home Loan Bank of Chicago borrowings totaling $200.0 million that had
maturities in November and December of 2004. The refinanced borrowings are due in September 2006.
Prior to refinancing, the interest rates on the borrowings were 5.62% and 5.77% while, the new two
year FHLB borrowing has a fixed interest rate of 2.75%. As a result of this transaction, we paid a
$1.7 million prepayment penalty. In addition, in the fourth quarter of 2004, we borrowed an
additional $200.0 million from the FHLB, on customary terms offered by the FHLB to member
institutions. In addition to the foregoing borrowings, we also had outstanding overnight
borrowings of $137.6 million at December 31, 2004 and $150.0 million of short-term fixed rate
borrowing which matured early in January 2005 and was refinanced on similar short-term basis; these
additional borrowings also were on terms and conditions which the FHLB generally makes available to
member institutions. We use overnight and short-term borrowings to fund loan originations and
decreases in deposits on a shorter-term basis. Shareholders equity decreased $60.6 million in 2004 primarily as a result of the repurchase of
shares, dividends paid in 2004, a decrease in our accumulated other comprehensive income and an
increase in unearned deferred compensation offset by our net earnings. We repurchased 6,642,521 shares in 2004 at an average price of $11.87. In addition, on December
19, 2004, we announced another 5.0 million Share Repurchase Plan that began January 21, 2005. On
February 21, 2005, our existing repurchase plan was modified by authorizing an additional 5.0
million shares (a total of 10.0 million shares) to be repurchased. In 2005, through February 28th,
we have repurchased an additional 4,524,000 shares, at an average price of $12.17 per share. We increased our quarterly cash dividend to $0.04 per share for the first and second quarter of
2004, and again increased our cash dividend to $0.05 per share for the third and fourth quarter of
2004. The dividend payout ratio for 2004 was 45.3%, and total dividends paid during the year were
$13.4 million. In February 2005, we further increased our dividend to $0.06 per share; our total
dividends paid will not increase proportionately, however, as a result of our share repurchases. Accumulated other comprehensive income decreased $5.0 million in 2004 primarily as a result of
unfunded supplemental non-qualified benefit plan obligation and reduced fair market value on the
mortgage-related securities. Accumulated other comprehensive income reflects the difference
between the net current value of securities available for sale and the book value of those
securities, net of tax, and any unfunded supplemental non-qualified benefit plan obligation, net of
tax. After the shareholders approved the 2004 Stock Incentive Plan, restricted shares were issued which
increased unearned deferred compensation. Our shareholders equity to total assets ratio at
December 31, 2004 was 19.5% as compared to 23.5% at December 31, 2003. 46




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Average Balance Sheet and Yield/Rate Analysis The following tables present, for the periods indicated, the total dollar amount of interest income
from average interest-earning assets, the resultant yields, and the interest expense on average
interest-bearing liabilities, expressed both in dollars and rates. No tax equivalent adjustments
were made since we do not have any tax exempt investments. Average balances are derived from
average daily balances. The yield on securities available-for-sale is included in investment
securities and mortgage-related securities and yields are calculated on the historical basis. The
yields and rates are established by dividing income or expense dollars by the average balance of
the asset or liability. AVERAGE BALANCE SHEET, INTEREST AND RATE PAIDYears ended December 31,2004
    
    
    2003
    
    
    2002Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    AverageAverage
    
    
    Earned/
    
    
    Yield/
    
    
    Average
    
    
    Earned/
    
    
    Yield/
    
    
    Average
    
    
    Earned/
    
    
    Yield/Balance
    
    
    Paid
    
    
    Cost
    
    
    Balance
    
    
    Paid
    
    
    Cost
    
    
    Balance
    
    
    Paid
    
    
    Cost(Dollars in thousands)Assets:Interest-Earning Assets (1):Loans receivable, net
    
    $
    1,799,670
    
    
    $
    97,330
    
    
    
    5.41
    %
    
    $
    1,739,572
    
    
    $
    104,623
    
    
    
    6.01
    %
    
    $
    1,808,861
    
    
    $
    124,490
    
    
    
    6.88
    %Mortgage-related securities
    
    
    1,090,363
    
    
    
    47,431
    
    
    
    4.35
    
    
    
    665,804
    
    
    
    29,164
    
    
    
    4.38
    
    
    
    576,259
    
    
    
    32,256
    
    
    
    5.60Investment securities (2)
    
    
    104,681
    
    
    
    3,956
    
    
    
    3.78
    
    
    
    116,097
    
    
    
    4,654
    
    
    
    4.01
    
    
    
    120,015
    
    
    
    5,580
    
    
    
    4.65Interest-earning deposits
    
    
    11,834
    
    
    
    128
    
    
    
    1.08
    
    
    
    47,491
    
    
    
    423
    
    
    
    0.89
    
    
    
    27,991
    
    
    
    431
    
    
    
    1.54Federal funds
    
    
    5,546
    
    
    
    76
    
    
    
    1.37
    
    
    
    205,671
    
    
    
    2,206
    
    
    
    1.07
    
    
    
    162,137
    
    
    
    2,675
    
    
    
    1.65Total interest-earning assets
    
    
    3,012,094
    
    
    
    148,921
    
    
    
    4.95
    
    
    
    2,774,635
    
    
    
    141,070
    
    
    
    5.08
    
    
    
    2,695,263
    
    
    
    165,432
    
    
    
    6.14Noninterest-earning assets
    
    
    175,491
    
    
    
    
    
    
    
    
    
    
    
    185,530
    
    
    
    
    
    
    
    
    
    
    
    179,081Total average assets
    
    $
    3,187,585
    
    
    
    
    
    
    
    
    
    
    $
    2,960,165
    
    
    
    
    
    
    
    
    
    
    $
    2,874,344Liabilities and Equity:Interest-Bearing Liabilities:Savings deposits
    
    $
    253,321
    
    
    
    1,084
    
    
    
    0.43
    
    
    $
    293,735
    
    
    
    1,490
    
    
    
    0.51
    
    
    $
    229,303
    
    
    
    2,402
    
    
    
    1.05Money market accounts
    
    
    335,553
    
    
    
    3,301
    
    
    
    0.98
    
    
    
    347,901
    
    
    
    4,353
    
    
    
    1.25
    
    
    
    349,868
    
    
    
    6,673
    
    
    
    1.91Interest-bearing
demand accounts
    
    
    164,588
    
    
    
    359
    
    
    
    0.22
    
    
    
    143,331
    
    
    
    416
    
    
    
    0.29
    
    
    
    141,328
    
    
    
    833
    
    
    
    0.59Time deposits
    
    
    1,139,368
    
    
    
    37,373
    
    
    
    3.28
    
    
    
    1,261,281
    
    
    
    45,160
    
    
    
    3.58
    
    
    
    1,281,258
    
    
    
    54,983
    
    
    
    4.29Total deposits
    
    
    1,892,830
    
    
    
    42,117
    
    
    
    2.23
    
    
    
    2,046,248
    
    
    
    51,419
    
    
    
    2.51
    
    
    
    2,001,757
    
    
    
    64,891
    
    
    
    3.24Advance payment by borrowers
for taxes and insurance
    
    
    19,759
    
    
    
    36
    
    
    
    0.18
    
    
    
    19,205
    
    
    
    88
    
    
    
    0.46
    
    
    
    21,401
    
    
    
    243
    
    
    
    1.14Borrowings
    
    
    414,600
    
    
    
    16,345
    
    
    
    3.94
    
    
    
    319,348
    
    
    
    17,975
    
    
    
    5.63
    
    
    
    398,684
    
    
    
    22,544
    
    
    
    5.65Total interest-bearing
liabilities
    
    
    2,327,189
    
    
    
    58,498
    
    
    
    2.51
    
    
    
    2,384,801
    
    
    
    69,482
    
    
    
    2.91
    
    
    
    2,421,842
    
    
    
    87,678
    
    
    
    3.62Noninterest-Bearing LiabilitiesNoninterest-bearing deposits
    
    
    106,224
    
    
    
    
    
    
    
    
    
    
    
    111,955
    
    
    
    
    
    
    
    
    
    
    
    92,988Other noninterest-bearing liabilities
    
    
    33,638
    
    
    
    
    
    
    
    
    
    
    
    48,481
    
    
    
    
    
    
    
    
    
    
    
    44,836Total noninterest-bearing liabilities
    
    
    139,862
    
    
    
    
    
    
    
    
    
    
    
    160,436
    
    
    
    
    
    
    
    
    
    
    
    137,824Total liabilities
    
    
    2,467,051
    
    
    
    
    
    
    
    
    
    
    
    2,545,237
    
    
    
    
    
    
    
    
    
    
    
    2,559,666Equity
    
    
    720,534
    
    
    
    
    
    
    
    
    
    
    
    414,928
    
    
    
    
    
    
    
    
    
    
    
    314,678Total average liabilities
and equity
    
    $
    3,187,585
    
    
    
    
    
    
    
    
    
    
    $
    2,960,165
    
    
    
    
    
    
    
    
    
    
    $
    2,874,344Net interest income and net
interest rate spread (3)
    
    
    
    
    
    $
    90,423
    
    
    
    2.44
    
    
    
    
    
    
    $
    71,588
    
    
    
    2.17
    
    
    
    
    
    
    $
    77,754
    
    
    
    2.52Net interest-earning assets
and net interest margin(4)
    
    $
    684,905
    
    
    
    
    
    
    
    3.00
    %
    
    $
    389,834
    
    
    
    
    
    
    
    2.58
    %
    
    $
    273,421
    
    
    
    
    
    
    
    2.88
    %Average interest-earnings
assets to average interest-bearing liabilities
    
    
    1.29
    x
    
    
    
    
    
    
    
    
    
    
    1.16
    x
    
    
    
    
    
    
    
    
    
    
    1.11
    x
   (1)
    
    For the purposes of these computations, non-accruing loans and loans held for sale are
included in the average loans outstanding.(2)
    
    FHLB stock is included in investment securities dollars outstanding and yields.(3)
    
    Interest rate spread is the difference between the average yield on interest-earning assets
and the average cost on interest-bearing liabilities.(4)
    
    Net interest margin is determined by dividing net interest income by total interest-earning
assets. 47




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Rate/Volume Analysis The following table presents the extent to which changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities have affected our interest
income and interest expense during the periods indicated. Information is provided in each category
with respect to:  (1)
    changes attributable to changes in volume (change in volume multiplied by prior
rate);(2)
    changes attributable to change in rate (changes in rate multiplied by prior
volume); and(3)
    the net change. The changes attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate. Year Ended December 31,2004 Compared to 2003Increase (Decrease) Due ToVolume (1)
    
    
    Rate (2)
    
    
    Net (3)(In thousands)Interest-earning assets:Loans receivable
    
    $
    3,519
    
    
    $
    (10,812
    )
    
    $
    (7,293
    )Mortgage-related securities
    
    
    18,470
    
    
    
    (203
    )
    
    
    18,267Investment securities
    
    
    (442
    )
    
    
    (256
    )
    
    
    (698
    )Interest-earning deposits
    
    
    (370
    )
    
    
    75
    
    
    
    (295
    )Federal funds
    
    
    (2,607
    )
    
    
    477
    
    
    
    (2,130
    )Total
    
    
    18,570

    
    
    
    (10,719
    )
    
    
    7,851Interest-bearing liabilities:Savings deposits
    
    
    (191
    )
    
    
    (215
    )
    
    
    (406
    )Money market deposits
    
    
    (149
    )
    
    
    (903
    )
    
    
    (1,052
    )Interest-bearing demand deposits
    
    
    56
    
    
    
    (113
    )
    
    
    (57
    )Time deposits
    
    
    (4,168
    )
    
    
    (3,619
    )
    
    
    (7,787
    )Advance payment by borrowers for
taxes and insurance
    
    
    3
    
    
    
    (55
    )
    
    
    (52
    )Borrowings
    
    
    4,561
    
    
    
    (6,191
    )
    
    
    (1,630
    )Total
    
    
    112
    
    
    
    (11,096
    )
    
    
    (10,984
    )Net change in net interest income
    
    $
    18,458
    
    
    $
    377
    
    
    $
    18,835
 Year Ended December 31,2003 Compared to 2002Increase (Decrease) Due ToVolume (1)
    
    
    Rate (2)
    
    
    Net (3)(In thousands)Interest-earning assets:Loans receivable
    
    $
    (4,627
    )
    
    $
    (15,240
    )
    
    $
    (19,867
    )Mortgage-related securities
    
    
    4,560
    
    
    
    (7,652
    )
    
    
    (3,092
    )Investment securities
    
    
    (177
    )
    
    
    (749
    )
    
    
    (926
    )Interest-earning deposits
    
    
    221
    
    
    
    (229
    )
    
    
    (8
    )Federal funds
    
    
    609
    
    
    
    (1,078
    )
    
    
    (469
    )Total
    
    
    586
    
    
    
    (24,948
    )
    
    
    (24,362
    )Interest-bearing liabilities:Savings deposits
    
    
    554
    
    
    
    (1,466
    )
    
    
    (912
    )Money market deposits
    
    
    (38
    )
    
    
    (2,282
    )
    
    
    (2,320
    )Interest-bearing demand deposits
    
    
    12
    
    
    
    (429
    )
    
    
    (417
    )Time deposits
    
    
    (845
    )
    
    
    (8,978
    )
    
    
    (9,823
    )Advance payment by borrowers for
taxes and insurance
    
    
    (23
    )
    
    
    (132
    )
    
    
    (155
    )Borrowings
    
    
    (4,466
    )
    
    
    (103
    )
    
    
    (4,569
    )Total
    
    
    (4,806
    )
    
    
    (13,390
    )
    
    
    (18,196
    )Net change in net interest income
    
    $
    5,392
    
    
    $
    (11,558
    )
    
    $
    (6,166
    )
 48




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Comparisons of Operating Results for Years Ended December 31, 2004 and 2003 General Net income was $29.6 million for 2004 as compared to $22.6 million for 2003. The increase is
primarily the result of investing the $404.8 million of net capital received from our stock
offering in October 2003, which resulted in increases in interest income and the net interest
margin, and from a $2.0 million gain on sale of real estate. These items were partially offset by
reduction in the gains on the sales of loans, payment of a borrowing prepayment penalty, and
increases in operating expenses. Net Interest Income Net interest income for 2004 increased $18.8 million, or 26.3% to $90.4 million as compared to
$71.6 million for 2003. Net interest income increased primarily as a result of the investment of
the $404.8 million of net stock proceeds and as a result of the investment of the proceeds, an
increased net interest margin. The net interest margin for 2004 was 3.00% as compared to 2.58% for
2003. The increase in the net interest margin for 2004 was primarily the result of investing the $404.8
million of net capital received from the stock offering (the capital bears no interest) in late
2003. The increase in the dollar amount of interest earning assets was also the result of the
investment of the capital received from the Companys stock offering. Most of the capital received
was invested in mortgage-related securities. Going forward, since the effect of the increased
capital was reflected for all of 2004, we do not expect to achieve a similar effect in 2005 Total Interest Income Total interest income for 2004 increased $7.9 million or 5.6%, to $148.9 million as compared to
$141.1 million for 2003. The increase was primarily the result of the increased dollar amount of
mortgage-related securities partially offset by the decrease in the yields earned on the loan
portfolio. Interest income on loans decreased $7.3 million or 7.0% to $97.3 million as compared to $104.6
million in 2003. The decrease was primarily the result of the reduced average yield earned on the
portfolio partially offset by an increase in the average dollar amount of the loan portfolio
outstanding. Market interest rates on most loan originations throughout 2004 were below the
existing yield on the loan portfolio and a large number of payoffs were on loans that were in
excess of the average yield of loans in our loan portfolio. These events reduced our average yield
on the loan to 5.41% in 2004 as compared to 6.01% in 2003. Interest income on investment securities decreased $698,000 or 15.0% primarily as a result of
reduced average dollar amount outstanding and reduced yield on those investments. Interest income on mortgage-related securities increased $18.3 million or 62.6% as a result of
investing the $404.8 million of net stock proceeds in late 2003 and additional borrowings in 2004
into mortgage-related securities. All of the funds were invested in mortgage-related securities
with initial average lives of 3 to 4 years and at a yield of approximately 4.50%. Interest income on interest-earning deposits (which includes federal funds sold) decreased $2.4
million or 92.2% as a result of reduced dollars outstanding partially offset by an increase in
average yield on those deposits. The federal funds sold and interest-earning deposits at December
31, 2003 were reinvested into mortgage-related securities. Interest Expense Interest expense on deposits decreased $9.3 million or 18.1% as a result of decreased average cost
of deposits and decreased dollar amount of deposits. The average cost of deposits for 2004 was
2.23% as compared to 2.51% in 2003. The decrease in the cost of deposits was the result of
relatively flat market interest rates and our efforts to price deposits closer to the median of the
market rather than at the higher end of the market offerings. However, as a result of this pricing
decision, our deposit portfolio decreased throughout 2004. Interest expense on borrowings decreased $1.6 million or 9.1% as a result of the reduced average
cost of borrowings partially offset by an increase in the dollar amount of average borrowings.
Average borrowings in 2004 increased
$95.3 million and at December 31, 2004, borrowings were $462.0 million higher than at December 31,
2003. We used the proceeds of these borrowings as well as our existing capital resources, to fund
an increase in the loan portfolio, an increase in mortgage-related securities, a decrease in the
deposit portfolio and repurchases of our 49




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shares. In the fourth quarter of 2004, we borrowed $200.0
million from the FHLB of Chicago at a cost of 2.77% and reinvested those funds into
mortgage-related securities. The average cost of borrowings in 2004 was 3.94% as compared to 5.63%
in 2003. The decrease in the average cost was the result of the new borrowings being added at a
cost that was less than the average cost of borrowings and the refinancing of $200.0 million in
September of 2004. The refinanced $200.0 million of borrowings had an average cost of 5.70% and
were refinanced at an interest rate of 2.75%. As a result of prepaying the $200.0 million of FHLB
borrowing, we paid a prepayment penalty of $1.7 million. The prepayment of the FHLB borrowings was
done as a result of management anticipating a rise in interest rates at the time the original FHLB
borrowings matured and its desire to lock in relatively lower interest rates, which should
favorably affect related interest expense going forward; the prepayment fees were more than offset
by interest savings. The balance of our borrowings at December 31, 2004 were overnight funds or
fixed rate short term borrowings. Provision for Loan Losses Provisions for loan losses in 2004 and 2003 were $1.3 million. The $1.3 million in the provisions
for loan losses for 2004 was primarily determined as a result of charge-offs of loans totaling $1.3
million. The charge-offs in 2004 were primarily attributed to one commercial loan that was placed
in real estate owned and subsequently liquidated. In addition , there is one large commercial
loan, of approximately $3.2 million that was non-performing at December 31, 2004 that we are
closely monitoring and working with the business owners in an effort to arrange repayment. The dollar amount of the typical commercial real estate, development and commercial loan tends to
be larger than our single family loans and, therefore, any loss that we experience on these loans
could be larger than what we have historically experienced on our single family loans. Depending on
the type of commercial loan, the collateral may appeal only to a specialized group of people or
businesses and therefore, may limit the number of potential buyers of the collateral, or in the
case of collateral that is comprised of inventory, the liquidation of the collateral is more
uncertain if a problem should arise. The allowance for loan losses at December 31, 2004 was $13.9 million or 222.1% of non-performing
loans and 176.5% of non-performing assets as compared to $13.8 million or 132.8% of non-performing
loans and 125.2% of non-performing assets at December 31, 2003. The loan loss allowance to total
loans was 0.74% at December 31, 2004 as compared to 0.80% at December 31, 2003. Future provisions for loan losses will continue to be based upon our assessment of the overall loan
portfolio and the underlying collateral, trends in non-performing loans, current economic
conditions and other relevant factors in order to maintain the allowance for loan losses at
adequate levels to provide for probable and estimatable losses. The establishment of the amount of
the loan loss allowance inherently involves judgments by management as to the adequacy of the
allowance, which ultimately may or may not be correct. Higher rates of loan defaults than
anticipated would likely result in a need to increase provisions in future years. Also, as
multi-family and commercial loan portfolios increase, additional provisions would likely be added
to the loan loss allowances as they carry a higher risk of loss. See also Asset Quality in Item
1, which is incorporated by reference, for certain other factors that may affect our provisions for
loan losses on a go forward basis. Noninterest Income Total noninterest income decreased $3.4 million or 17.6% to $16.2 million as compared to $19.6
million for 2003. The decrease was primarily the result of decreased dollar amount of loan sales
which correspondently decreased the gains on sales of loans. Service charges on deposits decreased $184,000 in 2004 primarily as a result of the decreased
number of deposit accounts and customer utilization of on-line banking and credit cards. We
believe the reduced number of checking accounts is the result of our change in the checking account
pricing policy in 2003. Brokerage and insurance commissions increased $348,000 or 13.8% as a result of increased
annuity and insurance sales. Loan related fees and servicing revenue increased $954,000 or 150.0% in 2004 primarily as a
result of $1.4 million of mortgage loan servicing rights becoming impaired in 2003, which offset
related income in that year. In 2004, there were no impairments to the mortgage servicing rights.
Mortgage servicing rights normally become impaired 50




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from increased prepayments on mortgage loans which reduces the anticipated servicing fee income
over the life of the loan. Gains on sales of loans decreased substantially in 2004 as a result of reduced dollar amount of
loan sales. Loan sales in 2004 were $120.5 million as compared to $461.1 million in 2003. In the third quarter of 2004, we sold one-half of our interest in approximately 318 acres of owned
real estate to an unrelated third party; the transaction resulted in a $2.0 million gain. We
simultaneously established a limited liability company (Arrowood Development) with that party, in
which we maintain a 50% interest, to develop the land. It is anticipated that the development of
the real estate into a residential subdivision and subsequent sale of the developed lots will be a
two-to four-year project. Other income increased $37,000 or 0.8% in 2004 primarily as the result of increased ATM and
checkcard fees. Noninterest Expense Compensation expense increased $4.5 million or 14.1% to $36.2 million in 2004 as compared to $31.7
million in 2003. The increase was primarily the result of reduced compensation and benefit cost
deferrals on loan originations, vesting of restricted shares from the 2001 and 2004 Stock Incentive
Plans and increased cost of benefits which included retirement and health expenses. Each loan that
is originated has an incremental compensation and benefit cost determined and as loan originations
decrease the incremental compensation and benefit cost deferrals decrease. In 2004, as a result of
reduced refinancings of existing loans, the compensation and benefit cost deferrals decreased $2.2
million as compared to 2003. At the 2004 Annual Meeting, shareholders approved a 2004 Stock Incentive Plan which authorized
4,106,362 stock options and 1,642,521 shares for a management recognition plan (MRP or
restricted stock). In May 2004, 955,000 shares of restricted stock was granted to various
officers. This grant and the fair market valuation of ESOP shares increased compensation expense
approximately $1.8 million in 2004 as compared to 2003. Health insurance and pension costs
increased a $1.1 million primarily as a result of increased health insurance premiums and decreased
rates of return on pension investments. Occupancy and equipment expense remained fairly constant when compared to 2003 primarily as a
result of not adding any new offices in 2004. However, in 2005, we anticipate adding two new
branch offices (in the Racine area) and one new office in the Waukesha area. The net effect of
adding these new offices will be to increase our occupancy and equipment expense and other
operating expenses in 2005. Other expenses increased slightly in 2004 as compared to 2003. However, within the other expenses,
marketing costs decreased $234,000 primarily as a result of the non-recurring expenses associated
with the merger of our two subsidiary banks in March 2003. This marketing expense decrease was
offset by increases in real estate owned expense associated with the disposal of a large commercial
loan and increased auditing costs associated with the internal control attestation required as part
of the implementation of Sarbanes-Oxley Act Section 404. Income Taxes The effective tax rate for 2004 was 34.6%, as compared to an effective tax rate of 34.1% in 2003. Bank owned life insurance income is permanently tax deferred if the policy is held to the
participants death. Therefore, the income earned on the life insurance is not included in taxable
income for the calculation of tax expense. Like many Wisconsin financial institutions, we have non-Wisconsin subsidiaries which hold and
manage investment assets, the income on which has not been subject to Wisconsin tax. The Wisconsin
Department of Revenue has instituted an audit program specifically aimed at out of state bank
subsidiaries. The Department has asserted the position that some or all of the income of the out
of state subsidiaries is taxable in Wisconsin. The Department is conducting audits of many such
organizations, including our Nevada subsidiaries; its audit of Bank Mutual and its Nevada
subsidiaries has not yet been concluded, and the Department has not asserted a claim against the
Bank or its subsidiaries. The Department sent letters in late July 2004 to Wisconsin financial institutions (whether or not
they were undergoing an audit) reporting on settlements relating to these issues involving, at that
time, 17 financial institutions 51




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and their out-of-state investment subsidiaries. The letter provided a summary of available
settlement parameters. For prior periods they include: restrictions on the types of subsidiary
income excluded from Wisconsin taxation; assessment of certain back taxes relating to a limited
time period; limitations on net operating loss carry forwards and interest on past-due taxes (but
no penalties). For 2004 and going forward, the letter states similar provisions, including limits
on subsidiaries assets which could be considered in determining income not subject to Wisconsin
taxation. As outlined, the settlement would result in the rescission of prior letter rulings, and
purport to be binding going forward except for future legislation or change by mutual agreement.
However, the letter appears to implicitly accept the general proposition that some out-of-state
investment subsidiary income is not subject to Wisconsin taxes. The Departments positions may be
challenged by one or more financial institution in the state. The Company has engaged in discussions with the Department and has advised the Department that it
wishes to receive and consider a proposal from the Department. In particular, the Company asked
the Department to consider some specific factors which the Company believes may distinguish it from
many other institutions. We have received certain information from the Department to further
evaluate its position and our alternatives under our particular circumstances. The Company
believes that it will need more specific detail than was included in the Departments July letter
or subsequent communications to quantify in any definitive way the Departments view of its
exposure, either for past periods or with respect to operations going forward, and to evaluate the
Companys alternatives. A determination on how to proceed will depend in part on further
communication from and actions by the Department. Depending upon the terms and circumstances, an adverse resolution of these matters could result in
additional Wisconsin tax obligations for prior periods and/or higher Wisconsin taxes going forward,
with a substantial negative impact on the earnings of Bank Mutual Corporation. The Company
believes it has reported income and paid Wisconsin taxes in accordance with applicable legal
requirements, and the Departments long standing interpretations thereof. We also may incur
further costs in the future to address these issues. 52




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Comparisons of Operating Results for Years Ended December 31, 2003 and 2002 General Net income was $22.6 million for 2003 as compared to $26.5 million for 2002. The decrease is
primarily the result of decreased net interest margin and increases in the provisions for loan
losses and operating expenses These items were partially offset by an increase in the gains on the
sale of loans. Net Interest Income Net interest income for 2003 decreased $6.2 million, or 7.9%, to $71.6 million as compared to $77.8
million for 2002. Net interest income decreased primarily as a result of a decrease in the net
interest margin. The net interest margin for 2003 was 2.58% as compared to 2.88% for 2002.
Although market interest rates for loans and deposits remained fairly stable throughout 2003, the
high level of loan refinancing activity, in which higher interest rate loans were paid off,
downward interest rate modifications on existing loans and the sales of fixed rate mortgage loans
decreased the yield on the loan portfolio more than the decrease in the cost of funds. Total Interest Income Total interest income for 2003 decreased $24.4 million, or 14.7%, to $141.1 million as compared to
$165.4 million for 2002. The decrease was primarily the result of: existing loans being refinanced
to lower interest rate loans; sales of fixed rate mortgage loans in which the proceeds were
invested in lower yielding mortgage-related securities; and prepayments of higher yielding
mortgage-related securities. Interest income on loans decreased $19.9 million, or 16.0% in 2003 to $104.6 million as compared to
$124.5 million in 2002. The decrease was primarily the result of refinancing of existing loans to
lower interest rate loans, loan originations that were at interest rates below the existing yield
on the portfolio, downward interest rate modifications on certain existing loans and reduced
average dollars outstanding for the year. Although 2003 was the second consecutive year of record
originations, it was also a record year of loan sales. We sell our 30 year and some of our 20 and
15 year fixed rate mortgage loan originations to help us manage interest rate risk. All of these
events reduced the average yield on our loan portfolio to 6.01% for 2003 as compared to 6.88% for
2002. Interest income on investment securities decreased $926,000 or 16.6% primarily as a result of
reduced dollars invested and a reduced yield on those investments. As investments matured the
proceeds were either reinvested into an investment at a lower yield or invested into
mortgage-related securities. Interest income on mortgage-related securities decreased $3.1 million or 9.6%, as a result of
higher yielding mortgage-related securities being prepaid and the reinvestment of those dollars
into mortgage-related securities that were below the existing yield on the portfolio. In addition,
we invested $329.3 million of the $404.8 million of proceeds from the stock offering by the end of
November of 2003 and $74.9 million in December of 2003. Interest income on interest earning deposits (which includes federal funds sold) decreased $477,000
or 15.3%, primarily as a result of the decreased yield earned on the deposits. The average balance
of interest-earning deposits increased $63.0 million in 2003 to $253.2 million as compared to
$190.1 million in 2002. The weighted average yield on interest-earning deposits for 2003 was 1.04%
as compared to 1.63% for 2002. Interest Expense Interest expense on deposits decreased $13.5 million or 20.8% as a result of decreased costs of
deposits. The average cost of deposits decreased to 2.51% in 2003 from 3.24% in 2002 primarily as
a result of market interest rates trending lower throughout 2003 and the mix of the types of
deposits. Savings deposits increased whereas, the higher cost time deposits decreased. We
purposely reduced the offering interest rates on some of our time deposit products to decrease our
cost of funds and to limit the growth. Although the cost of deposits decreased throughout 2003,
and our policy to be somewhat less aggressive in pricing our deposit products as a result of our
liquidity position, it did not decrease as much as the yield on interest-earning assets, therefore,
our net interest margin was compressed. 53




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Interest expense on borrowings decreased $4.6 million or 20.3%, as a result of less borrowings
outstanding for 2003. Average borrowings outstanding for 2003 was $319.3 million as compared to
$398.7 million for 2002. Provisions for Loan Losses Provisions for loan losses in 2003 were $1.3 million as compared to $760,000 for 2002. The
increase in the provision for loan losses was primarily the result of increased commercial business
loan delinquencies and, to a lesser extent, a change in the loan portfolio composition. We have
two commercial borrowers with loans totaling $6.5 million that became non-performing in 2003. Both
commercial borrowers have experienced reduced sales for their products and are experiencing

operating losses. One commercial borrower, with an aggregate of $3.3 million in loans, had been
current in its loan payments until the fourth quarter of 2003 in which it became delinquent. The
other borrower with an aggregate of $3.2 million in loans, has also experienced reduced sales
however, they are delinquent in their payments. The dollar amount of the typical commercial real estate, development and commercial loan tends to
be larger than our single family loans and, therefore, any loss that we experience on these loans
could be larger than what we have historically experienced on our single family loans. Depending on
the type of commercial loan, the collateral may appeal only to a specialized group of people or
businesses and therefore, may limit the number of potential buyers of the collateral, or in the
case of collateral that is comprised of inventory, the liquidation of the collateral is more
uncertain if a problem should arise. The allowance for loan losses at December 31, 2003 was $13.8 million or 132.8% of non-performing
loans and 125.2% of non-performing assets as compared to $12.7 million or 151.9% of non-performing
loans and 139.4% of non-performing assets at December 31, 2002. The loan loss allowance to total
loans was 0.80% at December 31, 2003 as compared to 0.76% at December 31, 2002. Noninterest Income Total noninterest income increased $2.9 million or 17.6% to $19.6 million for 2003 as compared to
$16.7 million for 2002. The increase is primarily the result of increased gains on the sales of
loans and the reduction of the valuation allowance for mortgage servicing rights. Service charges on deposits increased $180,000 in 2003 as a result of increased number of accounts
which pay service fees (normally checking accounts) and a pricing increase in which deposit fees
were increased. Brokerage and insurance commissions decreased $630,000 in 2003 primarily as a result of decreased
securities and fixed rate tax deferred annuity sales. Loan related fees and servicing revenues increased $1.7 million in 2003 as a result of reducing the
valuation allowance for mortgage servicing rights. In 2002 and early 2003, mortgage servicing
rights were determined to be temporarily impaired; therefore, servicing revenue was decreased and a
valuation allowance was established to reflect the proper value. As loan refinancings decreased
thereby reducing principal prepayments, the mortgage servicing rights increased in value. At that
point, the entire valuation allowance was reduced, the effect of which is reflected in the
increased loan related fees and servicing revenues. Gains on the sale of investment increased $112,000 as a result of a sale of an investment. Gains on the sales of loans increased $862,000 as a result of increased dollar amount of loans
sold. We sold $461.1 million of fixed rate mortgage loans in 2003 as compared to $368.6 million in
2002. Gains on the sales of loans are primarily dependent on the dollar amount of fixed rate
mortgage loan originations and the sale of those loans. If interest rates remain flat or increase,
these gains could be reduced in future periods as sales are likely to decrease (as experienced in
the fourth quarter of 2003). Other noninterest income increased $726,000 in 2003 primarily as a result of an increase in debit
card fees and income on assets held in a rabbi trust. 54




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Noninterest Expense Total noninterest expense increased $1.4 million primarily as a result of a modest increase in
compensation and related expenses; an increase in costs associated with updating our data
processing equipment and software; and an increase in costs associated with opening a new office
and replacing an existing office. Compensation, payroll taxes, and other employee benefit expense increased $397,000 or 1.3% as a
result of compensation and benefit increases partially offset by a $275,000 recapture of a self
funded health plan reserve. Occupancy and equipment expense increased $338,000 as a result of deploying upgraded teller PCs,
purchasing new teller software throughout our bank office network in 2002, and the construction of
a new bank office and a replacement bank office in the later part of 2003. Other expenses increased $705,000 primarily as a result of increased marketing expenses, costs
associated with the consolidation of the two subsidiary banks and a branding campaign for the
resulting bank, and ATM and electronic banking fees. Income Taxes The effective tax rate for 2003 was 34.1%, as compared to an effective tax rate of 32.8% in 2002. 55




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Liquidity and Capital Resources The term liquidity refers to our ability to generate adequate amounts of cash to fund loan
originations, loan purchases, deposit withdrawals, and operating expenses. Our primary sources of
funds are deposits, scheduled amortization, and prepayments of loan principal and mortgage-related
securities, maturities and calls of investment securities, borrowings from the FHLB of Chicago and
funds provided by our operations. Historically, these sources of funds have been adequate to
maintain liquidity, with more borrowing in periods in which their operations generate less cash.
In the event these sources of liquidity would become inadequate, Bank Mutual believes that it could
access the wholesale deposit market, although there can be no assurances that wholesale deposits
would be available if needed. During 2004, we substantially increased our levels of FHLB
borrowings, in part to take advantage of what we believe were favorable borrowing opportunities and
in part to fund growth without the need to grow deposits by offering above-market promotional
interest rates. Loan repayments and maturing investment securities are a relatively predictable source of funds.
However, deposit flows, calls of investment securities and prepayments of loans and
mortgage-related securities are strongly influenced by interest rates, general and local economic
conditions and competition in the marketplace. For example, during 2004, loan prepayments
decreased significantly because of the stable interest rate environment; another very different
interest rate environment could lead to a significantly different result. These factors reduce the
predictability of the timing of these sources of funds. Our primary investing activities are the origination and purchase of one-to four-family real estate
loans, multi-family and commercial real estate loans, home equity loans, other consumer loans,
commercial business loans, the purchase of mortgage-related securities, and to a lesser extent, the
purchase of investment securities. These investing activities were funded by principal payments on mortgage loans and mortgage-related
securities, calls and maturities on investment securities, borrowings, deposits, and funds provided
by our operating activities. At December 31, 2004, we exceeded each of the applicable regulatory capital requirements for our
savings bank subsidiary. In order to be classified as well-capitalized by the FDIC we are
required to have leverage (tier 1) capital of at least 5.00%. To be classified as a
well-capitalized bank by the FDIC, we must also have a risk-based total capital ratio of at least
10.00%. At December 31, 2004, Bank Mutual had a risk-based total capital ratio of 28.85% and a
leverage ratio of 13.74%. See Notes to Consolidated Financial StatementsNote 8. Shareholders
Equity. We believe that our relatively high capital levels as compared to industry standards,
which primarily resulted from our stock offering in 2003, provide us with the flexibility to
increase leverage through borrowings, as we did in 2004, and to prudently repurchase shares, as we
have with share repurchase programs in 2004 and 2005. Shareholders equity is decreased by unearned ESOP shares, which represents shares in the Bank
Mutual Employee Stock Ownership Plan which have not yet been earned by participating employees, and
unearned deferred compensation, which represents stock grants under the management recognition plan
(MRP) component of its 2004 and 2001 Stock Incentive Plans. See Notes to Consolidated Financial
Statements  Note 1. Summary of Significant Accounting Policies. Shareholders equity is
decreased by $4.8 million of accumulated other comprehensive income, consisting primarily of net
unrealized losses, net of taxes, on securities available-for-sale. Bank Mutual Corporation in 2004
repurchased 6,642,521 shares under its stock repurchase programs, of which 955,000 restricted
shares were re-issued to officers and directors in accordance with the 2004 Stock Incentive Plan
and 298,736 were re-issued for exercises of stock options. Cash and cash equivalents decreased $48.9 million during 2004; however, we still maintained $37.6
million of cash and cash equivalents at December 31, 2004. The Company used $378.6 million for
investing activities, primarily as a result of purchases of mortgage-related and investment
securities and an increase in the loan portfolio, partially offset by principal repayments on
mortgage-related securities. The cash from operating activities of $27.7 million is primarily a
result of Bank Mutuals net income for the year, and non-cash expenses, offset by a net increase in
other assets. Cash provided by financing activities of $302.0 million resulted primarily from the
net proceeds of the borrowings, offset by our repurchases of securities and decreases in deposits. Contractual Obligations, Commitments, Contingent Liabilities, and Off-balance Sheet Arrangements The Company has various financial obligations, including contractual obligations and commitments,
that may require future cash payments. 56




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##### Table of Contents



The following table presents, as of December 31, 2004. significant fixed and determinable
contractual obligations to third parties by payment date. Further discussion of the nature of each
obligation is included in the referenced note to the consolidated financial statements. Payments Due InOne to
    
    
    Three to
    
    
    OverOne Year
    
    
    Three
    
    
    Five
    
    
    FiveOr Less
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    Total(In thousands)Deposits without a stated
maturity (a)
    
    $
    840,390
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    840,390Certificates of deposits (a)
    
    
    584,172
    
    
    
    467,046
    
    
    
    91,273
    
    
    
    
    
    
    
    1,142,491Borrowed funds (a)
    
    
    168,010
    
    
    
    407,955
    
    
    
    1,025
    
    
    
    46,935
    
    
    
    623,925Operating leases
    
    
    1,142
    
    
    
    1,616
    
    
    
    1,223

    
    
    
    455
    
    
    
    4,436Purchase obligations
    
    
    2,160
    
    
    
    4,320
    
    
    
    4,320
    
    
    
    750
    
    
    
    11,520Deferred retirement plans and
deferred compensation plans
    
    
    221
    
    
    
    392
    
    
    
    275
    
    
    
    7,189
    
    
    
    8,077
   (a)
    
    Excludes interest to be paid in the periods indicated. The Companys operating lease obligations represent short and long-term lease and rental payments
for facilities, certain software and data processing 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 directors as described in
Note 10 to the consolidated financial statements. The following table details the amounts and expected maturities of significant off balance sheet
commitments as of December 31, 2004. Further discussion of these commitments is included in Note
13 to the consolidated financial statements. Payments Due InOne to
    
    
    Three to
    
    
    OverOne Year
    
    
    Three
    
    
    Five
    
    
    FiveOr Less
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    Total(In thousands)Commitments to extend credit:Commercial
    
    $
    5,635
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    5,635Residential real estate
    
    
    68,204
    
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    68,204Revolving home equity
and credit card lines
    
    
    154,213
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    154,213Standby letters of credit
    
    
    3,618
    
    
    
    85
    
    
    
    
    
    
    
    
    
    
    
    3,703Commercial letters of credit
    
    
    22,261
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,261Unused commercial lines
of credit
    
    
    21,098
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,098Net commitments to sell
mortgage loans
    
    
    10,545
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,545
 Commitments to extend credit, including loan commitments, standby letters of credit, unused lines
of credit and commercial letters of credit do not necessarily represent future cash requirements,
since these commitments often expire without being drawn upon. 57




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Impact of Inflation and Changing Prices The financial statements and accompanying notes of Bank Mutual Corporation have been prepared in
accordance with accounting principles generally accepted in the United States (GAAP). GAAP
generally requires the measurement of financial position and operating results in terms of
historical dollars without consideration for changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased cost of our
operations. Unlike industrial companies, our assets and liabilities are primarily monetary in
nature. As a result, changes in market interest rates have a greater impact on performance than do
the effects of inflation. Risk Factors In addition to the various factors discussed above, you should consider carefully the following
risk factors when evaluating Bank Mutual Corporations performance and outlook. The Current Interest Rate Environment is Having an Adverse Impact on Our Net Interest Income.
Beginning in June 2004, the Federal Reserve Board began increasing the Federal Funds target rate
with the targeted rate being increased five times in 2004 and once in February 2005. Since these
interest rate increases began, interest rates on short-term deposits have increased slightly. For
example, the Federal Funds target rate was 1.00% as of December 31, 2003 and at December 31, 2004,
the rate was 2.25%. The ten-year Treasury Bond rate was 4.25% as of December 31, 2003 and at
December 31, 2004 the rate was 4.23%. If interest rates continue to rise, the amount of interest we pay on deposits could increase more
quickly than the amount of interest we receive on our loans, mortgage-related securities and
investment securities. This could cause our profits to decrease. Rising interest rates would likely
reduce the value of our mortgage-related securities and investment securities and may decrease
demand for loans and make it more difficult for borrowers to repay their loans. Increasing market
interest rates may also depress property values, which could affect the value of collateral
securing our loans. For additional information on our exposure to interest rates, see
Quantitative and Qualitative Disclosures about Market RiskManagement of Interest Rate Risk. If Our Allowance for Loan Losses is Not Sufficient to Cover Actual Loan Losses, Our Earnings Could
Decrease.
Our loan customers may not repay their loans according to the terms of the loans, and the
collateral securing the payment of these loans may be insufficient to pay any remaining loan
balance. We therefore may experience significant loan losses, which could have a material adverse
effect on our operating results. Material additions to our allowance also would materially decrease our net income, and the
charge-off of loans may cause us to increase the allowance. We make various assumptions and
judgments about the collectibility of our loan portfolio, including the creditworthiness of our
borrowers and the value of the real estate and other assets serving as collateral for the repayment
of many of our loans. We rely on our loan quality reviews, our experience and our evaluation of
economic conditions, among other factors, in determining the amount of the allowance for loan
losses. If our assumptions prove to be incorrect, our allowance for loan losses may not be
sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance. Our emphasis on a diverse loan portfolio has been one of the more significant factors we have taken
into account in evaluating our allowance for loan losses and provision for loan losses. If we were
to further increase the amount of loans in our portfolio other than traditional real estate loans,
we may decide to make increased provisions for loan losses. In addition, bank regulators
periodically review our allowance for loan losses and may require us to increase our provision for
loan losses or recognize further loan charge-offs. We Are Expanding Our Lending Activities in Riskier Areas.We have identified commercial real
estate, commercial business and consumer loans as areas for increased lending emphasis. While
increased lending diversification is expected to increase interest income, non-residential loans
carry greater risk of payment default than residential real estate loans. As the volume of these
loans increase, credit risk increases. In the event of substantial borrower defaults, our provision
for loan losses would increase and therefore, earnings would be reduced. Our consumer loan portfolio included $53.3 million of indirect auto loans at December 31, 2004.
Borrowers may be more likely to become delinquent on an automobile loan than on a residential real
estate loan. Moreover, unlike the collateral for real estate loans, automobiles depreciate rapidly
and, in the event of default, principal loss as a percent of the loan balance depends upon the
mileage and condition of the vehicle at the time of repossession, over which 58




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the Bank has no control. Similarly, any non-real estate collateral securing commercial
business loans may depreciate over time and fluctuate in value. Increases in Market Interest Rates are Likely to Adversely Affect Equity.As of December 31, 2004,
we owned $1.3 billion of securities available-for-sale. Generally accepted accounting principles
require that we carry these securities at fair value on our balance sheet. Unrealized gains or
losses on these securities, reflecting the difference between the fair market value and the
amortized cost, net of its tax effect, are carried as a component of shareholders equity. When
market rates of interest increase, the fair value of our securities available-for-sale generally
decreases and equity correspondingly decreases. When rates decrease, fair value generally
increases and shareholders equity correspondingly increases. As of December 31, 2004, the
Companys available-for-sale portfolio had an unrealized loss of $5.8 million. Low Demand for Real Estate Loans May Lower Our Profitability.Making loans secured by real estate
is our primary business and primary source of profits. If customer demand for real estate loans
decreases, our profits may decrease because our alternative investments, primarily securities, earn
less income for us than real estate loans. Customer demand for loans secured by real estate could
be reduced by a weaker economy, an increase in unemployment, a decrease in real estate values or an
increase in interest rates. Strong Competition Within Our Market Area May Reduce Our Customer Base.We encounter strong
competition both in attracting deposits and originating real estate and other loans. We compete
with commercial banks, savings institutions, mortgage banking firms, credit unions, finance
companies, mutual funds, insurance companies, and brokerage and investment banking firms. Our
market area includes branches of several commercial banks that are substantially larger than us in
terms of deposits and loans. In addition, tax exempt credit unions operate in most of our market
area and aggressively price their products and services to a large part of the population. Our
profitability depends upon our continued ability to successfully maintain or increase our market
share. We Have Significant Intangible Assets Which May Need to be Written Off as an Expense in the Future.
The Company has approximately $52.6 million in goodwill, $4.4 million in other intangible assets
and $4.5 million of mortgage servicing rights as of December 31, 2004. As a result of SFAS No.
142, the Company no longer amortizes goodwill but will continue to amortize the other intangible
assets over seven to fifteen years and will evaluate the mortgage servicing rights for impairment
on a monthly basis. We will periodically check goodwill, and the other intangible assets for
impairment. At some point in the future, our intangible assets may become impaired, and we would
need to write them off as a reduction to earnings in the period in which they became impaired. Stock-Based and Other Benefits Affect Our Results.We have adopted stock incentive plans which
provided for the granting of options to purchase common stock and for awards of common stock to our
eligible officers, employees and directors. We also have an employee stock ownership plan, and
have adopted a restoration plan that will supplement the benefits to selected executive officers
under the employee stock ownership plan and our 401(k) plan. The cost of the employee stock
ownership plan will vary based on our stock price at specific points in the future. Additionally,
we experienced an increase in employee health care costs in 2004, and expect further increases in
2005. These expenses will continue to affect our future earnings, as may other factors, such as
government mandates, which would further increase the cost of compensation and/or benefits that are
provided to employees. Wisconsin Tax Developments Could Reduce Our Net Income.The Bank has Nevada subsidiaries which
hold and manage investment securities and other investments. Because the subsidiaries are out of
state, related income has not been subject to tax in Wisconsin. The Wisconsin Department of
Revenue has implemented a program for the audit of Wisconsin financial institutions who have formed
and contributed assets to subsidiaries located in Nevada, and presumably will seek to impose
Wisconsin state income taxes on income from those operations, at least on a going forward basis.
The Department has announced terms and conditions on which is has settled similar issues with other
financial institutions in the state. The Company believes that it will need more specific detail
than was included in that announcement or subsequent communications to quantify in any definitive
way the Departments view of its exposure, either for past periods or with respect to operations
going forward, and to evaluate the Companys alternatives. A determination on how to proceed will
depend in part on further communication from and actions by the Department. Depending upon the terms and circumstances, an adverse resolution of these matters could result in
additional Wisconsin tax obligations for prior periods and/or higher Wisconsin taxes going forward,
with a substantial negative impact on the earnings of Bank Mutual Corporation. We may also need to
incur costs in the future to address any action taken against us by the Department. 59




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Our Ability to Grow May be Limited if We Cannot Make Acquisitions.In an effort to fully deploy
the capital we raised in our stock offering, we intend to seek to expand our banking franchise,
internally by de novo branching and by acquiring other financial institutions or branches and other
financial services providers. However, we have no specific plans for acquisitions at this time. Our
ability to grow through selective acquisitions of other financial institutions or branches will
depend on successfully identifying, acquiring and integrating those institutions or branches. We
cannot assure you that we will be able to generate internal growth or identify attractive
acquisition candidates, make acquisitions on favorable terms or successfully integrate any acquired
institutions or branches. Our Return on Shareholders Equity Is Reduced as a Result of the 2003 Offering.Net income divided
by average shareholders equity, known as return on equity, is a ratio many investors use to
compare the performance of a financial institution to its peers. Due to the large amount of
additional capital that we raised in our stock offering in late 2003, our return on equity
decreased as compared to our performance in prior years, pending optimal deployment of that
additional capital. While we have deployed a significant amount of that capital (including market
purchases of our shares in our share repurchase programs), our capital remains relatively high by
industry standards. Until we can increase our net interest income and non-interest income, we
expect that our return on equity may be below the industry average, which may negatively impact the
value of our common stock. Our Borrowings Have Significantly Increased, Which Further Exposes Us to the Risks of Leverage.
Although our capital levels remain high, we substantially increased our borrowings in 2004.
Borrowings tend to be a more costly source of funds than deposits. In addition, if interest rates
change substantially, we may be less able to adjust our interest rate exposure on these borrowings
than we would in the case of deposits. We will also need to have capital resources or other
sources of funds to repay these borrowings when they come due, which we cannot assure. Economic Conditions and World Events Could Affect Our Earnings.The United States economy began to
improve in 2003 and continued to improve in 2004 according to economists. However, significant
uncertainty remains in the economy. We do not know how swift or strong the recovery will be or how
long it will continue. The effects of a recession, or a weak economy, can significantly affect our
operations and profitability. For example, higher unemployment and reduced business sales or
profits can make it more difficult for borrowers to repay their loans. Similarly, reduced income
or confidence can lead consumers to reduce their purchases, and thus reduce loan demand. The national and local economies were adversely affected by the attacks of September 11, 2001 and
their aftermath and other world events such as the Iraq conflict. Bank Mutual Corporation, and the
economy as a whole, may be affected by future world events, such as acts of terrorism, developments
in the war on terrorism, conflict in the Middle East, and the international situation in North
Korea and Iran. 60




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##### Table of Contents



Quarterly Financial Information The following table sets forth certain unaudited quarterly data for the periods indicated: Quarter EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 31(In thousands, except per share amounts)2004 (unaudited)Interest income
    
    $
    36,661
    
    
    $
    36,253
    
    
    $
    36,756
    
    
    $
    39,251Interest expense
    
    
    14,569
    
    
    
    14,370
    
    
    
    14,413
    
    
    
    15,146Net interest income
    
    
    22,092
    
    
    
    21,883
    
    
    
    22,343
    
    
    
    24,105Provision for loan losses
    
    
    490
    
    
    
    384
    
    
    
    267
    
    
    
    189Net income after provision
for loan losses
    
    
    21,602
    
    
    
    21,499
    
    
    
    22,076
    
    
    
    23,916Total noninterest income
    
    
    3,847
    
    
    
    4,429
    
    
    
    3,876
    
    
    
    4,023Total noninterest expense
    
    
    14,753
    
    
    
    15,019
    
    
    
    15,059
    
    
    
    15,251Income before income taxes
    
    
    10,696
    
    
    
    10,909
    
    
    
    10,893
    
    
    
    12,688Income taxes
    
    
    3,622
    
    
    
    3,791
    
    
    
    3,859
    
    
    
    4,360Net income
    
    $
    7,074
    
    
    $
    7,118
    
    
    $
    7,034
    
    
    $
    8,328Earnings per
share - Basic
    
    $
    0.09
    
    
    $
    0.09
    
    
    $
    0.09
    
    
    $
    0.11Earnings per
share - Diluted
    
    $
    0.09
    
    
    $
    0.09
    
    
    $
    0.09
    
    
    $
    0.11Cash dividend paid per share
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    0.05
    
    
    $
    0.052003 (unaudited)Interest income
    
    $
    36,696
    
    
    $
    35,576
    
    
    $
    33,802
    
    
    $
    34,996Interest expense
    
    
    18,510
    
    
    
    18,077
    
    
    
    16,975
    
    
    
    15,920Net interest income
    
    
    18,186
    
    
    
    17,499
    
    
    
    16,827
    
    
    
    19,076Provision for loan losses
    
    
    258
    
    
    
    109
    
    
    
    
    
    
    
    937Net income after provision
for loan losses
    
    
    17,928
    
    
    
    17,390
    
    
    
    16,827
    
    
    
    18,139Total noninterest income
    
    
    4,505
    
    
    
    5,037
    
    
    
    6,166
    
    
    
    3,910Total noninterest expense
    
    
    13,381
    
    
    
    14,360
    
    
    
    14,080
    
    
    
    13,787Income before income taxes
    
    
    9,052
    
    
    
    8,067
    
    
    
    8,913
    
    
    
    8,262Income taxes
    
    
    3,183
    
    
    
    2,887
    
    
    
    2,912
    
    
    
    2,713Net income
    
    $
    5,869
    
    
    $
    5,180
    
    
    $
    6,001
    
    
    $
    5,549Earnings per
share - Basic
    
    $
    0.08
    
    
    $
    0.07
    
    
    $
    0.08
    
    
    $
    0.07Earnings per
share - Diluted
    
    $
    0.08
    
    
    $
    0.06
    
    
    $
    0.08
    
    
    $
    0.07Cash dividend paid per share
    
    $
    0.027
    
    
    $
    0.027
    
    
    $
    0.030
    
    
    $
    0.035
 Recent Accounting Developments We discuss recent accounting changes in the Notes to Consolidated Financial StatementNote 1.
Summary of Significant Accounting PoliciesRecent Accounting Changes. 61




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Item 7A. Quantitative and Qualitative Disclosures About Market Risk Management of Interest Rate Risk The Banks ability to maintain net interest income depends upon earning a higher yield on assets
than the rates we pay on deposits and borrowings. Fluctuations in interest rates will ultimately
impact both our level of income and expense recorded on a large portion of our assets and
liabilities. Fluctuations in interest rates will also affect the market value of all
interest-earning assets, other than those which possess a short term to maturity. Interest rate sensitivity is a measure of the difference between amounts of interest-earning assets
and interest-bearing liabilities which either reprice or mature during a given period of time. The
difference, or the interest rate sensitivity gap, provides an indication of the extent to which
our interest rate spread will be affected by changes in interest rates. See Gap Analysis below. Due to the nature of our operations, we are not directly subject to foreign currency exchange or
commodity price risk. Instead, our real estate loan portfolio, concentrated in Wisconsin, is
subject to risks associated with the local economy. We seek to coordinate asset and liability decisions so that, under changing interest rate
scenarios, earnings will remain within an acceptable range. The primary objectives of our interest rate management strategy are to:  
    maintain earnings and capital within self-imposed parameters over a
range of possible interest rate environments;
    coordinate interest rate risk policies and procedures with other
elements of our business plan, all within the context of the current
business environment and our capital and liquidity requirements; and
    manage interest rate risk in a manner consistent with the approved
guidelines and policies set by our board of directors. To achieve the objectives of managing interest rate risk, our Asset/Liability committee meets
periodically to discuss and monitor the market interest rate environment and provides reports to
the board of directors. This committee is comprised of senior management. Historically, our lending activities have emphasized one- to four-family first and second mortgage
loans. Our primary source of funds has been deposits and borrowings, consisting primarily of time
deposits and borrowings which have substantially shorter terms to maturity than the loan portfolio.
We have employed certain strategies to manage the interest rate risk inherent in the
asset/liability mix, including:  
    emphasizing the origination of adjustable-rate and certain 15-year
fixed rate mortgage loans for our portfolio, and selling certain 15
and 20 year fixed rate mortgage loans and all 30-year fixed rate
mortgage loans;
    maintaining a significant level of investment securities and
mortgage-related securities with a weighted average life of less than
eight years or with interest rates that reprice in less than five
years; and
    managing deposits and borrowings to provide stable funding. 62




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We believe that the frequent repricing of our adjustable-rate mortgage loans, the cash flows from
our 15-year fixed rate real estate loans, the shorter duration of our consumer loans, and
adjustable rate features and shorter durations of our investment securities, reduce our exposure to
interest rate fluctuations. 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. At December 31, 2004, based on the assumptions below, our interest-bearing liabilities maturing or
repricing within one year exceeded our interest-earning assets maturing or repricing within the
same period by $58.1 million. This represented a negative cumulative one-year interest rate
sensitivity gap of 1.69%, and a ratio of interest-earning assets maturing or repricing within one
year to interest-bearing liabilities maturing or repricing within one year of 95.5%. The following table presents the amounts of our interest-earning assets and interest-bearing
liabilities outstanding at December 31, 2004, which we anticipate 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:  i)
    Investment securities - based upon contractual maturities and if applicable, call dates.ii)
    Mortgage-related securities - based upon an independent outside source for determining cash
flows (prepayment speeds).iii)
    Loans - based upon contractual maturities, repricing date, if applicable, scheduled
repayments of principal and projected prepayments of principal based upon our historical
experience or anticipated prepayments.iv)
    Deposits - based upon contractual maturities and our historical decay rates.v)
    Borrowings - based upon the earlier of call date or final maturity. 63




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At December 31, 2004Within
    
    
    Three to
    
    
    More Than
    
    
    More Than
    
    
    OverThree
    
    
    Twelve
    
    
    One Year -
    
    
    Three Years -
    
    
    FiveMonths
    
    
    Months
    
    
    Three Years
    
    
    Five Years
    
    
    Years
    
    
    Total(Dollars in thousands)Interest-earning assets:Loans receivable:Mortgage loans:Fixed
    
    $
    23,229
    
    
    $
    73,016
    
    
    $
    157,070
    
    
    $
    93,176
    
    
    $
    191,777
    
    
    $
    538,268Adjustable
    
    
    163,275
    
    
    
    192,319
    
    
    
    323,793
    
    
    
    113,293
    
    
    
    15,627
    
    
    
    808,307Consumer loans
    
    
    106,509
    
    
    
    134,596
    
    
    
    152,339
    
    
    
    51,776
    
    
    
    32,051
    
    
    
    477,271Commercial and industrial loans
    
    
    17,792
    
    
    
    19,767
    
    
    
    26,317
    
    
    
    5,297
    
    
    
    997
    
    
    
    70,170Interest-earning deposits
    
    
    707
    
    
    
    !
    
    
    
    !
    
    
    
    !
    
    
    
    !
    
    
    
    707Investment securities
    
    
    50,977
    
    
    
    1,750
    
    
    
    14,719
    
    
    
    !
    
    
    
    !
    
    
    
    67,446Mortgage-related securities:Fixed
    
    
    100,581
    
    
    
    252,228
    
    
    
    444,063
    
    
    
    203,092
    
    
    
    215,913
    
    
    
    1,215,877Adjustable
    
    
    57,420
    
    
    
    !
    
    
    
    !
    
    
    
    !
    
    
    
    !
    
    
    
    57,420Other interest-earning assets
    
    
    38,186
    
    
    
    !
    
    
    
    !
    
    
    
    !
    
    
    
    !
    
    
    
    38,186Total interest-earning assets
    
    
    558,676
    
    
    
    673,676
    
    
    
    1,118,301
    
    
    
    466,634
    
    
    
    456,365
    
    
    
    3,273,652Noninterest-bearing and interest-
bearing liabilities:Noninterest-bearing demand
accounts
    
    
    2,498
    
    
    
    7,163
    
    
    
    16,890
    
    
    
    14,098
    
    
    
    71,206
    
    
    
    111,855Interest-bearing liabilities:Deposits:Interest-bearing demand accounts
    
    
    3,831
    
    
    
    10,987
    
    
    
    25,907
    
    
    
    21,625
    
    
    
    109,200
    
    
    
    171,550Savings accounts
    
    
    7,187
    
    
    
    19,331
    
    
    
    43,781
    
    
    
    34,548
    
    
    
    142,592
    
    
    
    247,439Money market accounts
    
    
    309,410
    
    
    
    !
    
    
    
    !
    
    
    
    !
    
    
    
    !
    
    
    
    309,410Time deposits
    
    
    289,191
    
    
    
    332,116
    
    
    
    429,212
    
    
    
    91,197
    
    
    
    !
    
    
    
    1,141,716Advance payments by borrowers
for taxes and insurance
    
    
    2,796
    
    
    
    !
    
    
    
    !
    
    
    
    !
    
    
    
    !
    
    
    
    2,796Borrowings
    
    
    287,682
    
    
    
    18,278
    
    
    
    409,344
    
    
    
    2,602
    
    
    
    43,619
    
    
    
    761,525Total interest-bearing
liabilities
    
    
    902,595
    
    
    
    387,875
    
    
    
    925,134
    
    
    
    164,070
    
    
    
    366,617
    
    
    
    2,746,291Interest rate sensitivity gap
    
    $
    (343,919
    )
    
    $
    285,801
    
    
    $
    193,167
    
    
    $
    302,564
    
    
    $
    89,728
    
    
    $
    527,361Cumulative interest rate
sensitivity gap
    
    $
    (343,919
    )
    
    $
    (58,118
    )
    
    $
    135,049
    
    
    $
    437,613
    
    
    $
    527,361Cumulative interest rate sensitivity
gap as a percentage total assets
    
    
    (9.98
    )%
    
    
    (1.69
    )%
    
    
    3.92
    %
    
    
    12.70
    %
    
    
    15.31
    %Cumulative interest-earning assets
as a percentage of interest
bearing liabilities
    
    
    61.90
    %
    
    
    95.50
    %
    
    
    106.10
    %
    
    
    118.39
    %
    
    
    119.20
    %
 The methods used in the previous table have some inherent shortcomings. For example, although
certain assets and liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates. Interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Certain assets, such as adjustable-rate
loans, have features which limit changes in interest rates on a short-term basis and over the life
of the loan. If interest rates change, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Finally, the ability of borrowers to
make payments on their adjustable-rate loans may decrease if interest rates increase. 64




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##### Table of Contents



Present Value of Equity In addition to the gap analysis table, we also use a simulation model to monitor interest rate
risk. The model reports the present value of equity in different interest rate environments,
assuming an instantaneous and permanent interest rate shock to all interest rate-sensitive assets
and liabilities. The present value of equity 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, 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 present value of equity whereas decreases in market value of assets will decrease the
present value of equity. Conversely, increases in the market value of liabilities will decrease the
present value of equity whereas decreases in the market value of liabilities will increase the
present value of equity. The following table presents the estimated present value of equity over a range of interest rate
change scenarios at December 31, 2004. The present value ratio shown in the table is the present
value of equity as a percent of the present value of total assets in each of the different rate
environments. For purposes of this table, we have made assumptions such as prepayment rates and
decay rates similar to those used for the gap analysis table. Present Value of Equityas Percent ofPresent Value of Equity
    
    
    Present Value of AssetsChange in
    
    Dollar
    
    
    Dollar
    
    
    Percent
    
    
    Present Value
    
    
    PercentInterest Rates
    
    Amount
    
    
    Change
    
    
    Change
    
    
    Ratio
    
    
    Change(Basis Points)
    
    (Dollars in thousands)+300
    
    $
    539,401
    
    
    $
    (243,693
    )
    
    

    (31.10
    )%
    
    
    17.05
    %
    
    
    (24.20
    )%+200
    
    
    622,280
    
    
    
    (160,815
    )
    
    
    (20.50
    )
    
    
    19.03
    
    
    
    (15.30
    )+100
    
    
    708,961
    
    
    
    (74,133
    )
    
    
    (9.50
    )
    
    
    20.97
    
    
    
    (6.80
    )0
    
    
    783,095
    
    
    
    
    
    
    
    
    
    
    
    22.49
    
    
    
    -100
    
    
    816,333
    
    
    
    33,239
    
    
    
    4.20
    
    
    
    23.00
    
    
    
    2.30-200
    
    
    817,196
    
    
    
    34,101
    
    
    
    4.40
    
    
    
    22.69
    
    
    
    0.90-300
    
    
    810,600
    
    
    
    27,506
    
    
    
    3.50
    
    
    
    22.21
    
    
    
    (1.20
    )
 As in the case of the gap analysis table, the methods we used in the previous table have some
inherent shortcomings. This type of modeling requires that we make assumptions which may not
reflect the manner in which actual yields and costs respond to changes in market interest rates.
For example, we make assumptions regarding the acceleration rate of the prepayment speeds of higher
yielding mortgage loans. Prepayments will accelerate in a falling rate environment and the reverse
will occur in a rising rate environment. We also assume that decay rates on core deposits will
accelerate in a rising rate environment and the reverse in a falling rate environment. The table
assumes that we will take no action in response to the changes in interest rates, when in practice
rate changes on certain products, such as savings deposits, may lag market changes. In addition,
prepayment estimates and other assumptions within the model are subjective in nature, involve
uncertainties, and therefore cannot be determined with precision. Accordingly, although the present
value of the equity model may provide an estimate of our interest rate risk at a particular point
in time, such measurements are not intended to and do not provide a precise forecast of the effect
of changes in interest rates on our present value of equity. 65




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data Report of Ernst & Young LLP, Independent Registered Public Accounting Firm Report on Consolidated Financial Statements Board of Directors
Bank Mutual Corporation and Subsidiaries We have audited the accompanying consolidated statements of financial condition of Bank Mutual
Corporation (the Company) and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of income, changes in shareholders equity, and cash flows for each of the
three years in the period ended December 31, 2004. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of the Company and subsidiaries at December 31, 2004
and 2003, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Companys internal control over financial reporting
as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
January 28, 2005 expressed an unqualified opinion thereon. As discussed in Note 1, in 2003 the Company changed its method for accounting for goodwill. /s/ Ernst & Young LLP Milwaukee, Wisconsin
January 28, 2005 66




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##### Table of Contents



Bank Mutual Corporation and SubsidiariesConsolidated Statements of Financial Condition December 312004
    
    
    2003(In Thousands)AssetsCash and due from banks
    
    $
    36,868
    
    
    $
    36,384Federal funds sold
    
    
    
    
    
    
    30,000Interest-earning deposits
    
    
    707
    
    
    
    20,119Cash and cash equivalents
    
    
    37,575
    
    
    
    86,503Securities available-for-sale, at fair value:Investment securities
    
    
    68,753
    
    
    
    67,854Mortgage-related securities
    
    
    1,266,224
    
    
    
    1,053,349Loans held for sale
    
    
    4,987
    
    
    
    4,056Loans receivable, net
    
    
    1,875,885
    
    
    
    1,712,278Goodwill
    
    
    52,570
    
    
    
    52,570Other intangible assets
    
    
    4,412
    
    
    
    5,073Mortgage servicing rights
    
    
    4,542
    
    
    
    4,698Other assets
    
    
    130,351
    
    
    
    122,146$
    3,445,299
    
    
    $
    3,108,527Liabilities and shareholders equityLiabilities:Deposits
    
    $
    1,982,881
    
    
    $
    2,052,290Borrowings
    
    
    761,525
    
    
    
    299,491Advance payments by borrowers for taxes and insurance
    
    
    2,796
    
    
    
    2,987Other liabilities
    
    
    25,348
    
    
    
    22,6792,772,550
    
    
    
    2,377,447Minority interest in real estate development
    
    
    2,295
    
    
    
    Shareholders equity:Preferred stock  $.01 par value:Authorized
  20,000,000 shares in 2004 and 2003Issued and outstanding  none in 2004 and 2003
    
    
    
    
    
    
    Common stock  $.01 par value:Authorized
  200,000,000 shares in 2004 and 2003Issued  78,783,849 shares in 2004 and 78,775,779 shares
in 2003Outstanding
 73,485,113 in 2004 and 78,775,779 in 2003
    
    
    788
    
    
    
    788Additional paid-in capital
    
    
    495,858
    
    
    
    495,990Retained earnings
    
    
    258,110
    
    
    
    241,958Unearned ESOP shares
    
    
    (4,865
    )
    
    
    (5,766
    )Accumulated other comprehensive income
    
    
    (4,844
    )
    
    
    149Unearned deferred compensation
    
    
    (10,076
    )
    
    
    (2,039
    )Treasury
stock  5,298,736 shares in 2004
    
    
    (64,517
    )
    
    
    Total shareholders equity
    
    
    670,454
    
    
    
    731,080$
    3,445,299
    
    
    $
    3,108,527
 See accompanaying notes to consolidated financial statements: 67




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##### Table of Contents



Bank Mutual Corporation and SubsidiariesConsolidated Statements of Income Year ended December 312004
    
    
    2003
    
    
    2002(In Thousands, Except Per Share Amounts)Interest income:Loans
    
    $
    97,330
    
    
    $
    104,623
    
    
    $
    124,490Investment securities
    
    
    3,956
    
    
    
    4,654
    
    
    
    5,580Mortgage-related securities
    
    
    47,431
    
    
    
    29,164
    
    
    
    32,256Interest-earning deposits
    
    
    204
    
    
    
    2,629
    
    
    
    3,106Total interest income
    
    
    148,921
    
    
    
    141,070
    
    
    
    165,432Interest expense:Deposits
    
    
    42,117
    
    
    
    51,419
    
    
    
    64,891Borrowings
    
    
    16,345
    
    
    
    17,975
    
    
    
    22,544Advance payments by borrowers for taxes and insurance
    
    
    36
    
    
    
    88
    
    
    
    243Total interest expense
    
    
    58,498
    
    
    
    69,482
    
    
    
    87,678Net interest income
    
    
    90,423
    
    
    
    71,588
    
    
    
    77,754Provision for loan losses
    
    
    1,330
    
    
    
    1,304
    
    
    
    760Net interest income after provision for loan losses
    
    
    89,093
    
    
    
    70,284
    
    
    
    76,994Noninterest income:Service charges on deposits
    
    
    4,630
    
    
    
    4,814
    
    
    
    4,634Brokerage and insurance commissions
    
    
    2,875
    
    
    
    2,527
    
    
    
    3,157Loan related fees and servicing revenue (loss)
    
    
    1,590
    
    
    
    636
    
    
    
    (1,056
    )Gain on sales of loans
    
    
    1,569
    
    
    
    6,855
    
    
    
    5,993Gain on sales of securities
    
    
    537
    
    
    
    121
    
    
    
    9Gain on sale of real estate
    
    
    2,009
    
    
    
    
    
    
    
    Loss on retirement of debt
    
    
    (1,737
    )
    
    
    
    
    
    
    Other
    
    
    4,702
    
    
    
    4,665
    
    
    
    3,939Total noninterest income
    
    
    16,175
    
    
    
    19,618
    
    
    
    16,676Noninterest expenses:Compensation, payroll taxes and other employee benefits
    
    
    36,214
    
    
    
    31,747
    
    
    
    31,350Occupancy and equipment
    
    
    10,853
    
    
    
    10,871
    
    
    
    10,533Amortization of other intangible assets
    
    
    661
    
    
    
    661
    
    
    
    662Other
    
    
    12,354
    
    
    
    12,329
    
    
    
    11,624Total noninterest expenses
    
    
    60,082
    
    
    
    55,608
    
    
    
    54,169Income before income taxes
    
    
    45,186
    
    
    
    34,294
    
    
    
    39,501Income taxes
    
    
    15,632
    
    
    
    11,695
    
    
    
    12,956Net income
    
    $
    29,554
    
    
    $
    22,599
    
    
    $
    26,545Per share data:Earnings per
share - basic
    
    $
    0.39
    
    
    $
    0.30
    
    
    $
    0.34Earnings per
share - diluted
    
    $
    0.38
    
    
    $
    0.29
    
    
    $
    0.34Cash dividends per share paid
    
    $
    0.18
    
    
    $
    0.12
    
    
    $
    0.093
 See accompanying notes
to consolidated finacial statements. 68




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##### Table of Contents



Bank Mutual Corporation and SubsidiariesConsolidated Statements of Changes in Shareholders Equity Additional
    
    
    
    
    
    
    UnearnedCommon
    
    
    Paid-In
    
    
    Retained
    
    
    ESOPStock
    
    
    Capital
    
    
    Earnings
    
    
    Shares(In Thousands, Except Per Share Amounts)Balances at January 1, 2002
    
    $
    820
    
    
    $
    107,446
    
    
    $
    201,777
    
    
    $
    (7,850
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    26,545
    
    
    
    Other comprehensive incomeChange in net unrealized gain
(loss) on securities
available-for-sale, net of
deferred income tax liability
of $2,593
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of management recognition
plan shares
    
    
    
    
    
    
    1,207
    
    
    
    
    
    
    
    1,203Committed ESOP Shares
    
    
    
    
    
    
    (176
    )
    
    
    
    
    
    
    Cash dividends ($0.093 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase of shares for the ESOP
    
    
    
    
    
    
    
    
    
    
    (3,390
    )
    
    
    Balances at December 31, 2002
    
    
    820
    
    
    
    108,477
    
    
    
    224,932
    
    
    
    (6,647
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    22,599
    
    
    
    Other comprehensive incomeChange in net unrealized
gain (loss) on securities
available-for-sale, net of
deferred income tax
liability of $5,853
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Committed ESOP shares
    
    
    
    
    
    
    2,087
    
    
    
    352
    
    
    
    881Exercise of stock options
    
    
    1
    
    
    
    (253
    )
    
    
    
    
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    Cash dividends ($0.12 per share)
    
    
    
    
    
    
    
    
    
    
    (5,925
    )
    
    
    Proceeds from sale of stock
    
    
    (33
    )
    
    
    385,645
    
    
    
    
    
    
    
    Balances at December 31, 2003
    
    
    788
    
    
    
    495,990
    
    
    
    241,958
    
    
    
    (5,766
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    29,554
    
    
    
    Other comprehensive incomeChange in net unrealized gain
(loss) on securities
available-for-sale, net of
deferred income tax benefit of
$2,036
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Minimum pension liability, net
of deferred income tax benefit
of $800
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of management recognition
plan shares
    
    
    
    
    
    
    (22
    )
    
    
    
    
    
    
    Committed ESOP shares
    
    
    
    
    
    
    2,800
    
    
    
    
    
    
    
    901Exercise of stock options
    
    
    
    
    
    
    (2,910
    )
    
    
    
    
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash dividends ($0.18 per share)
    
    
    
    
    
    
    
    
    
    
    (13,402
    )
    
    
    Balances at December 31, 2004
    
    $
    788
    
    
    $
    495,858
    
    
    $
    258,110
    
    
    $
    (4,865
    )
 69




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##### Table of Contents



Bank Mutual Corporation and SubsidiariesConsolidated Statements of changes in Shareholders Equity Accumulated Other
    
    
    UnearnedComprehensive
    
    
    Deferred
    
    
    TreasuryIncome (Loss)
    
    
    Compensation
    
    
    Stock
    
    
    Total(In Thousands, Except Per Share Amounts)Balances at January 1, 2002
    
    $
    6,018
    
    
    $
    (4,047
    )
    
    $
    (66
    )
    
    $
    304,098Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,545Other comprehensive incomeChange in net unrealized gain (loss) on
securities available-for-sale, net of
deferred income tax liability of $2,593
    
    
    4,469
    
    
    
    
    
    
    
    
    
    
    
    4,469Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,014Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    (12,417
    )
    
    
    (12,417
    )Issuance of management recognition plan shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,410Committed ESOP Shares
    
    
    
    
    
    
    
    
    
    
    622
    
    
    
    446Cash dividends ($0.093 per share)
    
    
    
    
    
    
    914
    
    
    
    
    
    
    
    914Purchase of shares for the ESOP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,390
    )Balances at December 31, 2002
    
    
    10,487
    
    
    
    (3,133
    )
    
    
    (11,861
    )
    
    
    323,075Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,599Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in net unrealized gain (loss) on
securities available-for-sale, net of
deferred income tax liability of $5,853
    
    
    (10,338
    )
    
    
    
    
    
    
    
    
    
    
    (10,338
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,261Purchase of shares for the ESOP
    
    
    
    
    
    
    
    
    
    
    (8,011
    )
    
    
    (8,011
    )Committed ESOP shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,320Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    1,192
    
    
    
    940Amortization of deferred compensation
    
    
    
    
    
    
    1,094
    
    
    
    (461
    )
    
    
    667Cash dividends ($0.12 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,925
    )Proceeds from sale of stock
    
    
    
    
    
    
    
    
    
    
    19,141
    
    
    
    404,753Balances at December 31, 2003
    
    
    149
    
    
    
    (2,039
    )
    
    
    
    
    
    
    731,080Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,554Other comprehensive incomeChange in net unrealized gain (loss) on
securities available-for-sale, net of
deferred income tax benefit of $2,036
    
    
    (3,801
    )
    
    
    
    
    
    
    
    
    
    
    (3,801
    )Minimum pension liability, net of deferred
income tax benefit of $800
    
    
    (1,192
    )
    
    
    
    
    
    
    
    
    
    
    (1,192
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,561Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    (78,859
    )
    
    
    (78,859
    )Issuance of management recognition plan shares
    
    
    
    
    
    
    (10,193
    )
    
    
    10,215
    
    
    
    Committed ESOP shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,701Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    4,127
    
    
    
    1,217Amortization of deferred compensation
    
    
    
    
    
    
    2,156
    
    
    
    
    
    
    
    2,156Cash dividends ($0.18 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,402
    )Balance at December 31, 2004
    
    $
    (4,844
    )
    
    $
    (10,076
    )
    
    $
    (64,517
    )
    
    $
    670,454
 70




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Bank Mutual Corporation and Subsidiaries Consolidated Statements of Cash Flows Year ended December 312004
    
    
    2003
    
    
    2002(In Thousands)Operating activities:Net income
    
    $
    29,554
    
    
    $
    22,599
    
    
    $
    26,545Adjustments to reconcile net income to net cash provided
by operating activities:Provision for loan losses
    
    
    1,330
    
    
    
    1,304
    
    
    
    760Provision for depreciation
    
    
    3,253
    
    
    
    3,021
    
    
    
    2,811Amortization of intangibles
    
    
    661
    
    
    
    661
    
    
    
    662Net (increase) decrease in mortgage servicing rights
    
    
    156
    
    
    
    (1,638
    )
    
    
    1,190Amortization of cost of stock benefit plans
    
    
    5,857
    
    
    
    3,987
    
    
    
    3,298Net premium amortization on securities
    
    
    355
    
    
    
    2,107
    
    
    
    119Net change in loans originated for sale
    
    
    638
    
    
    
    49,770
    
    
    
    (8,657
    )Net gain on sale of available-for-sale securities
    
    
    (537
    )
    
    
    (121
    )
    
    
    (9
    )Gain on sales of loans
    
    
    (1,569
    )
    
    
    (6,855
    )
    
    
    (5,993
    )Gain on sale of investment real estate
    
    
    (2,009
    )
    
    
    
    
    
    
    Gain on sale of real estate owned
    
    
    (19
    )
    
    
    (48
    )
    
    
    (184
    )Increase (decrease) in other liabilities
    
    
    5,166
    
    
    
    (8,022
    )
    
    
    (9,971
    )Increase in other assets
    
    
    (14,633
    )
    
    
    (5,447
    )
    
    
    (2,330
    )(Increase) decrease in accrued interest receivable
    
    
    (530
    )
    
    
    575
    
    
    
    2,192Net cash provided by operating activities
    
    
    27,673
    
    
    
    61,893
    
    
    
    10,433Investing activities:Net purchases of investments in mutual funds
    
    
    (968
    )
    
    
    (10,903
    )
    
    
    (1,030
    )Proceeds from maturities of investment securities
    
    
    27,000
    
    
    
    124,872
    
    
    
    51,897Purchases of investment securities
    
    
    (25,512
    )
    
    
    (117,598
    )
    
    
    (35,360
    )Purchases of mortgage-related securities
    
    
    (523,334
    )
    
    
    (923,451
    )
    
    
    (365,312
    )Principal repayments on mortgage-related securities
    
    
    302,848
    
    
    
    470,994
    
    
    
    275,518Proceeds from sale of investment securities
    
    
    537
    
    
    
    8,076
    
    
    
    4,032Net (increase) decrease in loans receivable
    
    
    (159,892
    )
    
    
    (26,459
    )
    
    
    143,192Proceeds from sale of investment real estate
    
    
    2,182
    
    
    
    
    
    
    
    Proceeds from sale of foreclosed properties
    
    
    3,223
    
    
    
    1,003
    
    
    
    1,182Increase in Federal Home Loan Bank stock
    
    
    (2,688
    )
    
    
    (2,613
    )
    
    
    (1,652
    )Purchases of premises and equipment
    
    
    (2,029
    )
    
    
    (3,896
    )
    
    
    (3,658
    )Net cash provided (used) by investing activities
    
    
    (378,633
    )
    
    
    (479,975
    )
    
    
    68,809
 71




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Bank Mutual Corporation and Subsidiaries Consolidated Statements of Cash Flows (continued) Year ended December 312004
    
    
    2003
    
    
    2002(In Thousands)Financing activities:Net increase (decrease) in deposits
    
    $
    (68,767
    )
    
    $
    (73,371
    )
    
    $
    36,761Net increase (decrease) in short-term borrowings
    
    
    137,600
    
    
    
    (22,679
    )
    
    
    (656
    )Proceeds from long-term borrowings
    
    
    556,446
    
    
    
    28,125
    
    
    
    8,245Repayments on long-term borrowings
    
    
    (232,012
    )
    
    
    (60,933
    )
    
    
    (117,971
    )Net decrease in advance payments by borrowers
for taxes and insurance
    
    
    (191
    )
    
    
    (73
    )
    
    
    (439
    )Proceeds from sale of stock
    
    
    
    
    
    
    404,753
    
    
    
    Proceeds from exercise of stock options
    
    
    1,217
    
    
    
    940
    
    
    
    472Cash dividends
    
    
    (13,402
    )
    
    
    (5,925
    )
    
    
    (3,390
    )Purchase of treasury stock
    
    
    (78,859
    )
    
    
    (8,011
    )
    
    
    (12,417
    )Net cash provided (used) by financing activities
    
    
    302,032
    
    
    
    262,826
    
    
    
    (89,395
    )Decrease in cash and cash equivalents
    
    
    (48,928
    )
    
    
    (155,256
    )
    
    
    (10,153
    )Cash and cash equivalents at beginning of year
    
    
    86,503
    
    
    
    241,759
    
    
    
    251,912Cash and cash equivalents at end of year
    
    $
    37,575
    
    
    $
    86,503
    
    
    $
    241,759Supplemental information:Interest paid on deposits
    
    $
    42,759
    
    
    $
    52,413
    
    
    $
    65,438Income taxes paid
    
    
    13,881
    
    
    
    11,764
    
    
    
    13,684Loans transferred to foreclosed properties
and repossessed assets
    
    
    5,045
    
    
    
    1,461
    
    
    
    1,406Issuance of management recognition plan shares
    
    
    10,193
    
    
    
    
    
    
    
    
 72




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 1. Summary of Significant Accounting Policies Organization From November 1, 2000 until October 29, 2003, Bank Mutual Corporation was an OTS chartered United
States corporation which became the mid-tier holding company in the regulatory restructuring of
Mutual Savings Bank, into mutual holding company form. Until October 29, 2003, Bank Mutual
Bancorp, MHC (the MHC), a U.S.-chartered mutual holding company of which Mutual Savings Banks
depositors held all of the voting and membership rights, owned a majority of Bank Mutual
Corporations outstanding common stock. On November 1, 2000, Bank Mutual Corporation also acquired First Northern Capital Corp., the parent
of First Northern Savings Bank. On March 16, 2003, Mutual Savings Bank and First Northern Savings
Bank combined to form a single OTS chartered savings bank subsidiary of Bank Mutual Corporation
called Bank Mutual (Bank Mutual or the Bank). On October 29, 2003, Bank Mutual Corporation completed a conversion and reorganization from a
mutual holding company form, established a new Wisconsin chartered Bank Mutual Corporation and, in
effect, sold the MHCs interest in Bank Mutual Corporation to the public. Existing Bank Mutual
Corporation shareholders exchanged each existing share for 3.6686 shares of the new Bank Mutual
Corporation. The total number of shares issued and exchanged in the offering was 78,707,669
shares. All share and per share numbers in these financial statements have been adjusted to reflect the
full conversion transaction and related share exchange. As used herein, the Company refers to Bank Mutual Corporation both before and after the full
conversion transaction Business Bank Mutual is a federal savings bank offering a full range of financial services to customers who
are primarily located in the state of Wisconsin. Bank Mutual is principally engaged in the business
of attracting deposits from the general public and using such deposits to originate residential and
commercial real estate loans, consumer loans, and commercial and industrial loans. Principles of Consolidation The consolidated financial statements include the accounts and transactions of the Company and its
wholly owned subsidiaries. Bank Mutual has the following wholly owned subsidiaries: Lake Financial
and Insurance Services, Mutual Investment Corporation, MC Development Ltd., and First Northern
Investments Inc. Significant intercompany accounts and transactions have been eliminated in
consolidation. Bank Mutual also has two 50% owned subsidiaries, Savings Financial Corporation,
which is accounted for using the equity method, and Arrowood Development, LLC, which is
consolidated into the financial statements. 73




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 1. Summary of Significant Accounting Policies (continued) In preparing the consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the date of the
statement of financial condition and revenues and expenses for the period. Actual results could
differ from those estimates. Cash and Cash Equivalents The Company considers federal funds sold and interest-bearing deposits that have original
maturities of three months or less to be cash equivalents. Federal Home Loan Bank Stock Stock of the Federal Home Loan Bank (FHLB) is owned due to regulatory requirements and carried at
cost, which is its redeemable value. Investment and Mortgage-Related Securities Available-for-Sale Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net
of tax, reported as a separate component of equity. The amortized cost of securities classified as available-for-sale is adjusted for amortization of
premiums and accretion of discounts to maturity, or in the case of mortgage-related securities,
over the estimated life of the security. Such amortization is included in interest income from
investments. Interest and dividends are included in interest income from investments. Realized
gains and losses and declines in value judged to be other-than-temporary are included in net gain
or loss on sales of securities and are based on the specific identification method. Loans Held for Sale Loans held for sale, which generally consist of current production of certain fixed-rate mortgage
loans, are recorded at the lower of cost or market value, determined on an individual loan basis.
Fees received from the borrower are deferred and recorded as an adjustment of the carrying value. Loans Receivable and Related Interest Income Interest on loans is accrued and credited to income as earned. Accrual of interest is generally
discontinued either when reasonable doubt exists as to the full, timely collection of interest or
principal or when a loan becomes contractually past due by more than 90 days with respect to
interest or principal. At that time, any accrued but uncollected interest is reversed and
additional income is recorded only to the extent that payments are received and the collection of
principal is reasonably assured. Loans are restored to accrual status when the obligation is
brought current, has performed in accordance with the contractual terms for a
reasonable period of time and the ultimate collectibility of the total contractual principal and
interest is reasonably assured. Loan Fees and Related Costs Loan origination and commitment fees and certain direct loan origination costs are deferred and
amortized as an adjustment of the related loans yield. The Company amortizes these amounts using
the level-yield method over the contractual life of the related loans. 74




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 1. Summary of Significant Accounting Policies (continued) Allowance for Loan Losses The allowance for loan losses is maintained at a level believed adequate by management to absorb
probable losses inherent in the loan portfolio and is based on the size and current risk
characteristics of the loan portfolio, an assessment of individual problem loans and actual loss
experience, current economic events in specific industries and geographical areas, including
unemployment levels, and other pertinent factors, including regulatory guidance and general
economic conditions. Determination of the allowance is inherently subjective as it requires
significant estimates, including the amounts and timing of expected future cash flows on impaired
loans, estimated losses on pools of homogeneous loans based on historical loss experience, and
consideration of current economic trends, all of which may be susceptible to significant change.
Loan losses are charged off against the allowance, while recoveries of amounts previously charged
off are credited to the allowance. A provision for loan losses is charged to operations based on
managements periodic evaluation of the factors previously mentioned, as well as other pertinent
factors. Evaluations are conducted at least quarterly and more often if deemed necessary. Mortgage Servicing Rights Mortgage servicing rights are recorded as an asset when loans are sold with servicing rights
retained. The total cost of loans sold is allocated between the loan balance and the servicing
asset based on their relative fair values. The total cost of loans sold is allocated between the
loan balance and their servicing asset based on their relative fair values. The capitalized value
of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net
future servicing revenue. Mortgage servicing rights are carried at the lower of the initial
carrying value, adjusted for amortization, or estimated fair value. The carrying values are
periodically evaluated for impairment. For purposes of measuring impairment, the servicing rights
are stratified into pools based on term and interest rate. Impairment represents the excess of the
remaining capitalized cost of a stratified pool over its fair value, and is recorded through a
valuation allowance. The fair value of each servicing rights pool is calculated based on the
present value of estimated future cash flows using a discount rate, given current market
conditions. Estimates of fair value include assumptions about prepayment speeds, interest rates
and other factors which are subject to change over time. Changes in these underlying assumptions
could cause the fair value of mortgage servicing rights, and the related valuation allowance, if
any, to change significantly in the future. Mortgage Banking Loan Commitments In connection with its mortgage banking activities, the Company enters into loan commitments to
fund residential mortgage loans at specified interest rates and within specified periods of time,
generally up to 60 days from the time of rate lock. A loan commitment whose loan arising from
exercise of the loan commitment will be held for sale upon funding is a derivative instrument under
Statement of Financial Accounting Standards No. 133 (SFAS No. 133), Accounting for Derivative
Instruments and Hedging Activities, (as amended), which must be recognized at fair value on the
consolidated balance sheet in other assets and other liabilities with changes in its value recorded
in income from mortgage banking operations. In determining the fair value of its derivative loan commitments for economic purposes, the Company
considers the value that would be generated when the loan arising from exercise of the loan
commitment is sold in the secondary mortgage market. That value includes the price that the loan
is expected to be sold for in the secondary mortgage market. 75




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 1. Summary of Significant Accounting Policies (continued) Foreclosed Properties and Repossessed Assets 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. Costs related to the development and
improvement of property are capitalized, whereas costs related to holding the property are
expensed. Gains and losses on sales are recognized based on the carrying value upon closing of the
sale. Premises and Equipment Land, buildings, leasehold improvements and equipment are carried at amortized cost. Buildings and
equipment are depreciated over their estimated useful lives using the straight-line method.
Leasehold improvements are amortized over the shorter of their useful lives or lease terms. The
Company reviews buildings, leasehold improvements and equipment for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Impairment exists when the estimated undiscounted cash flows for the property are less than its
carrying value. If identified, an impairment loss is recognized through a charge to earnings based
on the fair value of the property. Goodwill and Other Intangible Assets Goodwill, representing the excess of purchase price over the fair value of net assets acquired,
results from acquisitions made by the Company. Goodwill is reviewed at least annually for
impairment based upon guidelines specified by Statement of Financial Accounting Standards (SFAS)
No. 142  Goodwill and Other Intangible Assets. Other intangible assets, primarily attributed to
the customer relationships acquired, are amortized over their estimated useful lives, generally
seven to fifteen years. Other intangible assets are reviewed if facts and circumstances indicate
that they may be impaired. Prior to January 1, 2002, the Company amortized goodwill on a
straight-line basis over periods of ten to twenty years and periodically assessed whether events or
changes in circumstances indicated that the carrying amount of goodwill might be impaired. Life Insurance Policies Investments in life insurance policies owned by the Company are carried at the amount that could be
realized under the insurance contract if the Company cashed them in on the respective dates. Income Taxes The Company files a consolidated federal income tax return and separate, or combined, state income
tax returns, depending on the state. A deferred tax asset or liability is determined based on the
enacted tax rates that will be in effect when the differences between the financial statement
carrying amounts and tax basis of existing assets and liabilities are expected to be reported in
the Companys income tax returns. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date of the change. A valuation
allowance is provided for any deferred tax asset for which it is more likely than not that the
asset will not be realized. Changes in valuation allowances are recorded as a component of income
taxes. 76




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 1. Summary of Significant Accounting Policies (continued) Earnings Per Share Basic and diluted earnings per share (EPS) are computed by dividing net income by the
weighted-average number of common shares outstanding for the period. ESOP shares committed to be
released are considered outstanding. Vested shares of restricted stock which have been awarded
under the management recognition plan (MRP) provisions of the Companys 2004 and 2001 Stock
Incentive Plans, are considered common stock equivalents and are included in the weighted-average
number of shares outstanding for basic EPS. Nonvested MRP shares are considered common stock
equivalents and are included in the weighted-average number of shares outstanding for diluted EPS. Pension Costs The Company has both defined benefit and defined contribution plans. The Companys net periodic
pension cost of the defined benefit plan consists of the expected cost of benefits earned by
employees during the current period and an interest cost on the projected benefit obligation,
reduced by the expected earnings on assets held by the retirement plan, amortization of
transitional assets over a period of 15 years, amortization of prior service cost and amortization
of recognized actuarial gains and losses over the estimated future service period of existing plan
participants. The costs associated with the defined contribution plan consist of a predetermined
percentage of compensation, which is determined by the Companys Board of Directors. Segment Information The Company has determined that it has one reportable segment  community banking. Bank Mutual
offers a range of financial products and services to external customers, including: accepting
deposits from the general public; originating residential, consumer and commercial loans; and
marketing annuities and other insurance products. Stock Compensation In May 2001, the Company shareholders approved the 2001 Stock Incentive Plan (the 2001 Plan),
providing for restricted stock (MRP) awards up to 1,226,977 shares. Of these, 1,210,630 MRP
shares were granted during the year ended December 31, 2001 to employees in management positions
and directors and 124,737 shares were subsequently forfeited. No shares were granted during the
years ended December 31, 2002 and 2003. The outstanding 2001 MRP grants had a fair value of $5,001
at December 31, 2004. In May 2004, the Company shareholders approved the 2004 Stock Incentive Plan (the 2004 Plan),
providing for MRP awards up to 1,642,521 shares. Of these, 955,000 shares were granted during the
year ended December 31, 2004. The outstanding 2004 MRP grants had a fair value of $11,622 at
December 31, 2004. The 2001 and 2004 MRP grants are being amortized to compensation expense as the
Companys employees and directors become vested in the granted shares. The amount amortized to expense was $2,156 for the year ended December 31, 2004 and $667 for the
year ended December 31, 2003. The remaining unamortized cost of the MRP is reflected as a
reduction of shareholders equity as unearned deferred compensation. Options for 4,050,122 shares were granted on May 8, 2001 under the 2001 Plan at an exercise price
of $3.2056 and expire on May 8, 2011. On May 3, 2004, options for an additional 2,382,000 shares
were granted under the 2004 Plan at an exercise price of $10.673 per share and expire May 3, 2014. 77




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 1. Summary of Significant Accounting Policies (continued) The following schedule reflects stock options for the years ended December 31, 2004, 2003 and 2002. For the Year Ended December 312004
    
    
    2003
    
    
    2002Stock
    
    
    Weighted
    
    
    Stock
    
    
    Weighted
    
    
    Stock
    
    
    WeightedOptions
    
    
    Avg. Cost
    
    
    Options
    
    
    Avg. Cost
    
    
    Options
    
    
    Avg. CostOutstanding at beginning
of year
    
    
    3,298,590
    
    
    $
    3.2056
    
    
    
    3,819,346
    
    
    $
    3.2056
    
    
    
    4,013,436
    
    
    $
    3.2056Granted
    
    
    2,382,000
    
    
    $
    10.6730
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    403,637
    
    
    $
    3.2056
    
    
    
    368,143
    
    
    $
    3.2056
    
    
    
    147,132
    
    
    $
    3.2056Forfeited
    
    
    
    
    
    
    
    
    
    
    152,613
    
    
    $
    3.2056
    
    
    
    46,958
    
    
    $
    3.2056Outstanding at end of year
    
    
    5,276,953
    
    
    $
    6.5760
    
    
    
    3,298,590
    
    
    $
    3.2056
    
    
    
    3,819,346
    
    
    $
    3.2056
 At December 31, 2004Unexercisable Stock Options
    
    
    Exercisable Stock OptionsRemainingPrice
    
    Shares
    
    Contractual Life
    
    Shares
    
    Exercise Price$3.2056
    
    1,420,495
    
    6.4 years
    
    1,474,458
    
    $3.2056$10.6730
    
    2,382,000
    
    9.3 years
 The estimated fair value of each option granted is calculated using the Black-Scholes
option-pricing model. The following summarizes the weighted average assumptions used in the model: 2004
    
    
    2003
    
    
    2002Risk-free interest rate
    
    
    4.81 - 5.30
    %
    
    
    5.30
    %
    
    
    5.30
    %Dividend yield
    
    
    2.00
    %
    
    
    2.00
    %
    
    
    2.00
    %Expected stock volatility
    
    
    11.76  26.30
    %
    
    
    26.30
    %
    
    
    26.30
    %Expected years until exercise
    
    
    5.00  9.25
    
    
    
    6.00
    
    
    
    7.00
 The Black-Scholes option valuation model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. Option valuation
models such as the Black-Scholes require the input of highly subjective assumptions including the
expected stock price volatility. Bank Mutuals stock options have characteristics significantly
different from traded options and inasmuch, changes in the subjective input assumptions can
materially affect the fair value estimate. In managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock options. 78




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 1. Summary of Significant Accounting Policies (continued) The Company accounts for the stock options in accordance with APB Opinion 25, as allowed under SFAS
No. 123, and, therefore, no compensation cost has been recognized in connection with stock options
granted in any year. Pursuant to SFAS No. 123 disclosure requirements, pro forma net income and
earnings per share are presented below as if compensation cost for stock options was determined
under the fair value method and amortized to expense over the options vesting periods. Year Ended December 312004
    
    
    2003
    
    
    2002Net income:As reported
    
    $
    29,554
    
    
    $
    22,599
    
    
    $
    26,545Pro forma
    
    $
    28,689
    
    
    $
    21,880
    
    
    $
    25,826Basic earnings per share:As reported
    
    $
    0.39
    
    
    $
    0.30
    
    
    $
    0.34Pro forma
    
    $
    0.38
    
    
    $
    0.29
    
    
    $
    0.33Diluted earnings per share:As reported
    
    $
    0.38
    
    
    $
    0.29
    
    
    $
    0.34Pro forma
    
    $
    0.37
    
    
    $
    0.28
    
    
    $
    0.32
 The pro forma amounts may not be indicative of the effect on reported net income and earnings per
share for future years as current options vest over five years. Recent Accounting Changes In January 2003, the Financial Accounting Standards Board (FASB) issued Financial Interpretation
Number (FIN) 46. FIN 46 required the consolidation of entities in which an enterprise absorbs a
majority of the entitys expected losses, receives a majority of the entitys expected residual
returns, or both, as a result of ownership, contractual or other financial interest in the entity.
The provisions of this statement were effective immediately for variable interests in variable
interest entities (VIEs) created after January 31, 2003. The Corporation adopted FIN 46 for the
quarter ended December 31, 2003. Management has evaluated the applicability of FIN 46 on various investments and interests,
including low-income housing partnership interests, small business commercial real estate
partnerships and historic tax credit partnerships. The Company has determined as of December 31,
2003, that it did not have any VIEs. In 2004, a partnership, which is 50% owned by the Company,
was established to develop 318 acres of owned real estate with an unrelated third party, which is
classified as a VIE. This VIE is recorded on the statement of financial condition as an increase
in other assets ($2.3 million) and is accompanied by an increase in minority interest in real
estate development as a mezzanine item, after liabilities and before shareholders equity. The
income and expenses of the partnership are presented in other income and expenses are presented in
other expenses of the statement of income. 79




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 1. Summary of Significant Accounting Policies (continued) Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 105, Application
of Accounting Principles to Loan Commitments was issued on March 9, 2004 and is effective for
commitments to originate mortgage loans to be held for sale that are entered into after March 31,
2004. SAB No. 105 requires that
fair-value measurement include only differences between the guaranteed interest rate in the loan
commitment and a market interest rate, excluding expected future cash flows related to the
customers relationship or loan servicing. Because of the SABs limit on the types of cash flows
that can be considered in the fair-value measurement, mortgage-loan commitments could be recognized
as liabilities if the guaranteed rate in the commitment is less than the market interest rate. In
addition, SAB No. 105 requires registrants to disclose their accounting policy for loan commitments
pursuant to APB Opinion No. 22, including methods and assumptions used to estimate fair value and
any associated hedging strategies, as required by Statement No. 107, Statement No. 133 and Item No.
305 of Regulation S-K (Quantitative and Qualitative Disclosures About Market Risk). The provisions
of SAB No. 105 must be applied to loan commitments accounted for as derivatives that are entered
into after March 31, 2004. This SAB had minimal impact on our financial condition or the results
of operations. The FASB Emerging Issues Task Force (EITF) issued EITF No. 03-01 The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments to provide guidance on
certain accounting issues. Specifically, it provided guidance to better define when and whether
unrealized losses in the investment category of Available-for-Sale should be deemed other than
temporary and if the unrealized losses are other than temporary requiring immediate recognition
through the statement of income. In September 2004, FASB, after receiving input from businesses,
delayed the implementation of certain aspects of the issue which addresses the determination of
other-than-temporary issues and will reconsider in its entirety the EITF and all other guidance on
disclosing, measuring and recognizing other-than-temporary impairments of debt and equity
securities. On December 16, 2004, FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment, which is a
revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes
APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement
of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in
SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative. We expect to adopt SFAS No. 123(R) on
July 1, 2005. As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees
using APB 25s intrinsic value method and, as such, generally recognizes no compensation cost for
employee stock options. Accordingly, the adoption of SFAS No. 123(R)s fair value method will have
an impact on our results of operations, although it will have no material impact on our overall
financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future. However, had we
adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the
impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per
share in Note 1. Summary of Significant Accounting Policies...Stock Compensation to our
consolidated financial statements. SFAS No. 123(R) also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow as required under current literature. This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after adoption. While the
Company cannot estimate what those amounts will be in the future (because they depend on, among
other things, when employees exercise stock options), the amount of operating cash
flows recognized in prior periods for such excess tax deductions were not material to the cash
flows of the Company. Reclassifications Certain 2003 and 2002 amounts have been reclassified to conform to the 2004 presentation. 80




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 2. Securities, Available-for-Sale The amortized cost and fair value of investment securities available-for-sale are as follows: Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueAt December 31, 2004:Investment securities:U.S. government and federal agency obligations
    
    $
    19,967
    
    
    $
    46
    
    
    $
    (182
    )
    
    $
    19,831Mutual funds
    
    
    46,018
    
    
    
    12
    
    
    
    (640
    )
    
    
    45,390Stock in federal agencies
    
    
    1,461
    
    
    
    2,071
    
    
    
    
    
    
    
    3,532Total investment securities
    
    
    67,446
    
    
    
    2,129
    
    
    
    (822
    )
    
    
    68,753Mortgage-related securities:Federal Home Loan Mortgage Corporation
    
    
    635,806
    
    
    
    1,525
    
    
    
    (6,307
    )
    
    
    631,024Federal National Mortgage Association
    
    
    544,928
    
    
    
    2,709
    
    
    
    (4,834
    )
    
    
    542,803Private Placement CMOs
    
    
    9,928
    
    
    
    
    
    
    
    
    
    
    
    9,928Government National Mortgage Association
    
    
    82,635
    
    
    
    111
    
    
    
    (277
    )
    
    
    82,469Total mortgage-related securities
    
    
    1,273,297
    
    
    
    4,345
    
    
    
    (11,418
    )
    
    
    1,266,224Total
    
    $
    1,340,743
    
    
    $
    6,474
    
    
    $
    (12,240
    )
    
    $
    1,334,977
 The following schedule identifies securities by time in which the securities had a gross unrealized
loss. Less than 12 months

    
    
    Greater than 12 monthsIn an unrealized loss position
    
    
    In an unrealized loss position
    
    
    Total
    
    
    TotalUnrealized
    
    
    
    
    
    
    
    
    
    
    Unrealized
    
    
    Number
    
    
    Estimated
    
    
    Unrealized
    
    
    EstimatedLoss
    
    
    Number
    
    
    Estimated
    
    
    Loss
    
    
    of
    
    
    Fair
    
    
    Loss
    
    
    FairAmount
    
    
    of Securities
    
    
    Fair Value
    
    
    Amount
    
    
    Securities
    
    
    Value
    
    
    Amount
    
    
    ValueInvestment securities:U.S. government and federal agency
obligationsCorporate issue obligations
    
    $
    (89
    )
    
    
    1
    
    
    $
    7,630
    
    
    $
    (93
    )
    
    
    2
    
    
    $
    6,907
    
    
    $
    (182
    )
    
    $
    14,537Mutual funds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (640
    )
    
    
    2
    
    
    
    44,707
    
    
    
    (640
    )
    
    
    44,707Stock in federal agencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total investment securities
    
    
    (89
    )
    
    
    1
    
    
    
    7,630
    
    
    
    (733
    )
    
    
    4
    
    
    
    51,614
    
    
    
    (822
    )
    
    
    59,244Mortgage-related securities:Federal Home Loan Mortgage Corporation
    
    
    (3,827
    )
    
    
    47
    
    
    
    294,753
    
    
    
    (2,480
    )
    
    
    36
    
    
    
    129,105
    
    
    
    (6,307
    )
    
    
    423,858Federal National Mortgage Association
    
    
    (1,498
    )
    
    
    37
    
    
    
    227,989
    
    
    
    (3,336
    )
    
    
    38
    
    
    
    182,415
    
    
    
    (4,834
    )
    
    
    410,404Government National Mortgage Association
    
    
    (71
    )
    
    
    4
    
    
    
    31,789
    
    
    
    (206
    )
    
    
    5
    
    
    
    37,877
    
    
    
    (277
    )
    
    
    69,666Total mortgage-related securities
    
    
    (5,396
    )
    
    
    88
    
    
    
    554,531
    
    
    
    (6,022
    )
    
    
    79
    
    
    
    349,397
    
    
    
    (11,418
    )
    
    
    903,928Total
    
    $
    (5,485
    )
    
    
    89
    
    
    $
    562,161
    
    
    $
    (6,755
    )
    
    
    83
    
    
    $
    401,011
    
    
    $
    (12,240
    )
    
    $
    963,172
 The Company does not believe any individual unrealized loss as of December 31, 2004 represents
an other-than-temporary impairment. The unrealized losses reported for mortgage-backed securities
relate primarily to securities issued by FNMA, FHLMC and private institutions. These unrealized
losses are primarily attributable to changes in interest rates and individually were 2% or less of
their respective amortized cost basis. The Company has the ability to hold the securities contained
in the previous table for a time necessary to recover the amortized cost. 81




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 2. Securities, Available-for-Sale (continued) Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueAt December 31, 2003:Investment securities:U.S. government and federal agency obligations
    
    $
    21,434
    
    
    $
    352
    
    
    $
    (50
    )
    
    $
    21,736Mutual funds
    
    
    45,051
    
    
    
    20
    
    
    
    (374
    )
    
    
    44,697Stock in federal agencies
    
    
    1,461
    
    
    
    
    
    
    
    (40
    )
    
    
    1,421Total investment securities
    
    
    67,946
    
    
    
    372
    
    
    
    (464
    )
    
    
    67,854Mortgage-related securities:Federal Home Loan Mortgage Corporation
    
    
    518,893
    
    
    
    3,053
    
    
    
    (3,774
    )
    
    
    518,172Federal National Mortgage Association
    
    
    444,167
    
    
    
    4,700
    
    
    
    (3,371
    )
    
    
    445,496Private Placement CMOs
    
    
    537
    
    
    
    6
    
    
    
    
    
    
    
    543Government National Mortgage Association
    
    
    89,589
    
    
    
    322
    
    
    
    (773
    )
    
    
    89,138Total mortgage-related securities
    
    
    1,053,186
    
    
    
    8,081
    
    
    
    (7,918
    )
    
    
    1,053,349Total
    
    $
    1,121,132
    
    
    $
    8,453
    
    
    $
    (8,382
    )
    
    $
    1,121,203
 The amortized cost and fair values of securities by contractual maturity at December 31, 2004, are
shown below. Actual maturities may differ from contractual maturities because issuers have the
right to call or prepay obligations with or without call or prepayment penalties. Amortized
    
    
    FairCost
    
    
    ValueDue in one year or less
    
    $
    5,248
    
    
    $
    5,294Due after one year through five years
    
    
    14,719
    
    
    
    14,537Due after five years through ten years
    
    
    
    
    
    
    Mutual funds
    
    
    46,018
    
    
    
    45,390Stock in Federal Agencies
    
    
    1,461
    
    
    
    3,532Mortgage-related securities
    
    
    1,273,297
    
    
    
    1,266,224$
    1,340,743
    
    
    $
    1,334,977
 The following table summarizes the adjustment to other comprehensive income and the related tax
effect for each of the three years ended December 31: 2004
    
    
    2003
    
    
    2002Change in unrealized holding gain (loss) on
available-for-sale securities during the periodUnrealized net gains (losses)
    
    $
    (5,837
    )
    
    $
    (16,070
    )
    
    $
    7,071Related tax expense (benefit)
    
    
    (2,036
    )
    
    
    (5,809
    )
    
    
    2,596(3,801
    )
    
    
    (10,261
    )
    
    
    4,475Less: Reclassification adjustment for gains included
in income
Related gains on available-for-sale securities
    
    
    
    
    
    
    121
    
    
    
    9Related tax expense
    
    
    
    
    
    
    44
    
    
    
    3
    
    
    
    77
    
    
    
    6Change in other comprehensive income
    
    $
    (3,801
    )
    
    $
    (10,338
    )
    
    $
    4,469
 82




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 2. Securities, Available-for-Sale (continued) Investment securities with a fair value of approximately $133,518 and $14,048 at December 31, 2004
and 2003, were pledged to secure deposits, borrowings and for other purposes as permitted or
required by law. See also Notes 6 and 11 for additional information regarding security pledges. 3. Loans Receivable Loans receivable consist of the following: December 312004
    
    
    2003Mortgage loans:One-to-four family
    
    $
    903,498
    
    
    $
    793,247Multifamily
    
    
    161,641
    
    
    
    124,494Commercial real estate
    
    
    195,708
    
    
    
    209,293Construction and development
    
    
    141,394
    
    
    
    122,436Total mortgage real estate loans
    
    
    1,402,241
    
    
    
    1,249,470Consumer and other loans:Fixed equity
    
    
    266,635
    
    
    
    252,550Home equity lines of credit
    
    
    88,444
    
    
    
    78,567Student
    
    
    20,519
    
    
    
    20,546Home improvement
    
    
    24,293
    
    
    
    12,605Automobile
    
    
    61,469
    
    
    
    67,630Other
    
    
    15,911
    
    
    
    18,623Total consumer and other loans
    
    
    477,271
    
    
    
    450,521Total commercial business loans
    
    
    70,170
    
    
    
    75,022Total loans receivable
    
    
    1,949,682
    
    
    
    1,775,013Less:Undisbursed loan proceeds
    
    
    60,653
    
    
    
    47,743Allowance for loan losses
    
    
    13,923
    
    
    
    13,771Unearned loan fees and discounts
    
    
    (779
    )
    
    
    1,22173,797
    
    
    
    62,735Total loans receivable  net
    
    $
    1,875,885
    
    
    $
    1,712,278
 The Companys first mortgage loans and home equity lines of credit are primarily secured by
properties housing one-to-four families which are generally located in the Companys local lending
areas in Wisconsin, Michigan and Minnesota. Non-accrual loans at December 31, 2004 were $5,683 and
at December 31, 2003, were $9,288. A summary of the activity in the allowance for loan losses follows: Year ended December 312004
    
    
    2003
    
    
    2002Balance at beginning of year
    
    $
    13,771
    
    
    $
    12,743
    
    
    $
    12,245Provisions
    
    
    1,330
    
    
    
    1,304
    
    
    
    760Charge-offs
    
    
    (1,253
    )
    
    
    (501
    )
    
    
    (481
    )Recoveries
    
    
    75
    
    
    
    225
    
    
    
    219Balance at end of year
    
    $
    13,923
    
    
    $
    13,771
    
    
    $
    12,743
 The unpaid principal balance of loans serviced for others was $620,055, $649,332, and $638,801 at
December 31, 2004, 2003 and 2002, respectively. These loans are not reflected in the consolidated
financial statements. 83




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 3. Loans Receivable (continued) The following table presents data on impaired loans: December 312004
    
    
    2003Impaired loans for which an allowance has been provided
    
    $
    7,153
    
    
    $
    16,254Impaired loans for which no allowance has been provided
    
    
    1,503
    
    
    
    738Total loans determined to be impaired
    
    $
    8,656
    
    
    $
    16,992Allowance for loan losses related to impaired loans
    
    $
    3,524
    
    
    $
    3,477
 Year ended December 312004
    
    
    2003
    
    
    2002Average recorded investment in impaired loans
    
    $
    8,706,263
    
    
    $
    9,396,890
    
    
    $
    Cash basis interest income recognized from impaired loans
    
    $
    293,073
    
    
    $
    408,617
    
    
    $
    
 4. Goodwill, Other Intangible Assets and Mortgage Servicing Rights The carrying amount of mortgage servicing rights net of accumulated amortization and the associated
valuation allowance at December 31, 2004 is presented in the following table. 2004
    
    
    2003
    
    
    2002Mortgage servicing rights at beginning of year
    
    $
    4,698
    
    
    $
    6,149
    
    
    $
    4,738Additions
    
    
    1,529
    
    
    
    4,480
    
    
    
    3,251Amortization
    
    
    (1,685
    )
    
    
    (5,931
    )
    
    
    (1,840
    )Mortgage servicing rights at end of year
    
    
    4,542
    
    
    
    4,698
    
    
    
    6,149Valuation allowance
    
    
    
    
    
    
    
    
    
    
    (3,089
    )Balance
    
    $
    4,542
    
    
    $
    4,698
    
    
    $
    3,060
 In 2004, there were no permanent impairments, however in 2003, a charge of $1,419 was recorded for
loans that had mortgage servicing rights that were permanently impaired. This amount is included
with the amortization in the table above. Deposit base intangibles had a carrying amount and a value net of accumulated amortization of
$4,412 at December 31, 2004. 84




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 4. Goodwill, Other Intangible Assets and Mortgage Servicing Rights (continued) The projections of amortization expense shown below for mortgage servicing rights are based on
existing asset balances and the existing interest rate environment as of December 31, 2004. Future
amortization expense may be significantly different depending upon changes in the mortgage
servicing portfolio, mortgage interest rates and market conditions. The following table shows the current period and estimated future amortization expense for
amortizable intangible assets: MortgageServicing
    
    
    Deposit BaseRights
    
    
    Intangibles
    
    
    TotalTwelve months ended December 31, 2004
(actual)
    
    $
    1,685
    
    
    $
    661
    
    
    $
    2,346Estimate for year ending December 31,2005
    
    
    $
    979
    
    
    $
    661
    
    
    $
    1,6402006
    
    
    
    978
    
    
    
    661
    
    
    
    1,6392007
    
    
    
    974
    
    
    
    661
    
    
    
    1,6352008
    
    
    
    949
    
    
    
    618
    
    
    
    1,5672009
    
    
    
    554
    
    
    
    405
    
    
    
    959Thereafter
    
    
    108
    
    
    
    1,406
    
    
    
    1,514$
    4,542
    
    
    $
    4,412
    
    
    $
    8,954
 5. Other Assets Other Assets are summarized as follows: December 312004
    
    
    2003Accrued interest:Mortgage-related securities
    
    $
    4,581
    
    
    $
    4,034Investment securities
    
    
    172
    
    
    
    200Loans receivable
    
    
    6,599
    
    
    
    6,586Total accrued interest
    
    
    11,352
    
    
    
    10,820Foreclosed properties and repossessed assets
    
    
    1,621
    
    
    
    630Premises and equipment
    
    
    43,966
    
    
    
    45,196Federal Home Loan Bank stock, at cost
    
    
    38,186
    
    
    
    35,498Bank owned life insurance
    
    
    19,324
    
    
    
    18,268Other
    
    
    15,902
    
    
    
    11,734$
    130,351
    
    
    $
    122,146
 85




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 5. Other Assets (continued) Foreclosed properties and repossessed assets are summarized as follows: December 312004
    
    
    2003Acquired by foreclosure or in lieu of foreclosure
    
    $
    1,589
    
    
    $
    529Repossessed collateral
    
    
    32
    
    
    
    101$
    1,621
    
    
    $
    630
 Premises and equipment are summarized as follows: December 312004
    
    
    2003Land and land improvements
    
    $
    12,478
    
    
    $
    12,748Office buildings
    
    
    41,342
    
    
    
    40,139Furniture and equipment
    
    
    15,979
    
    
    
    15,547Leasehold improvements
    
    
    929
    
    
    
    1,09370,728
    
    
    
    69,527Less allowances for depreciation and amortization
    
    
    26,762
    
    
    
    24,331$
    43,966
    
    
    $
    45,196
 Depreciation expense for 2004, 2003 and 2002 was $3,253, $3,021 and $2,811, respectively. Bank Mutual leases various branch offices, office facilities and equipment under noncancelable
operating leases which expire on various dates through 2012. Future minimum payments under
noncancelable operating leases with initial or remaining terms of one year or more for the years
indicated are as follows at December 31, 2004: 2005
    
    $
    1,1422006
    
    
    8772007
    
    
    7392008
    
    
    7242009
    
    
    499Thereafter
    
    
    455Total
    
    $
    4,436
 Rental expenses totaled $999, $974, and $1,022 for 2004, 2003 and 2002, respectively. 86




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 6. Deposits Deposits are summarized as follows: December 312004
    
    
    2003Checking accounts:Noninterest-bearing
    
    $
    111,855
    
    
    $
    110,099Interest-bearing
    
    
    171,565
    
    
    
    157,231283,420
    
    
    
    267,330Money market accounts
    
    
    309,531
    
    
    
    358,003Savings accounts
    
    
    247,439
    
    
    
    240,543Certificate accounts:Due within one year
    
    
    584,172
    
    
    
    510,195After one but within two years
    
    
    241,059
    
    
    
    318,652After two but within three years
    
    
    225,987
    
    
    
    140,604After three but within four years
    
    
    30,636
    
    
    
    192,203After four but within five years
    
    
    60,637
    
    
    
    24,760After five years
    
    
    
    
    
    
    1,142,491
    
    
    
    1,186,414$
    1,982,881
    
    
    $
    2,052,290
 The aggregate amount of certificate accounts with balances of one hundred thousand dollars or more
is approximately $155,117 and $149,690 at December 31, 2004 and 2003, respectively. Interest expense on deposits was as follows: Year ended December 312004
    
    
    2003
    
    
    2002Interest-bearing checking accounts
    
    $
    359
    
    
    $
    416
    
    
    $
    833Money market accounts
    
    
    3,301
    
    
    
    4,353
    
    
    
    6,673Savings accounts
    
    
    1,084
    
    
    
    1,490
    
    
    
    2,402Certificate accounts
    
    
    37,373
    
    
    
    45,160
    
    
    
    54,983$
    42,117
    
    
    $
    51,419
    
    
    $
    64,891
 87




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 7. Borrowings Borrowings consist of the following: December 312004
    
    
    
    
    
    
    2003Weighted-
    
    
    
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    
    
    
    AverageBalance
    
    Rate
    
    Balance
    
    
    
    
    
    RateFederal Home Loan Bank
advances maturing:2004
    
    $
    
    
    
    
    
    %
    
    $
    231,775
    
    
    
    
    
    
    
    5.61
    %2005
    
    
    168,010
    
    
    
    2.43
    
    
    
    17,996
    
    
    
    
    
    
    
    5.202006
    
    
    407,955
    
    
    
    2.80
    
    
    
    7,948
    
    
    
    
    
    
    
    4.852007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2008
    
    
    1,025
    
    
    
    5.90
    
    
    
    1,024
    
    
    
    
    
    
    
    5.902009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Thereafter
    
    
    46,935
    
    
    
    5.22
    
    
    
    40,748
    
    
    
    
    
    
    
    5.23Open-line of credit
    
    
    137,600
    
    
    
    2.47
    
    
    
    
    
    
    
    
    
    
    
    Other borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    761,525
    
    
    
    
    
    
    $
    299,491
 Bank Mutual is required to maintain unencumbered mortgage loans in its portfolios aggregating at
least 167% of the amount of outstanding advances from the FHLB as collateral. Bank Mutuals
borrowings at the FHLB are limited to the lesser of 35% of total assets or 60% of the book value of
certain mortgage loans. In addition, these notes are collateralized by FHLB stock of $38,186 and
$35,498 at December 31, 2004 and 2003, respectively. Bank Mutual has a line of credit with two financial institutions which totals $10.0 million. At
December 31, 2004 and 2003, no draws were outstanding. 8. Shareholders Equity Bank Mutual is subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and
possible additional discretionary, actions by regulators, that, if undertaken, could have a direct
material effect on the Companys financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, Bank Mutual must meet specific capital
guidelines that involve quantitative measures of Bank Mutuals assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. Bank Mutuals capital
amounts and classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors. 88




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 8. Shareholders Equity (continued) Quantitative measures established by federal regulation to ensure adequacy require Bank Mutual to
maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital
(as these terms are defined in regulations) to risk-weighted assets (as these terms are defined in
regulations), and of Tier I capital (as these terms are defined in regulations) to average assets
(as these terms are defined in regulations). Management believes, as of December 31, 2004, that
Bank Mutual met all capital adequacy requirements. To Be Well CapitalizedFor Capital
    
    
    Under Prompt CorrectiveActual
    
    
    Adequacy Purposes
    
    
    Action ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioBank MutualAs of December 31, 2004:Total capital
    
    $
    479,279
    
    
    
    28.85
    %
    
    $
    132,895
    
    
    
    8.00
    %
    
    $
    166,119
    
    
    
    10.00
    %(to risk-weighted assets)Tier 1 capital
    
    
    465,356
    
    
    
    28.01
    
    
    
    66,447
    
    
    
    4.00
    
    
    
    99,671
    
    
    
    6.00(to risk-weighted assets)Tier 1 capital
    
    
    465,356
    
    
    
    13.74
    
    
    
    135,504
    
    
    
    4.00
    
    
    
    169,380
    
    
    
    5.00(to average assets)Bank MutualAs of December 31, 2003:Total capital(to risk-weighted assets)
    
    $
    463,569
    
    
    
    30.08
    %
    
    $
    123,285
    
    
    
    8.00
    %
    
    $
    154,107
    
    
    
    10.00
    %Tier 1 capital(to risk-weighted assets)
    
    
    451,660
    
    
    
    29.31
    
    
    
    61,643
    
    
    
    4.00
    
    
    
    92,464
    
    
    
    6.00Tier 1 capital(to average assets)
    
    
    451,660
    
    
    
    14.82
    
    
    
    121,900
    
    
    
    4.00
    
    
    
    152,375
    
    
    
    5.00
 The Company is not aware of any conditions or events, which would change Bank Mutuals status as
well capitalized. There are no conditions or events since that notification that management
believes have changed Bank Mutuals category. 89




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 8. Shareholders Equity (continued) Following are reconciliations of Bank Mutuals (subsidiary bank) equity under generally accepted
accounting principles to capital as determined by regulators: Bank MutualRisk-
    
    
    Tier IBased
    
    
    (Core)Capital
    
    
    CapitalAs of December 31, 2004:Equity per bank records
    
    $
    519,548
    
    
    $
    519,548Unrealized gains on investments
    
    
    4,844
    
    
    
    4,844Goodwill and intangibles
    
    
    (55,214
    )
    
    
    (55,214
    )Investment in nonincludable subsidiaries
    
    
    (3,550
    )
    
    
    (3,550
    )Disallowed servicing assets
    
    
    (272
    )
    
    
    (272
    )Equity investments required to be deducted
    
    
    
    
    
    
    Allowance for loan losses
    
    
    13,923
    
    
    
    Regulatory capital
    
    $
    479,279
    
    
    $
    465,356
 9. Earnings Per Share The computation of the Companys basic and diluted earnings per share is presented in the following
table. Year ended December 312004
    
    
    2003
    
    
    2002Basic earnings per shareNet income
    
    $
    29,554
    
    
    $
    22,599
    
    
    $
    26,545Weighted average shares outstanding
    
    
    74,672,199
    
    
    
    75,779,184
    
    
    
    77,024,851Allocated ESOP shares for the period
    
    
    327,194
    
    
    
    327,194
    
    
    
    327,195Vested MRP shares for the period
    
    
    328,384
    
    
    
    223,141
    
    
    
    240,58775,327,777
    
    
    
    76,329,519
    
    
    
    77,592,633Basic earnings per share
    
    $
    0.39
    
    
    $
    0.30
    
    
    $
    0.34Diluted earnings per shareNet income
    
    $
    29,554
    
    
    $
    22,599
    
    
    $
    26,545Weighted average shares outstanding used
in basic earnings per share
    
    
    75,327,777
    
    
    
    76,329,519
    
    
    
    77,592,633Net dilutive effect of:Stock option shares
    
    
    1,958,592
    
    
    
    1,884,239
    
    
    
    1,294,961Unvested MRP shares
    
    
    292,133
    
    
    
    353,992
    
    
    
    278,57177,578,502
    
    
    
    78,567,750
    
    
    
    79,166,165Diluted earnings per share
    
    $
    0.38
    
    
    $
    0.29
    
    
    $
    0.34
 90




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 10. Employee Benefit Plans Bank Mutual Corporation Bank Mutual Corporation 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 $159 in 2004, $146 in
2003 and $103 in 2002. Bank Mutual Corporation also has a defined benefit pension plan covering employees meeting certain
minimum age and service requirements and a 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 which produces the highest average.
The Companys funding policy is to contribute annually the amount necessary to satisfy the
requirements of the Employee Retirement Income Security Act of 1974. As of January 1, 2002, First
Northern Savings Bank employees meeting certain minimum age and service requirements entered the
defined benefit plan; for those First Northern Savings Bank employees, only years of service after
that date are counted for funding. However, for vesting purposes, First Northern Savings Bank
employees received credit under the defined benefit plan for their years of service since joining
First Northern Savings Bank. The following tables set forth the defined benefit pension plans funded status and net periodic
benefit cost: 2004
    
    
    2003Change in Benefit ObligationBenefit obligation at beginning of year
    
    $
    22,596
    
    
    $
    18,982Service cost
    
    
    1,659
    
    
    
    1,419Interest cost
    
    
    1,394
    
    
    
    1,260Actuarial loss
    
    
    1,845
    
    
    
    1,334Benefits paid
    
    
    (419
    )
    
    
    (399
    )Benefit obligation at end of year
    
    $
    27,075
    
    
    $
    22,596Change in Plan AssetsFair value of plan assets at beginning of year
    
    $
    24,188
    
    
    $
    21,070Actual return on plan assets
    
    
    2,011
    
    
    
    1,567Employer contributions
    
    
    3,351
    
    
    
    1,950Benefits paid
    
    
    (419
    )
    
    
    (399
    )Fair value of plan assets at end of year
    
    $
    29,131
    
    
    $
    24,188Funded StatusFunded status at end of year
    
    $
    2,056
    
    
    $
    1,592Unrecognized net actuarial loss
    
    
    1,151
    
    
    
    (248
    )Unamortized prior service cost
    
    
    334
    
    
    
    462Unrecognized additional liability
    
    
    (2,187
    )
    
    
    Prepaid benefit cost
    
    $
    1,354
    
    
    $
    1,806Amount Recognized in the Statement of Financial
Position Consists of:Prepaid benefit cost
    
    $
    3,347
    
    
    $
    1,806Intangible assets
    
    
    194
    
    
    
    Accumulated other comprehensive income
    
    
    (2,187
    )
    
    
    Net amount recognized
    
    $
    1,354
    
    
    $
    1,806
 91




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 10. Employee Benefit Plans (continued) Accumulated Benefit Obligations The accumulated benefit obligations for the defined benefit pension plan was $27,075 and $22,596 at
October 31, 2004 and 2003, respectively. Weighted-average assumptions used in cost calculations:Discount rate
    
    
    6.00
    %
    
    
    6.25
    %Rate of increase in compensation levels
    
    
    4.00
    %
    
    
    4.00
    %Expected long-term rate of return on plan assets
    
    
    7.00
    %
    
    
    7.00
    %
 The expected long-term rate of return was estimated using a combination of the expected rate of
return for immediate participation contracts and the historical rate of return for immediate
participation contracts. 2004
    
    
    2003
    
    
    2002Components of Net Periodic Benefit CostService cost
    
    $
    1,659
    
    
    $
    1,419
    
    
    $
    1,251Interest cost
    
    
    1,394
    
    
    
    1,260
    
    
    
    1,163Expected return on plan assets
    
    
    (2,011
    )
    
    
    (1,567
    )
    
    
    (1,266
    )Amortization of prior service cost
    
    
    128
    
    
    
    129
    
    
    
    129Recognized actuarial loss (gain)
    
    
    
    
    
    
    
    
    
    
    (4
    )Amortization of gain from prior periods
    
    
    107
    
    
    
    (42
    )
    
    
    (68
    )Asset gain
    
    
    339
    
    
    
    114
    
    
    
    Total net periodic benefit cost
    
    $
    1,616
    
    
    $
    1,313
    
    
    $
    1,205
 Pension plan assets which consist primarily of immediate participation guarantee contracts with an
insurance company are actively managed by investment professionals. The Company projects the following benefit payments under the various retirement plans. Year
    
    Projected Benefit Payments2005
    
    $
    9002006
    
    
    9802007
    
    
    1,1672008
    
    
    1,7132008
    
    
    1,8542010 - 2014
    
    
    12,021$
    18,635
 92




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 10. Employee Benefit Plans (continued) The Company values its pension plan annually at October 31. The pension plan weighted-average
asset allocations at October 31, 2004 and 2003, by asset category are as follows: At October 312004
    
    
    2003Asset CategoryEquity Securities
    
    
    4.8
    %
    
    
    3.7
    %Debt securities
    
    
    14.1
    
    
    
    16.8Immediate participation guarantee contracts
    
    
    81.1
    
    
    
    79.5Total
    
    
    100.0
    %
    
    
    100.0
    %
 Investment Policy The investment objective is to minimize risk. Asset allocation strongly favors immediate
participation contracts with an Insurance Company. The equity securities are shares of stock
issued by the insurance company when it demutualized. Contributions The amount of the 2005 contribution will be determined based on a number of factors, including the
results of the Actuarial Valuation Report as of January 1, 2005. At this time, the amount of the
2005 contribution is not known. Bank Mutual Bank Mutual has a deferred retirement plan, which was formerly a Mutual Savings Bank plan, for
non-officer directors who have provided at least five years of service. Four of the five existing
eligible directors benefits have vested. In the event a director dies prior to completion of these
payments, payments will go to the directors heirs. Bank Mutual has funded these arrangements
through rabbi trust arrangements, and based on actuarial analyses believes these obligations are
adequately funded. First Northern Savings Bank also had supplemental retirement plans for several executives. Total
expense relating to these plans for the year ended December 31, 2004 and 2003 was $140 and $153,
respectively. 93




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 11. Stock-Based Benefit Plans The Company established an ESOP for the employees of the Company and Bank Mutual. The ESOP is a
qualifying plan under Internal Revenue Service guidelines. It covers all full-time employees who
have attained at least 21 years of age and completed one year of service. At November 1, 2000, the
ESOP borrowed $609 from the Company and purchased 223,454 shares of common stock issued in the
public offering. Subsequent to this initial purchase, through December 31, 2000, the ESOP borrowed
an additional $8,362 and purchased an additional 3,037,600 shares. In January 2001, the ESOP bought
an additional 10,892 shares. Expense is recognized based on the fair value (average stock price)
of shares scheduled to be released from the ESOP trust. One-tenth of the shares are scheduled to be
released each year, which started in 2001. Also, additional shares may be released as the ESOP
Trust receives cash dividends from the unallocated shares held in the Trust. In 2002, such
additional shares were released. ESOP expense for the year ended December 31, 2004 was $3,695; for
the year ended December 31, 2003 was $2,950; and for the year ended December 31, 2002 was $2,414. The following table summarizes shares of Company common stock held by the ESOP at December 31. 2004
    
    
    2003
    
    
    2002Shares allocated to participants
    
    
    327,194
    
    
    
    327,194
    
    
    
    436,960Unallocated and unearned shares
    
    
    1,762,614
    
    
    
    2,089,808
    
    
    
    2,417,002Fair value of unearned ESOP shares
    
    $
    21,451
    
    
    $
    23,803
    
    
    $
    15,236
 12. Income Taxes The provision for income taxes consists of the following: Year ended December 312004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    14,269
    
    
    $
    10,030
    
    
    $
    13,703State
    
    
    400
    
    
    
    415
    
    
    
    (43
    )14,669
    
    
    
    10,445
    
    
    
    13,660Deferred expense (benefit):Federal
    
    
    976
    
    
    
    1,520
    
    
    
    (895
    )State
    
    
    (13
    )
    
    
    (270
    )
    
    
    191963
    
    
    
    1,250
    
    
    
    (704
    )$
    15,632
    
    
    $
    11,695
    
    
    $
    12,956
 For state income tax purposes, certain subsidiaries have net operating loss carryovers of $15,418
available to offset against future income. The carryovers expire in the years 2005 through 2019 if
unused. 94




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 12. Income Taxes (continued) The income tax provision differs from the provision computed at the federal statutory corporate
rate as follows: Year ended December 312004
    
    
    2003
    
    
    2002Income before provision for income taxes
    
    $
    45,186
    
    
    $
    34,294
    
    
    $
    39,501Tax expense at federal statutory rate
    
    $
    15,815
    
    
    $
    12,003
    
    
    $
    13,825Increase (decrease) in taxes resulting from:State income
taxes  net of federal tax benefit
    
    
    291
    
    
    
    117
    
    
    
    (521
    )Bank Owned Life insurance
    
    
    (382
    )
    
    
    (432
    )
    
    
    (317
    )Other
    
    
    (92
    )
    
    
    7
    
    
    
    (31
    )Provision for income taxes
    
    $
    15,632
    
    
    $
    11,695
    
    
    $
    12,956
 Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. The significant components of the Companys deferred tax assets and liabilities are summarized as
follows: December 312004
    
    
    2003Deferred tax assets:State net operating losses
    
    $
    863
    
    
    $
    763Loan loss reserves
    
    
    5,578
    
    
    
    5,612Pension
    
    
    3,235
    
    
    
    2,289Deferred compensation
    
    
    1,445
    
    
    
    936Unrealized gain on investment securities
    
    
    2,117
    
    
    
    79Total deferred tax assets
    
    
    13,238
    
    
    
    9,679Valuation allowance
    
    
    (414
    )
    
    
    (409
    )Net deferred tax assets
    
    
    12,824
    
    
    
    9,270Deferred tax liabilities:Property and equipment depreciation
    
    
    1,227
    
    
    
    2,235FHLB stock dividends
    
    
    4,578
    
    
    
    3,174Deferred loan fees
    
    
    1,675
    
    
    
    633Purchase accounting adjustments
    
    
    5,358
    
    
    
    5,615Other
    
    
    1,034
    
    
    
    871Total deferred tax liabilities
    
    
    13,872
    
    
    
    12,528Net deferred tax liability
    
    $
    (1,048
    )
    
    $
    (3,258
    )
 95




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##### Table of Contents



Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 13. Financial Instruments with Off-Balance-Sheet Risk The Company is party to financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of its customers. These financial instruments consist of
commitments to extend credit and involve, to varying degrees, elements of credit and interest rate
risk in excess of the amounts recognized in the consolidated statements of financial condition. The
contract amounts reflect the extent of involvement the Company has in particular classes of
financial instruments and also represents the Companys maximum exposure to credit loss. Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and generally require payment of a fee. As some commitments expire
without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates the collateral needed and creditworthiness of each customer on
a case by case basis. The Company generally extends credit only on a secured basis. Collateral
obtained varies, but consists principally of one-to-four family residences. Financial instruments whose contract amounts represent credit risk are as follows: December 312004
    
    
    2003Unused consumer lines of credit
    
    $
    154,213
    
    
    $
    153,068Unused commercial lines of credit
    
    
    22,261
    
    
    
    12,919Commitments to extend credit:Fixed rate
    
    
    16,550
    
    
    
    17,115Adjustable rate
    
    
    57,289
    
    
    
    35,838Credit enhancement under the Federal Home Loan Bank
of Chicago Mortgage Partnership Finance program
    
    
    1
    
    
    
    3
 Forward commitments to sell mortgage loans of $10,545 at December 31, 2004, represent commitments
obtained by the Company from a secondary market agency to purchase mortgages from the Company.
Commitments to sell loans expose Bank Mutual to interest rate risk if market rates of interest
decrease during the commitment period. Commitments to sell loans are made to mitigate interest rate
risk on commitments to originate loans and loans held for sale. Forward commitments at December 31,
2003 were $8,315. The Company participates in the FHLB Mortgage Partnership Finance Program (the Program). In
addition to entering into forward commitments to sell mortgage loans to a secondary market agency,
the Company enters into firm commitments to deliver loans to the FHLB through the Program. Under
the Program, loans are funded by the FHLB and the Company receives an agency fee reported as a
component of gain on sale of loans. The Company had no firm commitments outstanding to deliver
loans through the Program at December 31, 2004. Once delivered to the Program, the Company provides
a contractually agreed-upon credit enhancement and performs servicing of the loans. Under the
credit enhancement, the Company is liable for losses on loans delivered to the Program after
application of any mortgage insurance and a contractually agreed-upon credit enhancement provided
by the Program subject to an agreed-upon maximum. The Company received a fee for this credit
enhancement. The Company does not anticipate that any credit losses will be incurred in excess of
anticipated credit enhancement fees. 96




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 14. Fair Value of Financial Instruments Disclosure of fair value information about certain financial instruments, whether or not recognized
in the consolidated financial statements, for which it is practicable to estimate the value, is
summarized below. In cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from this disclosure.
Accordingly, the aggregate fair value of amounts presented does not represent the underlying value
of the Company and is not particularly relevant to predicting the Companys future earnings or cash
flows. The following methods and assumptions are used by the Company in estimating its fair value
disclosures of financial instruments: Cash and Cash Equivalents: The carrying amounts reported in the statements of financial condition
for cash and cash equivalents approximate those assets fair values. Investment and Mortgage-Related Securities: Fair values for these securities are based on quoted
market prices or such prices of comparable instruments. Loans Receivable and Loans Held-for-Sale: The fair value of one-to-four family fixed-rate mortgage
loans was determined based on the current market price for securities collateralized by similar
loans. For variable rate one-to-four family mortgage, consumer and other loans that reprice
frequently and with no significant change in credit risk, carrying values approximate fair values.
The fair value for fixed-rate commercial real estate, rental property mortgage, consumer and other
loans was estimated by projecting cash flows at market interest rates. Mortgage Servicing Rights: The Company has calculated the fair market value of mortgage servicing
rights for those loans that are sold with servicing rights retained. For valuation purposes, loans
are stratified by product type and, within product type, by interest rates. The fair value of
mortgage servicing rights is based upon the present value of estimated future cash flows using
current market assumptions for prepayments, servicing cost and other factors. Federal Home Loan Bank Stock: Federal Home Loan Bank stock is carried at cost, which is its
redeemable (fair) value, since the market for this stock is restricted. Accrued Interest Receivable: The carrying value of accrued interest receivable approximates fair
value. Deposits and Advance Payments by Borrowers for Taxes and Insurance: Fair values for deposits are
estimated using a discounted cash flow calculation that applies current market borrowing interest
rates to a schedule of aggregated expected monthly maturities on deposits. The advance payments by
borrowers for taxes and insurance are equal to their carrying amounts at the reporting date. 97




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 14. Fair Value of Financial Instruments (continued) 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. December 31
    
    
    December 312004
    
    
    2003Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    ValueCash and cash equivalents
    
    $
    36,868
    
    
    $
    36,868
    
    
    $
    86,503
    
    
    $
    86,503Investment and mortgage-related securities
    
    
    1,334,977
    
    
    
    1,334,977
    
    
    
    1,121,182
    
    
    
    1,121,182Loans receivable, net
    
    
    1,875,885
    
    
    
    1,916,114
    
    
    
    1,712,278
    
    
    
    1,762,231Loans held for sale
    
    
    4,987
    
    
    
    4,987
    
    
    
    4,056
    
    
    
    4,056Mortgage servicing rights
    
    
    4,542
    
    
    
    5,659
    
    
    
    4,698
    
    
    
    4,698Federal Home Loan Bank stock
    
    
    38,186
    
    
    
    38,186
    
    
    
    35,498
    
    
    
    35,498Accrued interest receivable
    
    
    11,352
    
    
    
    11,352
    
    
    
    10,820
    
    
    
    10,820Deposits and accrued interest
    
    
    1,982,881
    
    
    
    1,915,729
    
    
    
    2,052,290
    
    
    
    2,230,147Advance payments by borrowers
    
    
    2,796
    
    
    
    2,796
    
    
    
    2,987
    
    
    
    2,987Borrowings
    
    
    761,525
    
    
    
    754,994
    
    
    
    299,491
    
    
    
    338,122
 The above table does not include any amount for the value of any off-balance-sheet items (see Note
12) since the fair value of these items is not significant. 98




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 15. Condensed Parent Company Only Financial Statements STATEMENT OF FINANCIAL CONDITION December 312004
    
    
    2003Assets:Cash and cash equivalents
    
    $
    140,138
    
    
    $
    213,226Investment in subsidiaries
    
    
    519,548
    
    
    
    509,747Due from subsidiaries
    
    
    6,392
    
    
    
    1,995Receivable from ESOP
    
    
    4,847
    
    
    
    5,747Other assets
    
    
    
    
    
    
    661$
    670,925
    
    
    $
    731,376Liabilities and shareholders equity:Liabilities:Due to subsidiaries
    
    $
    
    
    
    $
    Other liabilities
    
    
    471
    
    
    
    296471
    
    
    
    296Shareholders equity:Preferred
stock - $.01 par valueAuthorized
 20,000,000 shares in 2004 and 2003
    
    
    
    
    
    
    Issued and
outstanding  none in 2004 and 2003
    
    
    
    
    
    
    Common stock
 $.01 par value:Authorized - 200,000,000 shares in 2004 and 2003Issued - 78,783,849 shares in 2004 and 78,775,779 shares in 2003Outstanding - 73,485,113 in 2004 and 78,775,779 shares in 2003
    
    
    788
    
    
    
    788Additional paid-in capital
    
    
    495,858
    
    
    
    495,990Retained earnings
    
    
    258,110
    
    
    
    241,958Unearned ESOP shares
    
    
    (4,865
    )
    
    
    (5,766
    )Accumulated other comprehensive income
    
    
    (4,844
    )
    
    
    149Unearned deferred compensation
    
    
    (10,076
    )
    
    
    (2,039
    )Treasury stock -5,298,736 shares in 2004
    
    
    (64,517
    )
    
    
    Total shareholders equity
    
    
    670,454
    
    
    
    731,080$
    670,925
    
    
    $
    731,376
 99




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Bank Mutual Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued) December 31, 2004(Dollars in Thousands, Except Per Share Amounts) 15. Condensed Parent Company Only Financial Statements (continued) STATEMENT OF INCOME Year ended December 312004
    
    
    2003Interest income
    
    $
    2,735
    
    
    $
    1,723Equity in earnings of subsidiaries
    
    
    28,394
    
    
    
    22,129Gain on sale of investments
    
    
    537
    
    
    
    Other
    
    
    5
    
    
    
    7Total income
    
    
    31,671

    
    
    
    23,859Total expenses
    
    
    1,335
    
    
    
    944Income before provision for income taxes
    
    
    30,336
    
    
    
    22,915Provision for income taxes
    
    
    782
    
    
    
    316Net income
    
    $
    29,554
    
    
    $
    22,599
 STATEMENT OF CASH FLOWS Year ended December 312004
    
    
    2003Operating activities:Net income
    
    $
    29,554
    
    
    $
    22,599Adjustment to reconcile net income to net cash provided by (used in)
operating activities:Equity in earnings of subsidiaries
    
    
    (28,394
    )
    
    
    (22,129
    )Amortization of cost of stock benefit plans
    
    
    5,857
    
    
    
    3,987Decrease in due to subsidiaries
    
    
    (4,397
    )
    
    
    (5,450
    )Change in other operating activities and liabilities
    
    
    836
    
    
    
    (1,215
    )Net cash provided (used) in operating activities
    
    
    3,456
    
    
    
    (2,208
    )Investing activities:Stock proceeds invested in subsidiary
    
    
    
    
    
    
    (202,399
    )Dividends from Company subsidiaries
    
    
    13,600
    
    
    
    9,600Net cash provided (used) by investing activities
    
    
    13,600
    
    
    
    (192,799
    )Financing activities:Sale of stock
    
    
    
    
    
    
    404,753Cash dividends
    
    
    (13,402
    )
    
    
    (5,925
    )Purchase of treasury stock
    
    
    (78,859
    )
    
    
    (8,011
    )Proceeds from exercise of stock options
    
    
    1,217
    
    
    
    940Payments received on ESOP
    
    
    900
    
    
    
    900Net cash provided (used) by financing activities
    
    
    (90,144
    )
    
    
    392,657Increase (decrease) in cash and cash equivalents
    
    
    (73,088
    )
    
    
    197,650Cash and cash equivalents at beginning of year
    
    
    213,226
    
    
    
    15,576Cash and cash equivalents at end of year
    
    $
    140,138
    
    
    $
    213,226
 100




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Item 9.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure Not applicable. 
 Item 9A.
Controls and Procedures Disclosure Controls and Procedures:Bank Mutual Corporations management, with the
participation of Bank Mutual Corporations Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of Bank Mutual Corporations disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the Exchange Act)) as of the end of the period covered by this report. Based on such
evaluation, Bank Mutual Corporations Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, Bank Mutual Corporations disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on a timely basis,
information required to be disclosed by Bank Mutual Corporation in the reports that it files or
submits under the Exchange Act. Change in Internal Control Over Financial Reporting:There have not been any changes in
the Bank Mutual Corporation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 final fiscal quarter of the year
to which this report relates that have materially affected, or are reasonably likely to materially
affect, Bank Mutual Corporations internal control over financial reporting. Managements Report on Internal Control over Financial Reporting The internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. Our internal
control over financial reporting includes those policies and procedures that: (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorization of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. Management of Bank Mutual Corporation is responsible for establishing and maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Bank Mutual Corporations management, including its chief
executive officer and chief financial officer, has assessed the effectiveness of its internal
control over financial reporting as of December 31, 2004, based on the criteria established in
Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Based on their assessment and those criteria, management
believes that as of December 31, 2004, Bank Mutual Corporations internal control over financial
reporting is effective. Ernst & Young LLP, independent registered public accounting firm, has issued an attestation report
on managements assessment of Bank Mutual Corporations internal control over financial reporting.
That attestation report can be found below as part of this Item 9A. 101




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Ernst & Young LLP, Report on Effectiveness of Internal Control Over Financial Reporting Board of Directors
Bank Mutual Corporation and Subsidiaries We have audited managements assessment, included in the accompanying Managements Report on
Internal Control over Financial Reporting, that Bank Mutual Corporation maintained effective
internal control over financial reporting as of December 31, 2004, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Bank Mutual Corporations management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the effectiveness of the companys internal
control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that Bank Mutual Corporation maintained effective internal
control over financial reporting as of December 31, 2004, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion, Bank Mutual Corporation maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2004,
based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements of Bank Mutual Corporation and
Subsidiaries as of December 31, 2004 and 2003 and the consolidated statements of income,
shareholders equity and cash flows for each of the three years in the period ended December 31,
2004 Bank Mutual Corporation and our report dated January 28, 2005 expressed an unqualified opinion
thereon. /s/ Ernst & Young LLP Milwaukee, Wisconsin
January 28, 2005 102




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Item 9B.Other Information. In late 2004, the Employment Agreements of Messrs. Anderegg, Callen, Colberg and Maurer, and Ms.
Scholz, were extended for one year periods, through December 31, 2005, in accordance with the
provisions of those agreements. The Employment Agreements of Messrs. Crowley Sr. and Jr. extended
automatically, in accordance with their terms. 103




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Part III 
 Item 10.Directors and Executive Officers of the Registrant Information in response to this item is incorporated herein by reference to Election of Directors
and Section 16(a) Beneficial Ownership Reporting Compliance in Bank Mutual Corporations
definitive Proxy Statement for its Annual Meeting of Shareholders on May 2, 2005 (the 2005 Annual
Meeting Proxy Statement). See also Executive Officers of the Registrant in Part I hereof, which
is incorporated herein by reference. 
 Item 11.Executive Compensation Information in response to this item is incorporated by reference to Directors Compensation,
Executive Compensation, and Compensation Committee Interlocks and Insider Participation in the
2005 Annual Meeting Proxy Statement. 
 Item 12.Security Ownership of Certain Beneficial Owners and Management Information in response to this item is incorporated by reference to Security Ownership of Certain
Beneficial Owners and Executive Compensation  Stock
Options and Equity Compensation Plans 
Equity Compensation Plan Information in the 2005 Annual Meeting Proxy Statement. Equity Compensation Plan Information The following chart gives aggregate information regarding grants under all equity compensation
plans of Bank Mutual Corporation through December 31, 2004. Number of securitiesremaining availableNumber of securities
    
    
    
    for future issuance underto be issued upon
    
    Weighted-average
    
    equity compensationexercise of
    
    exercise price of
    
    plans (excludingoutstanding options,
    
    outstanding options,
    
    securities reflectedPlan category
    
    warrants and rights (1)
    
    warrants and rights
    
    in 1st column) (2)Equity compensation
plans approved by
security holders
    
    5,276,953
    
    $6.5764
    
    2,411,883Equity compensation
plans not approved
by security holders
    
    -0-
    
    n/a
    
    -0-Total
    
    5,276,953
    
    $6.5764
    
    2,411,883
   (1)
    
    Represents options granted under the 2001 Plan or 2004 Stock Incentive Plan, which were
approved by Company shareholders in 2001 and 2004, respectively.(2)
    
    Represents options or restricted stock which may be granted under the 2004 Plan. No further
awards may be made under the 2001 Plan. 
 Item 13.Certain Relationships and Related Transactions Information in response to this item is incorporated by reference to Election of Directors,
Compensation Committee Interlocks and Insider Participation and Certain Transactions with the
Company in the 2005 Annual Meeting Proxy Statement. 
 Item 14.Principal Accountant Fees and Services Information in response to this item is incorporated by reference to Independent Auditors in the
2005 Annual Meeting Proxy Statement. 104




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Part IV 
 Item 15.Exhibits and Financial Statement Schedules  (a)
    Documents filed as part of the Report: 1. and 2. Financial Statements and Financial Statement Schedules. The following consolidated financial statements of Bank Mutual Corporation and subsidiaries are
filed as part of this report under Item 8, Financial Statements and Supplementary Data: Consolidated
Statements of Financial Condition - December 31, 2004 and 2003. Consolidated
Statements of Income - Years Ended December 31, 2004, 2003 and 2002. Consolidated
Statements of Changes In Shareholders Equity - Years Ended December 31, 2004,
2003 and 2002. Consolidated
Statements of Cash Flows - Years Ended December 31, 2004, 2003 and 2002. Notes to Consolidated Financial Statements. Report of Ernst & Young LLP, Independent Auditors, on consolidated financial statements. The Report of Ernst & Young LLP on effectiveness of internal control over financial reporting
is filed as part of this report under Item 9A, Controls and Procedures.. All schedules for which provision is made in the applicable accounting regulations of the
Securities and Exchange Commission are not required under the related instructions or are
inapplicable, and therefore have been omitted.  (b).
    Exhibits. See Exhibit Index following the signature page of this report, which
is incorporated herein by reference. Each management contract or compensatory plan or arrangement required to
be filed as an exhibit to this report is identified in the Exhibit Index by an asterisk following
its exhibit number. 105




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 CORPORATIONMarch 11, 2004By: /s/  Michael T. Crowley, Jr.Michael T. Crowley, Jr.Chairman, President and Chief Executive Officer
   POWER OF ATTORNEY Each person whose signature appears below hereby authorizes Michael T. Crowley, Jr., Rick B.
Colberg, and Marlene M. Scholz, or any of them, as attorneys-in-fact with full power of
substitution, to execute in the name and on behalf of such person, individually, and in each
capacity stated below or otherwise, and to file, any and all amendments to this report.   Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities indicated.* Signature and Title /s/  Michael T. Crowley, Jr.

Michael T. Crowley, Jr., Chairman, President
Chief Executive Officer and Director
(Principal Executive Officer)
    
    /s/  Raymond W. Dwyer, Jr.

Raymond W. Dwyer, Jr., Director/s/  Rick B. Colberg

Rick B. Colberg, Chief Financial Officer
(Principal Financial Officer)
    
    /s/  Thomas J. Lopina, Sr.

Thomas J. Lopina, Sr., Director/s/  Marlene M. Scholz

Marlene M. Scholz, Senior Vice President
(Principal Accounting Officer)
    
    /s/  William J. Mielke

William J. Mielke, Director/s/  Thomas H. Buestrin

Thomas H. Buestrin, Director
    
    /s/  Robert B. Olson

Robert B. Olson, Director/s/  Mark C. Herr

Mark C. Herr, Director
    
    /s/  David J. Rolfs

David J. Rolfs, Director/s/  Jelmer G. Swoboda

Jelmer G. Swoboda, Director
   *
    
    Each of the above signatures is affixed as of March 11, 2005. 106




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BANK MUTUAL CORPORATION
(Bank Mutual Corporation or the Company)**
Commission File No. 000-32107 
 EXHIBIT INDEX TO

2004 REPORT ON FORM 10-K
 The following exhibits are filed with, or incorporated by reference in, this Report on Form 10-K
for the year ended December 31, 2004: Incorporated Herein
    
    FiledExhibit
    
    Description
    
    By Reference To
    
    Herewith2.1
    
    Plan of Restructuring of Bank Mutual
Corporation and Bank Mutual Bancorp, MHC
dated April 21, 2003, as amended and
restated on July 7, 2003 (the Plan)
    
    Exhibit 2.1 to the
Companys Registration
Statement on Form S-1,
Registration No. 333-105685
(the 2003 S-1)3(i)
    
    Restated Articles of Incorporation, as
last amended May 29, 2003, of Bank
Mutual Corporation (the Articles)
    
    Exhibit 3(i) to 2003 S-13(ii)
    
    Bylaws, as last amended May 29, 2003, of
Bank Mutual Corporation
    
    Exhibit 3(ii) to 2003 S-14.1
    
    The Articles
    
    Exhibit 3(i) above4.2
    
    The Plan
    
    Exhibit 2.1 above10.1*
    
    Bank Mutual Corporation Savings
Restoration Plan and Bank Mutual
Corporation ESOP Restoration Plan
    
    Exhibit 10.1(b) to the
Companys Annual Report on
Form 10-K for the year
ended December 31, 2003
(2003 10-K)10.2*
    
    Mutual Savings Bank Outside Directors
Retirement Plan
    
    Exhibit 10.2 to Bank Mutual
Corporations Registration
Statement on Form S-1,
Registration No. 333-39362
(the 2000 S-1)10.3*
    
    Mutual Savings Bank Executive Excess
Benefit Plan
    
    Exhibit 10.3 to 2000 S-110.4*
    
    Agreement regarding deferred
compensation dated May 16, 1988 between
Mutual Savings Bank and Michael T.
Crowley, Jr.
    
    Exhibit 10.4 to 2000 S-110.5(a)*
    
    Employment Agreement between Mutual
Savings Bank and Michael T. Crowley Jr.
    
    Exhibit 10.5(a) to 2000 S-110.5(b)*
    
    Amendment thereto dated February 17, 1998
    
    Exhibit 10.5(b) to 2000 S-1
 EI-1




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##### Table of Contents



Incorporated Herein
    
    FiledExhibit
    
    Description
    
    By Reference To
    
    Herewith10.6(a)*
    
    Employment Agreement between Mutual
Savings Bank and Michael T. Crowley, Sr.
dated December 31, 1993
    
    Exhibit 10.6(a) to 2000 S-110.6(b)*
    
    Amendment thereto dated February 17, 1998
    
    Exhibit 10.6(b) to 2000 S-110.7*
    
    Form of Employment Agreements of Mr.
Maurer, Ms. Scholz, Mr. Anderegg and Mr.
Callen with Mutual Savings Bank, each
dated as of January 1, 2001 (continuing
through 2005)
    
    Exhibit 10.7 to 2000 S-110.8*
    
    Resignation and Separation Agreement
dated as of June 6, 2003 between Bank
Mutual Corporation and Michael D.
Meeuwsen
    
    Exhibit 10.1 to Bank Mutual
Corporations Report on
Form 8-K dated June 6, 200310.9(a)*
    
    Employment Agreement between First
Northern Savings Bank and Rick B.
Colberg dated as of November 1, 2000
(continuing, as amended, through 2005)
    
    Exhibit 10.9 to Bank
Mutuals Annual Report on
Form 10-K for the year
ended December 31, 2000
(2000 10-K)10.9(b)*
    
    Amendment thereto, dated as of
August 2, 2002
    
    Exhibit 10.9(b) to 2003 10-K10.9(c)*
    
    Second Amendment thereto, dated as of
August 19, 2003
    
    Exhibit 10.9(c) to 2003 10-K10.10(a)*
    
    Non-Qualified Deferred Retirement Plan
for Directors of First Northern Savings
Bank
    
    Exhibit 10.10(a) to 2000
10-K10.10(b)*
    
    Amendment No. 1 thereto
    
    Exhibit 10.3.2 to First
Northern Capital Corp.s
Annual Report on Form 10-K
for the fiscal year ended
December 31, 1998 (FNCC
1998 10-K)10.11(a)*
    
    Form of Supplemental Retirement
Agreement dated as of January 1, 1994
between First Northern Savings Bank and
Rick B. Colberg
    
    Exhibit 10.11(a) to 2000
10-K10.11(b)*
    
    Form of Amendment No. 1 thereto dated as
of September 20, 1995
    
    Exhibit 10.11(b) to 2000
10-K10.11(c)*
    
    Form of Amendment No. 2 thereto, dated
as of October 15, 1998
    
    Exhibit 10.6.4 to FNCC 1998
10-K10.12*
    
    Bank Mutual Corporation 2001 Stock
Incentive Plan, as amended May 7, 2002
(superseded, except as to outstanding
awards)
    
    Exhibit 10.1 to Bank Mutual
Corporations Quarterly
Report on Form 10-Q for the
quarter ended March 31,
2002
 EI-2




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##### Table of Contents



Incorporated Herein
    
    FiledExhibit
    
    Description
    
    By Reference To
    
    Herewith10.13(a)*
    
    Bank Mutual Corporation 2004 Stock
Incentive Plan
    
    Exhibit A to Proxy
Statement for 2004 Annual
Meeting of Shareholders10.13(b)*
    
    Form of Option Agreement thereunder -
Bank Mutual Corporation 2004 Director
Stock Option Agreement
    
    Exhibit 10.1(b) to the
Companys Report on Form
10-Q for the quarter ended
June 20, 2004 (6-30-04
10-Q)10.13(c)*
    
    Form of Option Agreement thereunder -
Bank Mutual Corporation 2004 Incentive
Stock Option Agreement
    
    Exhibit 10.1(c ) to the
6-30-04 10-Q10.13(d)*
    
    Form of Restricted Stock Agreement
thereunder  Bank Mutual Corporation
2004 Directors Management Recognition
Award
    
    Exhibit 10.1(d) to the
6-30-04 10-Q10.13(e)*
    
    Form of Restricted Stock Agreement
thereunder  Bank Mutual Corporation
2004 Officers Management Recognition
Award
    
    Exhibit 10.1(e) to the
6-30-04 10-Q10.14*
    
    Mutual Savings Bank/First Northern
Savings Bank Management Incentive
Compensation Plan
    
    Exhibit 10.12(b) to
Post-Effective Amendment
No. 1 to 2003 S-110.15(a)
    
    Agency Agreement dated August 1, 2003
among Bank Mutual Corporation, Bank
Mutual Bancorp, MHC and Ryan Beck
    
    Exhibit 10.1 to Bank Mutual
Corporations Quarterly
Report on Form 10-Q for the
quarter ended June 30, 200310.15(b)
    
    Supplemental letter agreement with Ryan
Beck relating to resolicitation
    
    Exhibit 1.1(b) to
Post-Effective Amendment
No. 1 to 2003 S-121.1
    
    List of Subsidiaries
    
    
    
    X23.1
    
    Consent of Ernst & Young LLP
    
    
    
    X24.1
    
    Powers of Attorney
    
    Signature Page31.1
    
    Sarbanes-Oxley Act Section 302
Certification signed by the Chairman,
President and Chief Executive Officer of
Bank Mutual Corporation
    
    
    
    X31.2
    
    Sarbanes-Oxley Act Section 302
Certification signed by the Chief
Financial Officer of Bank Mutual
Corporation
    
    
    
    X
 EI-3




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##### Table of Contents



Incorporated Herein
    
    FiledExhibit
    
    Description
    
    By Reference To
    
    Herewith32.1
    
    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 Chairman, President
and Chief Executive Officer of Bank
Mutual Corporation
    
    
    
    X32.2
    
    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
   *
    
    Designates management or compensatory agreements, plans or arrangements required to be filed
as exhibits pursuant to Item 14(c) of Form 10-K**
    
    As used in this Exhibit Index, references to Bank Mutual Corporation and the Company also
include, where appropriate, Bank Mutual Corporation, a federally-chartered corporation and the
predecessor of the current registrant.***
    
    Mutual Savings Bank is now known as Bank Mutual. EI-4