e10vk

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

Commission file number: 000-31207

BANK MUTUAL CORPORATION

(Exact name of registrant as specified in its charter)


Wisconsin		39-2004336

(State or other jurisdiction of		(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:

Common Stock, $0.01 Par Value

(Title of class)

Securities registered pursuant to Section 12(g) of the Act:

NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act

Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No þ

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

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

Yes o No þ

As of February 28, 2007, 59,235,654 shares of Common Stock were validly issued and outstanding. The aggregate market value of the Common Stock (based upon the $12.22 last sale price quotation on The NASDAQ Global Select Market^SM on June 30, 2006, 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 $667.3 million.

DOCUMENTS INCORPORATED BY REFERENCE


		Part of Form 10-K Into Which
Document		Portions of Document are Incorporated

Proxy Statement for Annual Meeting of
Shareholders on May 7, 2007		Part III

Part 1

Item 1. Business

General

Until October 29, 2003, Bank Mutual Corporation was an OTS chartered United States corporation which became the mid-tier holding company in the 2000 regulatory restructuring of Mutual Savings Bank, into mutual holding company form. 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”).

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 at www.bankmutualcorp.com.

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 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, and those under “Risk Factors” in Item 1A.

Market Area

At February 28, 2007, the Bank had 76 banking offices located in 31 counties in Wisconsin, in addition to a Minnesota bank office. At June 30, 2006, The Bank had approximately a 2.06% share of all Wisconsin bank, savings bank, and savings association deposits. Counties in which the Bank operates include 75% 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-Racine-Kenosha Standard Metropolitan Statistical Area (“SMSAs”). There are currently 25 offices in this area, with the opening of our West Bend and second Waukesha offices in 2006 and our Kenosha office which opened in January 2007. The Milwaukee-Racine-Kenosha SMSAs area is the largest population and commercial base in Wisconsin, representing approximately 34% 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 15% 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 and will be adding a new office in the Eau Claire (N. Clairemont) area in 2007. 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 approximately 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 services. However, the Bank’s subsidiary, BancMutual Financial & Insurance Services, Inc. offers mutual funds and engages in the sale of tax deferred annuities, credit life and disability insurance, property and casualty insurance, brokerage services and in 2007, we are adding wealth management 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 48.80% of the Milwaukee area’s deposits at June 30, 2006.

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 brokerage 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, 2006, our total loans receivable was $2.1 billion, of which $1.6 billion, or 77.2%, consisted of one to four family ($1.1 billion or 53.0%) and other mortgage loans ($512.2 million or 24.2%). The remainder of our loans at December 31, 2006, amounting to $483.3 million, or 22.8% of total loans, consisted of consumer loans ($431.2 million or 20.3%) and commercial business loans ($52.1 million or 2.5%).

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. However, beginning in the second quarter of 2006, we began to retain certain 20 and 30 year fixed interest rate loans because those loans had characteristics which historically have indicated that they will be outstanding for a relatively short period of time. 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 $622,000 of our 15 year fixed rate mortgage loan originations in 2006.

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.

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,
	2006						2005						2004						2003					2002
				Percent						Percent						Percent					Percent					Percent
				Of						Of						Of					Of					Of
	Amount			Total			Amount			Total			Amount			Total			Amount		Total			Amount		Total
	(Dollars in thousands)
Mortgage loans:
One- to four-family	$	1,123,905			53.03	%	$	1,048,881			50.94	%	$	903,498			46.34	%	$	793,247		44.69	%	$	827,648		47.37	%
Multi-family		157,768			7.44			155,908			7.57			161,641			8.29			124,494		7.01			112,189		6.42
Commercial real estate		167,089			7.88			175,090			8.50			195,708			10.04			209,293		11.79			186,960		10.70
Construction and development		187,323			8.84			155,205			7.54			141,394			7.25			122,436		6.90			127,174		7.28

Total mortgage loans		1,636,085			77.19			1,535,084			74.55			1,402,241			71.92			1,249,470		70.39			1,253,971		71.77

Consumer loans:
Fixed-term equity		227,811			10.75			246,460			11.97			266,635			13.67			252,550		14.22			234,049		13.40
Home equity lines of credit		91,730			4.33			88,266			4.29			88,444			4.54			78,567		4.43			77,697		4.45
Student		20,404			0.96			19,821			0.96			20,519			1.05			20,546		1.16			22,636		1.30
Home improvement		33,287			1.57			30,067			1.46			24,293			1.25			12,605		0.71			6,993		0.40
Automobile		46,752			2.21			69,237			3.36			61,469			3.15			67,630		3.81			68,140		3.90
Other		11,262			0.53			12,944			0.63			15,911			0.82			18,623		1.05			22,434		1.28

Total consumer loans		431,246			20.35			466,795			22.67			477,271			24.48			450,521		25.38			431,949		24.73

Commercial business loans		52,056			2.46			57,247			2.78			70,170			3.60			75,022		4.23			61,060		3.50

Total loans receivable		2,119,387			100.00	%		2,059,126			100.00	%		1,949,682			100.00	%		1,775,013		100.00	%		1,746,980		100.00	%

Less:
Undisbursed loan proceeds		85,897						60,014						60,653						47,743					46,048
Allowance for loan losses		12,574						12,090						13,923						13,771					12,743
Deferred fees and discounts		(3,409	)					(3,470	)					(779	)					1,221					2,527

Total loans receivable, net	$	2,024,325					$	1,990,492					$	1,875,885					$	1,712,278				$	1,685,662

At December 31, 2006, our one- to four-family, multi-family and single family second mortgage loans were pledged as collateral under a blanket pledge to the Federal Home Loan Bank (“FHLB”) of Chicago. As of December 31, 2006, 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.

Loan Maturity. The following table presents the contractual maturity of our loans at December 31, 2006. The table does not include the effect of prepayments or scheduled principal amortization.


	At December 31, 2006
	Mortgage		Consumer		Commercial
	Loans		Loans		Business Loans		Total
	(In thousands)
Amounts Due:
Within one year	$	62,739	$	38,928	$	15,409	$	117,076
After one year One to two years		87,765		24,780		13,704		126,249
Two to three years		64,653		16,221		9,225		90,099
Three to five years		53,927		35,196		8,056		97,179
Five to ten years		131,979		221,925		2,482		356,386
Ten to twenty years		406,224		92,122		1,676		500,022
Over twenty years		828,798		2,074		1,504		832,376

Total due after one year		1,573,346		392,318		36,647		2,002,311

Total loans receivable	$	1,636,085	$	431,246	$	52,056		2,119,387

Less:
Undisbursed loan proceeds								85,897
Allowance for loan losses								12,574
Deferred loan fees								(3,409	)

Net loans receivable							$	2,024,325

The following table presents, as of December 31, 2006, the dollar amount of all loans due after December 31, 2007 and whether these loans have fixed interest rates or adjustable interest rates.


	Due after December 31, 2007
	Fixed		Adjustable		Total
	(In thousands)
Mortgage loans	$	553,011	$	1,020,335	$	1,573,346
Consumer loans		338,092		54,226		392,318
Commercial business loans		21,952		14,695		36,647


Total loans due after one year	$	913,055	$	1,089,256	$	2,002,311

The following table presents a summary of our lending activity.


	For the year ended December 31,
	2006		2005		2004
	(In thousands)
Balance outstanding at beginning of period	$	2,061,438	$	1,954,669	$	1,779,069
Originations:
Mortgage loans		347,296		388,106		479,814
Consumer loans		158,690		211,629		268,521
Commercial business loans		42,888		43,517		41,018

		548,874		643,252		789,353


Purchases:
One-to four-family mortgage loans		157,399		258,707		148,951


Less:
Principal payments and repayments:
Mortgage loans		311,267		372,409		349,951
Consumer loans		194,239		222,105		241,771
Commercial business loans		48,079		56,415		45,395

Total principal payments		553,585		650,929		637,117

Transfers to foreclosed properties, real estate owned and repossessed assets		1,429		538		5,045

Loan sales:
Mortgage loans		89,513		143,698		120,067
Commercial loans		—		25		475

Total loan sales		89,513		143,723		120,542

Total loans receivable and loans held for sale	$	2,123,184	$	2,061,438	$	1,954,669

Residential Mortgage Lending. Our primary lending activity has been the origination and purchase 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 $157.4 million in 2006, $258.7 million in 2005, and $149.0 million in 2004. We review most purchased loans for compliance with our underwriting standards and generally only invest in loans which are located in the midwestern United States. A selected number of mortgage loan sellers have delegated loan approval authority as long as Federal National Mortgage Association (“Fannie Mae”) Desktop Underwriting is utilized. Where the underwriting has been delegated, 20% of mortgage loans purchased from the selected sellers are reviewed for compliance with our underwriting standards.

We offer conventional fixed rate mortgage loans and ARM loans with maturity dates up to 30 years. Residential mortgage loans generally are underwritten to Fannie Mae standards. All ARM mortgage loans and some fixed rate mortgage loans with maturities of up to 30 years are held in our portfolio. Fixed rate mortgage loans, except those fixed rate loans originated under special loan programs for low and moderate income households 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 $417,000 for single family homes in 2006. Fannie Mae has higher limits for two-, three- and four-family homes. Fixed rate jumbo mortgage loans generally are sold without recourse, servicing released, to secondary market purchasers of such loans. Beginning in late February 2006, we began to retain certain fixed rate jumbo mortgage loans in our portfolio. ARM jumbo mortgage loans are underwritten in accordance with our underwriting guidelines and are retained in our loan portfolio.

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, radio, internal customer communications and our website.

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 2006 was $147,232, and in 2005 and 2004 was approximately $143,578 and $135,965, 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 that 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. In addition, some of the ARM loans are granted on an interest only basis whereby the borrower pays interest only during the initial one, two, three, or five years interest rate lock period. Upon the first interest rate adjustment, amortization begins for the remaining 29, 28, 27, or 25 year term. At December 31, 2006, 16.1% of our single family mortgage loan portfolio was interest only mortgage loans.

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 for the interest only ARM 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. If a borrower with a loan having a lower loan-to-value ratio wants to handle their taxes and insurance themselves, an escrow waiver fee is charged. We make disbursements for these items from the escrow account as the obligations become due.

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 except for certain low to moderate income loan program loans.

Our originations of residential mortgage loans amounted to $274.1 million in 2006, $258.5 million in 2005, and $326.8 million in 2004. A number of our mortgage loan originations in 2006, 2005 and 2004 have been the result of refinancing of our existing loans due to the relatively low interest rate levels. Total refinancings of our existing mortgage loans were as follows:


			Percentage of
			mortgage loan
	Amount		originations
	(Dollars in millions)
Period
Year ended December 31, 2006	$	58.7		16.9	%
Year ended December 31, 2005		86.5		22.3
Year ended December 31, 2004		121.8		37.0

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 trying to increase our consumer loan originations because higher yields can be obtained, 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, 2006, $431.2 million, or 20.3%, 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, and home equity lines of credit. At December 31, 2006, we had $352.8 million or 81.8% 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 advertisements, and advertisements in local newspapers.

Before May of 2006, we made indirect automobile, boat and recreational vehicle loans through applications taken by selected dealers on application forms approved by us. The applications were delivered to Savings Financial

Corporation (“SFC”), a 50% owned subsidiary of the Bank, for underwriting. If an application was approved, money was funded to the dealer and the loan became a part of the SFC portfolio. The SFC paper was then sold to either of the parent companies of SFC or to the Bank’s subsidiary First Northern Investments, Inc. After May of 2006, we discontinued indirect loan originations through SFC as a result of reduced profitability of these loans.

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 2006, we originated $61.6 million of fixed rate home equity or home improvement loans; these loans carry a weighted average written term of approximately 8.3 years and a fixed rate ranging from 5.49% to 11.90%. During 2005 we originated approximately $77.5 million of fixed rate home equity or home improvement loans, carrying a weighted average written term of approximately 6.9 years and a fixed rate ranging from 4.90% to 9.89%. We also offer adjustable rate home equity and home improvement loans. At December 31, 2006, $37.0 million or 14.1% 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 $91.7 million, or 21.3% of total consumer loans at December 31, 2006, 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 275 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. Home equity line of credit loans with loan-to-value of 90% or greater require a minimum payment of the greater of $50 or 1¹/2% of the month end balance. An annual fee is charged on home equity lines of credit.

At December 31, 2006, student loans amounted to $20.4 million, or 4.7% of our consumer loan portfolio. These loans are serviced by Great Lakes Educational Loan Services, Inc..

Multi-family and Commercial Real Estate Loans. At December 31, 2006, our multi-family and commercial real estate loan portfolio was $324.9 million or 15.3% 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 usually tied to prime interest rate. 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, 2006, the largest outstanding loan on a multi-family was $12.8 million on a 113 unit apartment/retail project located in Madison, Wisconsin. At the same date, the largest outstanding loan on a commercial real estate property was $5.9 million on a office building located in Brookfield, Wisconsin. At December 31, 2006, 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 $67.7 million at December 31, 2006.

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, 2006, our construction and development mortgage loan portfolio was $187.3 million, or 8.8% of our total loans receivable. At that date, commercial real estate loans were $42.5 million or 22.7% and multi-family mortgage loans were $91.4 million or 48.8% of the total construction and development loans. As a general matter, construction and development loans convert to permanent loans on our 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, 2006, our commercial business loan portfolio consisted of loans totaling $52.1 million or 2.5% 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 34.2% 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 U.S. 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, unless it is investment real estate at which point the annual review is on anything over $1.0 million. The largest commercial business loan at December 31, 2006 had an outstanding balance of $6.4 million and was secured by real estate and a general business security agreement.

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 (in 2007, $417,000 for a single family residential units; higher limits for two-, three-, and four-family units). For 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 $500,000, provided the loan-to-value is 80% or less (with mortgage insurance, 90% or less) and the loan meets other specific underwriting criteria. All portfolio loans in excess of $500,000, with a loan-to-value greater than 80% (with mortgage insurance, 90% or less), or failing to meet other specific underwriting criteria must be approved by a senior officer.

The Bank has delegated lending authority of up to $650,000 to lenders approved for the Bank’s correspondent program whose loans are to be purchased for the Bank’s portfolio. That approval is made in conjunction with the loan receiving an “approve” from Fannie Mae’s Desktop Underwriter or Freddie Mac’s Loan Prospector and an approval from the correspondent’s underwriter only after the Bank has reviewed a minimum of 50 loans submitted to the Bank for purchase. For those correspondents who have been delegated lending authority, the Bank does an ongoing sample of 20% of the loans being submitted by the correspondent for purchase by the Bank from correspondents who have been delegated lending authority.

Consumer loan underwriters have individual approval authority for secured loans ranging from $25,000 to $150,000 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 $150,000, 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 $10,000 to $25,000 provided the loan meets other specific underwriting criteria. All unsecured consumer loans in excess of $25,000, or not meeting specific underwriting criteria, must be approved by a senior officer.

Certain individual lenders and senior officers in the multi-family and commercial real estate department have lending authority of $500,000 for both existing and proposed construction of multi-family and commercial real estate properties. Two senior officers together have lending authority of $750,000 and three senior officers together

have lending authority of $1,000,000 for multi-family and commercial real estate loans. All multi-family and commercial real estate loans over $1,000,000 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 $250,000 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. Three senior officers together have lending authority of $1,000,000 for secured commercial business loans. All secured business loans over $1,000,000 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. Three senior officers together have lending authority of $250,000 for unsecured commercial business loans. All unsecured business loans over $250,000 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 their next meeting following the approval.

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 early intervention, 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 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 agreed upon payment deadline and it is not necessary to start a foreclosure action. Foreclosure 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 evaluate the borrower and collateral to determine any potential loss. If there is a potential loss, a specific loan loss allowance is developed or 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 charge-off a loan or refer the matter to our legal counsel for further collection effort. Loans we deem to be uncollectible, or partially uncollectible are charged off or a specific loan loss allowance is established 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 Educational Services Inc., which guarantees their servicing to comply with all Department of Education guidelines. Our student loan portfolio is guaranteed by the Great Lakes Educational Loan Services, Inc., which is reinsured by the U.S. Department of Education. Credit card loans are serviced by Elan Financial Services and indirect consumer loans are serviced by SFC.

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, a specific reserve may be allocated to that loan, or 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.

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,
	2006			2005			2004			2003			2002
	(Dollars in thousands)
Non-accrual mortgage loans	$	11,504		$	2,214		$	1,485		$	2,894		$	1,399
Non-accrual consumer loans		803			616			619			961			527
Non-accrual commercial business loans		1,625			2,517			3,579			5,433			5,357
Accruing loans delinquent 90 days or more		565			487			586			1,084			1,108

Total non-performing loans	$	14,497			5,834			6,269			10,372			8,391
Foreclosed properties, real estate owned and repossessed assets, net		1,231			708			1,621			630			750

Total non-performing assets	$	15,728		$	6,542		$	7,890		$	11,002		$	9,141

Non-performing loans to total loans		0.72	%		0.29	%		0.33	%		0.61	%		0.50	%

Non-performing assets to total assets		0.46	%		0.19	%		0.23	%		0.35	%		0.32	%

Interest income that would have been recognized if non-accrual loans had been current	$	652		$	1,159		$	831		$	384		$	375

There were no restructured loans at the dates presented.

Total non-performing loans increased as of December 31, 2006, as compared to December 31, 2005, primarily as a result of an increase in non-accrual multi-family mortgage loans, partially offset by a decrease in non-accrual commercial business loans. Total non-performing loans decreased as of December 31, 2005, as compared to December 31, 2004, primarily as a result of a decrease in non-accrual commercial business loans. We believe non-performing loans and assets, expressed as a percentage of total loans and assets, compare favorably with 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 $13.9 million, $5.3 million and $5.7 million of non-accrual loans at December 31, 2006, 2005 and 2004, respectively. Interest income that would have been recognized had such loans been performing in accordance with their contractual terms totaled approximately $652,000, $1.2 million and $831,000 for the years ended December 31, 2006, 2005 and 2004, respectively. A total of approximately $654,000, $464,000, and $83,000 of interest income was actually recorded on such loans in 2006, 2005 and 2004, 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 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.

There were no significant loans considered to be impaired as defined in Statement of Financial Accounting Standards (“SFAS”) No. 114 at December 31, 2003 or 2002. At December 31, 2006, there were loans totaling $17.3 million considered to be impaired as compared to $9.7 million at December 31, 2005 and $8.7 at December 31, 2004. The average impaired loans for the year ended December 31, 2006 were $6.5 million and the interest received and recognized on the impaired loans was $179,000.

Foreclosed real estate consists of property we acquired through foreclosure or deed in lieu of foreclosure. Foreclosed properties increased in 2006 as compared to 2005 primarily as a result of an increase in one-to-four family properties owned; however, some of those one-to-four family properties were collateral for commercial loans which we foreclosed. 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 2005 as compared to 2004 primarily as a result of one large commercial loan. All charge-offs are recorded through the allowance for loan losses.

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,
	2006			2005			2004			2003			2002
				(Dollars in thousands)
Balance at beginning of period	$	12,090		$	13,923		$	13,771		$	12,743		$	12,245
Provision for loan losses		632			541			1,330			1,304			760
Charge-offs:
Mortgage loans		(44	)		—			(64	)		(67	)		(14	)
Consumer loans		(271	)		(327	)		(373	)		(415	)		(428	)
Commercial business loans		(52	)		(2,104	)		(816	)		(19	)		(39	)

Total charge-offs		(367	)		(2,431	)		(1,253	)		(501	)		(481	)
Recoveries:
Mortgage loans		—			—			9			113			66
Consumer loans		81			49			66			107			40
Commercial business loans		138			8			—			5			113

Total recoveries		219			57			75			225			219

Net (charge-offs) recoveries		(148	)		(2,374	)		(1,178	)		(276	)		(262	)

Balance at end of period	$	12,574		$	12,090		$	13,923		$	13,771		$	12,743


Net charge-offs to average loans		(0.01	)%		(0.12	)%		(0.07	)%		(0.02	)%		(0.01	)%
Allowance for loan losses to total loans		0.62	%		0.61	%		0.74	%		0.80	%		0.76	%
Allowance for loan losses to non-performing loans		86.74	%		207.23	%		222.09	%		132.77	%		151.87	%

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 residential mortgage loans

	•		Consumer

	•		Multi-family and commercial real estate

	•		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 probable loss is charged against the general loan loss allowance by establishing a corresponding specific allowance for that loan.

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, 2002 was 0.50% and has remained well below 1.0% since that date. At December 31, 2006, the ratio was 0.72%. This recent increase as compared to December 31, 2005 and 2004 was the result of increased delinquencies in the multi-family portfolio. At December 31, 2006, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $17.3 million.

We believe the primary risks inherent in our portfolio are possible increases in interest rates, a possible weak economy, 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. At December 31, 2006, the allowance for loan losses as a percentage of total loans was 0.62% compared with 0.76% at December 31, 2002. The allowance for loan losses each year from 2002 to 2006 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.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Comparison of Operating Results for the Years Ended December 31, 2006 and 2005—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,
	2006					2005					2004					2003					2002
			Percentage					Percentage					Percentage					Percentage					Percentage
			of Loans					of Loans					of Loans					of Loans					of Loans
			in Category					in Category					in Category					in Category					in Category
			to Total					to Total					to Total					to Total					to Total
Loan Category	Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loans
	(Dollars in thousands)
Mortgage loans
One- to four-family	$	3,531		53.03	%	$	3,294		50.94	%	$	2,488		46.34	%	$	4,001		44.69	%	$	4,701		47.37	%
Other		3,049		24.16			2,424		23.61			3,222		25.58			3,150		25.70			3,160		24.40

Total mortgage loans		6,580		77.19			5,718		74.55			5,710		71.92			7,151		70.39			7,861		71.77
Home equity lines		496		4.33			483		4.29			663		4.54			481		4.43			496		4.45
Consumer		2,060		16.02			2,118		18.38			2,929		19.94			2,398		20.95			2,380		20.28
Commercial business loans		3,438		2.46			3,696		2.78			4,416		3.60			3,741		4.23			1,507		3.50
Unallocated		—		—			75		—			205		—			—		—			499		—

Total allowance for loan losses	$	12,574		100.00	%	$	12,090		100.00	%	$	13,923		100.00	%	$	13,771		100.00	%	$	12,743		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, 2006. 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, 2006, we had not invested 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, 2006, 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, 2006, substantially 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.

At December 31, 2006, mortgage-related securities available-for-sale totaled $1.1 billion, or 30.8% of total assets. At December 31, 2006, the mortgage-related securities portfolio had a weighted average yield of 4.50%. Of the mortgage-related securities we held at December 31, 2006, $940.1 million, or 88.3%, had fixed rates and $124.7 million, or 11.7%, had adjustable-rates. Mortgage-related securities at December 31, 2006 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 2.50% to 6.625% and a weighted average yield of 4.50% at December 31, 2006. At December 31, 2006, CMOs totaled $980.8 million, which constituted 92.1% of the mortgage-related securities portfolio, or 28.4% of total assets. Our CMOs had an expected average life of approximately 3.6 years at December 31, 2006. 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,
	2006			2005			2004
	(In thousands)
Investment securities available-for-sale:
Carrying value at beginning of period	$	63,361		$	68,753		$	67,854
Purchases		264			56,921			26,480
Sales		(9	)		(11	)		—
Calls		—			—			—
Maturities		(14,720	)		(60,780	)		(27,000	)
Principal payments		—			—			—
Premium amortization and discount accretion, net		—			104			20
(Decrease) increase in unrealized gains		(606	)		(1,626	)		1,399

Net increase (decrease) in investment securities		(15,071	)		(5,392	)		899

Carrying value at end of period	$	48,290		$	63,361		$	68,753

Mortgage-related securities available-for-sale:
Carrying value at beginning of period	$	1,087,816		$	1,266,224		$	1,053,349
Purchases		198,460			193,857			523,334
Principal payments		(224,693	)		(352,866	)		(302,848	)
Premium amortization and discount accretion, net		826			(248	)		(375	)
Increase (decrease) in unrealized gains		2,442			(19,151	)		(7,236	)

Net increase in mortgage-related securities		(22,965	)		(178,408	)		212,875

Carrying value at end of period	$	1,064,851		$	1,087,816		$	1,266,224

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.


	At December 31,
	2006		2005		2004
	Carrying/		Carrying/		Carrying/
	Fair Value		Fair Value		Fair Value
	(Dollars in thousands)
Money market investments
Interest-earning deposits	$	1,022	$	27,872	$	707
Federal funds sold		–		–		–

Total money market investments	$	1,022	$	27,872	$	707

Investment securities available-for-sale
Mutual funds	$	46,592	$	46,408	$	45,390
United States government and federal agency obligations.		–		14,585		19,831
Stock in federal agencies		1,698		2,368		3,532

Total investment securities available-for-sale	$	48,290	$	63,361	$	68,753

Mortgage-related securities available-for-sale by issuer:
Freddie Mac	$	441,404	$	493,305	$	631,024
Fannie Mae		373,394		409,636		542,803
Private placement CMO’s		207,902		122,302		9,928
GNMA		42,151		62,573		82,469

Total mortgage-related securities	$	1,064,851	$	1,087,816	$	1,266,224

Total investment portfolio	$	1,114,163	$	1,179,049	$	1,335,684

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, 2006. Mortgage-related securities are presented by issuer and by coupon type.


	At December 31, 2006
						More than One Year					More than Five
	One Year or Less					to Five Years					Years to Ten Years					More than Ten Years					Total
			Weighted					Weighted					Weighted					Weighted					Weighted
	Carrying		Average			Carrying		Average			Carrying		Average			Carrying		Average			Carrying		Average
	Value		Yield			Value		Yield			Value		Yield			Value		Yield			Value		Yield
											(Dollars in thousands)
Investment securities available-for-sale:
Mutual funds	$	46,592		4.95	%	$	—		–	%	$	—		–	%	$	—		–	%	$	46,592		4.95	%
Stock in Federal Agencies		1,698		3.41			—		—			—		—			—		—			1,698		3.41

Total investment securities	$	48,290		4.90		$	—		—		$	—		—		$	—		—		$	48,290		4.90

Mortgage-related securities available-for-sale:
By issuer:
GNMA pass-through certificates	$	—		—		$	10		8.50		$	—		—		$	673		4.75		$	683		4.81
Fannie Mae pass-through certificates		—		—			7,544		4.66			27,401		5.67			38,773		4.31			73,718		4.85
Freddie Mac pass-through certificates							442		5.74			8,478		5.29			746		6.62			9,666		5.41
Private CMO’s		—		—			—		—			—		—			207,902		5.08			207,902		5.08
Freddie Mac, Fannie Mae and GNMA-REMICs		—		—			14,932		4.76			129,851		3.89			628,099		4.38			772,882		4.31

Total mortgage-related securities	$	—		—		$	22,928		4.75		$	165,730		4.25		$	876,193		4.54		$	1,064,851		4.50

By coupon type:
Adjustable rate	$	—		—		$	349		5.23		$	—		—		$	124,391		4.50		$	124,740		4.50
Fixed rate		—		—			22,579		4.74			165,730		4.25			751,802		4.55			940,111		4.50

Total mortgage-related securities	$	—		—		$	22,928		4.75	%	$	165,730		4.25	%	$	876,193		4.54	%	$	1,064,851		4.30	%

Total investment and mortgage-related securities portfolio	$	48,290		4.90	%	$	22,928		4.75	%	$	165,730		4.25	%	$	876,193		4.54	%	$	1,113,141		4.52	%

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 and health savings 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 Certificate of Deposit Account Registry Service (“CDARS”) which increased the amount of wholesale deposits. At December 31, 2006, we had approximately $208.0 million of wholesale deposits.

When we determine our deposit rates, we consider local competition, U.S. Treasury securities offerings, the rates charged on other sources of funds and our deposit pricing model which identifies the profitability of deposits when priced at various levels. Core deposits (defined as regular savings accounts, money market accounts, and demand accounts) represented 33.7% of total deposits on December 31, 2006. At December 31, 2006, time deposits with remaining terms to maturity of one year or less amounted to $1.0 billion. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Gap Analysis.”

The following table presents our deposit activity for the periods indicated:


	For the Year Ended December 31,
	2006			2005			2004
	(Dollars in thousands)
Total deposits at beginning of period	$	2,086,822		$	1,982,881		$	2,052,290
Net deposits (withdrawals)		9,292			59,571			(112,771	)
Interest credited, net of penalties		62,527			44,370			43,362

Total deposits at end of period	$	2,158,641		$	2,086,822		$	1,982,881

Net increase (decrease)	$	71,819		$	103,941		$	(69,409	)

Percentage increase (decrease)		3.44	%		5.24	%		(3.38	%)

At December 31, 2006, we had $259.8 million in time deposits with balances of $100,000 and over maturing as follows:


Maturity Period	Amount
	(In thousands)
Three months or less	$	90,035
Over three months through six months		82,963
Over six months through 12 months		60,936
Over 12 months through 24 months		8,274
Over 24 months through 36 months		14,041
Over 36 months		3,542

Total	$	259,791

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,
			2006								2005								2004
						Weighted								Weighted								Weighted
			Percent			average					Percent			average					Percent			average
			of total			nominal					of total			nominal					of total			nominal
	Amount		deposits			rate			Amount		deposits			rate			Amount		deposits			rate
	(Dollars in thousands)
Savings	$	200,016		9.27	%		0.45	%	$	224,408		10.75	%		0.43	%	$	247,439		12.48	%		0.43	%
Interest-bearing demand		174,206		8.07			0.21			174,620		8.37			0.21			171,565		8.65			0.22
Money market		248,542		11.51			3.00			271,418		13.01			2.88			309,531		15.61			0.97
Non-interest bearing demand		104,821		4.86			0.00			110,583		5.30			0.00			111,855		5.64			0.00

Total		727,585		33.71			1.20			781,029		37.43			1.17			840,390		42.38			0.53

Certificates:
Time deposits with original maturities of:
Three months or less		64,486		2.99			4.76			111,068		5.32			3.91			86,259		4.35			1.28
Over three months to twelve months		628,952		29.14			5.11			280,756		13.45			3.73			114,032		5.75			1.45
Over twelve months to twenty-four months		323,869		15.00			4.14			345,578		16.56			3.51			199,174		10.04			2.25
Over twenty-four months to thirty-six months		98,005		4.54			4.18			187,215		8.97			3.38			209,038		10.54			3.12
Over thirty-six months to forty-eight months		7,155		0.33			3.38			45,616		2.19			3.97			204,096		10.29			4.29
Over forty-eight months to sixty months		308,589		14.29			4.66			335,560		16.08			4.70			329,855		16.65			4.84
Over sixty months		—		0.00			0.00			—		0.00			0.00			37		0.00			7.19

Total time deposits		1,431,056		66.29			4.71			1,305,793		62.58			3.89			1,142,491		57.62			3.37

Total deposits	$	2,158,641		100.00	%		3.52		$	2,086,822		100.00	%		2.87	%	$	1,982,881		100.00	%		2.17	%

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, 2006, we had borrowings totaling $279.7 million with maturities of less than one year; of the notes payable to the FHLB at year end, $175.0 million matures in mid-January of 2007 (which was refinanced) and another $100.0 million matures in March 2007. In addition, we have another $50.0 million that has a quarterly call feature beginning in March of 2007 and $120.0 million that has a quarterly call feature beginning in June of 2007. While we expect that we would be able to refinance these borrowings with the FHLB, we cannot provide any assurances that we could do so or as to the terms on which any such refinancing could be made. We have pledged all of our residential mortgage loans, some investment securities, and some multi-family mortgage loans 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,
	2006			2005			2004			2003			2002
	(Dollars in thousands)
Balance outstanding at end of year:
Notes payable to FHLB	$	705,025		$	765,796		$	623,925		$	299,491		$	332,299
Overnight borrowings from FHLB		—			—			137,600			—			—
Other borrowings		—			—			—			—			22,679
Weighted average interest rate at end of year:
Notes payable to FHLB		4.46	%		3.58	%		2.89	%		5.52	%		5.57	%
Overnight borrowings from FHLB		—			—			2.47	%		—			—
Other borrowings		—			—			—			—			0.99	%
Maximum amount outstanding during the year:
Notes payable to FHLB	$	841,835		$	909,920		$	623,925		$	332,398		$	445,414
Overnight borrowings from FHLB		38,000			186,000			289,800			15,000			5,480
Other borrowings		—			500			—			22,679			19,835
Average amount outstanding during the year:
Notes payable to FHLB	$	782,619		$	811,937		$	325,861		$	318,942		$	395,351
Overnight borrowings from FHLB		3,242			50,712			75,106			72			25
Other borrowings		—			1			—			430			3,309
Weighted average interest rate during the year:
Fixed interest rate notes payable to FHLB		3.86	%		3.25	%		5.23	%		5.61	%		5.68	%
Overnight borrowings from FHLB		5.40	%		2.95	%		2.03	%		1.38	%		1.53	%
Other borrowings		—			3.04	%		—			0.98	%		1.45	%

Borrowings decreased to $705.0 million at December 31, 2006, as compared to $765.8 million at December 31, 2005, primarily as a result of the reduction to the securities portfolio and growth in deposits. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Comparisons of Financial Condition at December 31, 2006 and 2005.”

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, 2006, 2005, 2004, 2003, and 2002 our average equity to average assets ratio was 15.3%, 16.6%, 22.6%, 14.0%, and 10.9%, respectively.

Cash Dividends

We paid cash dividends of $0.29 per share in 2006, $0.25 per share in 2005, $0.18 per share in 2004, and $0.12 per share in 2002. We increased our quarterly dividend to $0.08 per share in the first quarter of 2007, from $0.075 in the fourth quarter of 2006.

Subsidiaries

BancMutual Financial & Insurance Services, Inc. (f/k/a, “Lake Financial and Insurance Services, Inc.”) (“BMFIS”), 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 BMFIS. In March of 2007, BMFIS expanded its services to include investment advisory services which BMFIS anticipates will allow it to obtain additional service fees through expanded offerings to its customers.

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 owns indirect automobile, recreational vehicle and boat loans from our Savings Financial Corporation (“SFC”), a corporation 50% owned by the Bank. See below.

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. See Item 2. Properties.

SFC, 50% owned by the Bank and 50% owned by another financial institution, originated, sold, and serviced indirect automobile, recreational vehicles and boat loans. SFC historically sold those types of loans on a regular basis to FNII or the Bank, but retained the servicing rights in the loans. In May of 2006, we discontinued purchasing loans from SFC as a result of reduced profitability of these loans. We will maintain our ownership in SFC until and at such time all the indirect loans are paid off.

In addition, the Bank has four 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, 2006, we employed 692 full time and 89 part time associates. Management considers its relations with its associates to be good.

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 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, their operations, and the Company’s 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 loan 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-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 to the Company, 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 to the Company 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, 2006 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 will otherwise meet the QTL test requirements. 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.

As a member, the Bank must meet certain eligibility requirements and is required to purchase and maintain stock in the FHLB of Chicago in an amount equal to the greatest of $500 or 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year. At February 28, 2007, the Bank was 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 FDIC’s Deposit Insurance Fund up to a maximum of $100,000, with coverage of up to $250,000 for certain self-directed retirement accounts, as provided 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 five basis points to 43 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 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 and to respond to unauthorized disclosure of protected 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 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 to
Category	Weighted Assets	Weighted Assets	Total Assets
Well capitalized	≥ 10%	≥ 6%	≥ 5%
Adequately capitalized	≥ 8%	≥ 4%	≥ 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

	•		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 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 Patriot Act. The 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 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 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.

	•		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 OTS as a unitary 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.

The Company is limited to those activities permissible for financial holding companies because it is not a grandfathered unitary holding company. 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.

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 OTS. 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. The Sarbanes-Oxley Act was 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 and corporate governance, such as the relationship between a board of directors and management, between a board of directors and its committees, and the corporation and its shareholders. The Sarbanes-Oxley Act also mandated that the SEC adopt various implementing rules. Because some OTS accounting and governance regulations also refer to the SEC’s regulations, the Sarbanes-Oxley Act also affects the Bank.

Acquisition of Bank Mutual Corporation

Under federal law, no person may acquire control of the Company or the Bank without first obtaining the approval of such acquisition of control by the OTS. 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.

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.

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, 2006 and 2005—Income Taxes” for a discussion of Wisconsin tax developments relating to these subsidiaries.

Item 1A. Risk Factors.

In addition to the various factors discussed and cautionary statements set forth elsewhere in this report (particularly in “Business-Cautionary Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”), you should consider carefully the following risk factors when evaluating our performance, condition and outlook, and any investment of our securities..

The Current Interest Rate Environment Is Having an Adverse Impact on Our Net Interest Income

From June, 2004 through June, 2006, the Federal Reserve Board increased the Federal Funds target rate 17 times for an aggregate increase of 425 basis points and since June of 2006, it has left short-term interest rates unchanged.

Since these interest rate increases began, we have been unable to offset the effect of higher interest rates on our maturing liabilities with similar increases in our asset yields. As a result, our net interest income, and consequently our net income, declined as compared to the year ago periods. A continuation of these trends would have similar future effects.

Conversely, if interest rates decrease substantially, the amount of interest we pay on deposits could decrease more quickly than the amount of interest we receive on our loans, mortgage-related securities, and investment securities. This could cause our profits to increase. Decreasing interest rates would likely increase the value of our mortgage-related securities and investment securities and may increase demand for loans, and make it more attractive for borrowers to refinance their existing loans.

Increases in Market Interest Rates Are Also Likely to Adversely Affect Equity

As of December 31, 2006, we owned $1.1 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, 2006, Bank Mutual Corporation’s available-for-sale portfolio had a gross unrealized loss of $26.0 million, because fair value was $1.11 billion and amortized cost was $1.14 billion.

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 for loan losses also would materially decrease our net income, and the charge-off of loans may cause us to increase the allowance for loan losses. 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 provisions 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 provisions for loan losses or recognize further loan charge-offs.

Softness in the Real Estate Market May Affect Collateral Values and our Results.

Our market areas have seen a recent stabilizing, and even softening, in real estate prices. A decline in real estate values could affect the value of the collateral securing our mortgage loans. That decrease in value could in turn lead to increased losses on loans in the event of foreclosures. Increased losses would affect our loan loss allowance, and may cause us to increase our provision for loan losses resulting in a charge to earnings.

Some of Our Lending Activities Are in Riskier Credits than Traditional Real Estate Loans

We have identified commercial real estate, commercial business, construction and development and consumer loans as areas for lending emphasis. While lending diversification in being pursued for the purpose of increasing net interest income, non-residential and construction and development loans historically have carried 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 assets would be written off, and therefore, earnings would be reduced.

Low Demand for Real Estate Loans May Lower Our Profitability

Making loans secured by real estate, including one- to-four family and commercial real estate is our primary business and primary source of revenue. 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 change in real estate values, or an increase in interest rates.

Wisconsin Tax Developments Could Reduce Our Net Income

Like many Wisconsin financial institutions, we have non-Wisconsin subsidiaries which hold and manage investment assets and some loans, 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 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 Wisconsin banks; its audit of Bank Mutual, for the years 1997 to 2001, has not yet been concluded, and the Department has not asserted a claim against the Bank or its subsidiaries. Similar claims could be made by the Department relating to subsequent periods.

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 substantial negative impact on the earnings of the Company. Although 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, the Company’s position may not prevail in court or other actions may occur which give rise to liabilities. We also may incur further costs in the future to address and defend these issues. See Item 7. “Managements’ Discussion and Analysis of Financial Condition and Results of Operations – Income Taxes.”

Economic Conditions and World Events Could Affect Our Earnings

Portions of the United States economy have been strong as evidenced by the Federal Open Market Committee (“FOMC”) remarks. Since the FOMC has been attempting to stave off high inflation by increasing short-term interest rates, the effects of the increases may lead to reduced corporate profits and higher unemployment. Similarly, reduced income or confidence can lead consumers to reduce their purchases, and thus reduce loan demand.

We, 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 other international situations, and by natural disasters.

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. For example, almost

half of the deposits in the Milwaukee market area are held by two large commercial banks. 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. If our competitors succeed in attracting business from our customers, our deposits and loans could be reduced, which would likely affect our earnings.

Our Ability to Grow May Be Limited if We Cannot Make Acquisitions

In an effort to fully deploy the capital we raised in our 2003 offering, we continue to seek to expand our banking franchise by opening new offices, growing internally and by acquiring other financial institutions or branches and other financial services providers. Our ability to grow through selective acquisitions of other financial institutions or branches will depend on successfully identifying, acquiring, and integrating those institution 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.

We Have Significant Intangible Assets Which We May Need to Write Off (Expense) in the Future

We have approximately $52.6 million in goodwill, $3.1 million in other intangible assets and $4.7 million of mortgage servicing rights as of December 31, 2006. We continue to amortize the other intangible assets over seven to fifteen years and evaluate the mortgage servicing rights for impairment on a monthly basis. We periodically evaluate goodwill and the other intangible assets for impairment. At some point in the future, our intangible assets could become impaired, and we would need to write them off as a reduction to earnings in the period in which they became impaired.

We Are Subject to Security and Operational Risks Relating to Our Use of Technology that Could Damage Our Reputation and Our Business

Security breaches in our internet, telephonic or other banking activities could expose us to possible liability and damage our reputation. Any compromise of our security also could deter customers from using our internet banking services that involve the transmission of confidential information. We rely on standard internet and other security systems to provide the security and authentication necessary to effect secure transmission of data. These precautions may not protect our systems from compromises or breaches of our security measures that could result in damage to our reputation and our business.

Additionally, we outsource our data processing to a third parties. If our third party providers encounter technological or other difficulties or if we have difficulty in communicating with those third party processors, it will significantly affect our ability to adequately process and account for customer transaction, which would significantly affect our business operations.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The Company and its subsidiaries conducts its business through its executive office, an operations center and 77 banking offices, which had an aggregate net book value of $46.5 million as of December 31, 2006. 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

Date

Leased

Original Date

Leased

Leased or

Location

Acquired

Owned*

Location

Acquired

Owned*

Executive Office:

4949 West Brown Deer Road

1991

Owned

Brown Deer, WI 53223

Southeast Region:

Milwaukee Metro Area:

Bayshore Town Center

1971

Leased

Brookfield

1973**

Owned

5784 N. Port Washington Road

(2018

)

17100 W. Capitol Drive

Glendale, WI 53217

Brookfield, WI 53005

Brookfield Square

1975

Leased

Brown Deer

1979

Owned

400 N. Moorland Road

(2016

)

4801 W. Brown Deer Road

Brookfield, WI 53005

Brown Deer, WI 53223

Capitol Drive

1976

Owned

Cedarburg

1978**

Leased

8050 W. Capitol Drive

W62 N248 Washington Avenue

(2006

)

Milwaukee, WI 53222

Cedarburg, WI 53012

Downtown

1955

Owned

Grafton

1978

Owned

510 E. Wisconsin Avenue

2030 Wisconsin Avenue

Milwaukee, WI 53202

Grafton, WI 53024

Howell Avenue

1977

Owned

Mayfair Mall

2001

Leased

3847 S. Howell Avenue

2600 N. Mayfair Road

(2011

)

Milwaukee, WI 53207

Wauwatosa, WI 53226

Menomonee Falls

2003

Owned

Mequon

1970**

Owned

W178 N9379 Water Tower Place

11249 N. Port Washington Road

Menomonee Falls, WI.53051

Mequon, WI 53092

Oak Creek

1972

Owned

Oklahoma Avenue

1982

Owned

8780 S. Howell Avenue

6801 W. Oklahoma Avenue

Oak Creek, WI 53154

Milwaukee, WI 53219

Sherman Park

1950**

Owned

Southgate

1967

Owned

4812 W. Burleigh Street

3340 S. 27th Street

Milwaukee, WI 53210

Milwaukee, WI 53215

Southridge Mall

1978

Leased

Thiensville

1960**

Owned

5300 S. 76th Street

(2008

)

208 N. Main Street

Greendale, WI 53129

Thiensville, WI 53092

Waukesha — Grandview Plaza

2005

Owned

Waukesha — Meadowbrook

2006

Owned

1870 Meadow Lane

3212 Fiddlers Creek Drive

Pewaukee, WI 53072

Waukesha, WI 53188

West Allis

1976

Owned

West Bend

2006

Owned

10296 W. National Avenue

1526 S. Main Street

West Allis, WI 53227

West Bend, WI 53095

Racine/Kenosha Area:

Kenosha

2007

Owned

Racine — Douglas Avenue

2005

Owned

6310 South Green Bay Rd.

5133 Douglas Ave.

Kenosha, WI 53142

Racine, WI 53402

Racine — Regency Mall

2005

Owned

3039 S. Green Bay Road

Racine, WI 53406

Original Date

Leased

Original Date

Leased

Leased or

Location

Acquired

Owned*

Location

Acquired

Owned*

Additional Southeast Locations:

Madison Area:

Downtown

1980

Leased

West

1982

Leased

23 S. Pinckney Street

(2008

)

5521 Odana Road

(2011

)

Madison, WI 53703

Madison, WI 53719

Middleton

1978

Owned

Monona

1981

Owned

6209 Century Avenue

5320 Monona Drive

Middleton, WI 53562

Monona, WI 53716

Sheboygan Area:

Sheboygan

1973

Owned

Sheboygan Motor Bank

1984

Owned

801 N. 8th Street

730 N. 9th Street

Sheboygan, WI 53081

Beaver Dam:

1975

Owned

Beloit:

1971

Leased

130 W. Maple Avenue

3 Beloit Mall Shopping Center

(2012

)

Beaver Dam, WI 53916

Beloit, WI 53511

Berlin:

1973

Owned

Fond du Lac:

2000

Owned

103 E. Huron Street

W6606A Highway 23

Berlin, WI 54923

Fond du Lac, WI 54937

Janesville:

1973

Owned

Portage:

1976

Owned

2111 Holiday Drive

145 E. Cook Street

Janesville, WI 53545

Portage, WI 53901

Northeast Region:

Greater Green Bay Area:

201 N. Monroe Avenue

1975**

Owned

2255 University Avenue

1970**

Owned

Green Bay, WI 54301-4995

Green Bay, WI 54308-8046

2357 S. Oneida Street

1971**

Owned

2603 Glendale Avenue

1986**

Owned

Green Bay, WI 54304-5286

Green Bay, WI 54313-6823

2370 East Mason Street

1985**

Owned

2424 West Mason Street

1992**

Owned

Green Bay, WI 54302-3347

Green Bay, WI 54303-4711

749 Main Avenue

1972**

Owned

330 North Broadway

1979**

Owned

De Pere, WI 54115-5190

De Pere, WI 54115-5250

201 West Walnut St. (Operations Center)

1999**

Leased

Green Bay, WI 54303

(2009

)

Fox Valley Area:

Appleton

1985

Leased

Neenah

1974

Owned

4323 W. Wisconsin Avenue

(2009

)

101 W. Wisconsin Avenue

Fox River Mall

Neenah, WI 54956

Appleton, WI 54913

Marinette Area:

830 Pierce Avenue

1972**

Owned

Pine Tree Mall

1978**

Leased

Marinette, WI 54143-0318

2314 Roosevelt Road

(2008

)

Marinette, WI 54143-0345

Brillion:

Crivitz:

314 N. Main Street

1973**

Owned

315 Highway 141

1985**

Owned

Brillion, WI 54110-1198

Crivitz, WI 54114-0340

Hortonville:

Kiel:

209 South Nash Street

1979**

Owned

622 Fremont Street

1970**

Owned

Hortonville, WI 54944

Kiel, WI 53042-1321

Original Date

Leased

Original Date

Leased

Leased or

Location

Acquired

Owned*

Location

Acquired

Owned*

Additional Northeast Location:

New Holstein:

New London:

2205 Wisconsin Avenue

1976**

Owned

101 Park Street

1969**

Owned

New Holstein, WI 53061-1291

New London, WI 54961

Peshtigo:

Shawano:

616 French Street

1975**

Owned

835 E. Green Bay Avenue

1981**

Owned

Peshtigo, WI 54157-0193

Shawano, WI 54166-0396

Sturgeon Bay:

1227 Egg Harbor Road

1978**

Owned

Sturgeon Bay, WI 54235-0068

Northwest Region:

Eau Claire:

Downtown

1968**

Owned

Mall

1972**

Owned

319 E. Grand Avenue

2812 Mall Drive

Eau Claire, WI 54701

Gordy’s Country Market

1996**

Leased

Pinehurst

1986**

Owned

2717 Birch Street

(2010

)

2722 Eddy Lane

Eau Claire, WI 54703

Chippewa Falls Area:

Downtown

1975**

Owned

Falls Pick'N Save

1995**

Leased

35 W. Columbia

303 Prairie View Road

(2010

)

Chippewa Falls, WI 54729

Menomonie Area:

Downtown

1967**

Owned

North

1978**

Owned

717 Main Street

2409 Hills Ct. N.E

Menomonie, WI 54751

Barron:

1995**

Owned

Bloomer:

1995**

Owned

1512 E. Division Ave. (Hwy. 8)

1203 17th Avenue

Barron, WI 54812

Bloomer, WI 54724

Cornell:

1980**

Leased

Ellsworth:

1975**

Owned

422 Main Street

(month to

385 W. Main Street

Cornell, WI 54732

month)

Ellsworth, WI 54011

Hayward:

1984**

Owned

Hudson:

1979**

Owned

10562 Kansas Avenue

2000 Crestview Drive

Hayward, WI 54843

Hudson, WI 54016

Rice Lake:

1979**

Owned

Spooner:

1995**

Owned

2850 Pioneer Avenue

500 Front Street

Rice Lake, WI 54868

Spooner, WI 54801

St. Croix Falls:

1980**

Owned

Stanley:

1978**

Owned

144 Washington Street N

118 N. Broadway

St. Croix Falls, WI 54024

Stanley, WI 54768

Woodbury, Minnesota:

8420 City Centre Drive

1995**

Owned

Woodbury, 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

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.


		Executive
		Officer
Name and Age	Offices and Positions with Bank Mutual Corporation and the Bank*	Since (1)
Michael T. Crowley, Jr., 64	Chairman, President and Chief Executive Officer of Bank Mutual Corporation and the Bank (2)	1968

Eugene H. Maurer, Jr., 61	Senior Vice President and Secretary of Bank Mutual Corporation; Senior Vice President, Chief Financial Officer, Treasurer and Secretary of the Bank	1982

Rick B. Colberg, 54	Chief Financial Officer of Bank Mutual Corporation; Vice President of the Bank (3)	1980

Marlene M. Scholz, 61	Senior Vice President and principal accounting officer of Bank Mutual Corporation; Senior Vice President and Controller of the Bank	1981

P. Terry Anderegg, 56	Senior Vice President—Retail Operations of the Bank (4)	1993

Christopher J. Callen, 63	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 and, except as indicated, has held these positions since that time.

(2)		Michael Crowley, Jr. became president of Bank Mutual Corporation in 2003 and Chairman of the Bank in 2005.

(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 2003, as a result of the merger of the subsidiary banks.

Part II


Item 5.		Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchase of Equity Securities

The common stock of the Company is traded on The Nasdaq Global Select Market ^SM under the symbol “BKMU.”

As of February 28, 2007, there were 59,235,654 shares of common stock outstanding and approximately 5,900 shareholders of record. We paid a cash dividend of $0.29 per share in 2006. We increased our cash dividend to $0.08 per share to shareholders of record on February 15, 2007 which was paid March 1, 2007.

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.

Our common stock trades on The Nasdaq Global Select Market ^SM. The high and low trading prices from January 1, 2004 through December 31, 2006, by quarter, and the dividends paid in each quarter, were as follows:

COMMON STOCK TRADING PRICE RANGE
(High and Low Sales Price)


	2006				2005				2004
	High		Low		High		Low		High		Low
1^st Quarter	$	12.00	$	10.51	$	12.35	$	11.50	$	11.55	$	10.90
2^nd Quarter	$	12.45	$	11.00	$	12.10	$	10.31	$	11.35	$	9.65
3^rd Quarter	$	12.76	$	11.75	$	11.55	$	10.35	$	12.40	$	10.50
4^th Quarter	$	12.71	$	12.71	$	10.95	$	10.00	$	12.59	$	11.80

CASH DIVIDENDS PAID


	2006		2005		2004
1^st Quarter	$	0.070	$	0.060	$	0.040
2^ndQuarter	$	0.070	$	0.060	$	0.040
3^rd Quarter	$	0.075	$	0.065	$	0.050
4^th Quarter	$	0.075	$	0.065	$	0.050

	$	0.290	$	0.250	$	0.180

A cash dividend of $0.08 per share, a 6.7% increase over the fourth quarter of 2006 cash dividend of $0.075 per share, was paid on March 1, 2007 to shareholders of record on February 15, 2007.

During the first two months of 2007, Bank Mutual Corporation’s common stock sales price ranged between $12.37 to $11.51 per share, and closed on February 28, 2007 at $11.69 per share

During 2006, Bank Mutual Corporation repurchased 2,469,333 shares at an average price of $11.26 per share.

The following table provides the specified information about the repurchases of shares by the Company during the fourth quarter of 2006.


					Total number		Maximum number of
					of shares purchased		shares that may be
	Total number		Average		as part of publicly		purchased under the
	of shares		price paid		announced plans or		recent plans or
Period	purchased		per share		programs		programs*

October 1 to 31, 2006		—	$	—		—		2,130,548

November 1 to 30, 2006		—		—		—		2,130,548

December 1 to 31, 2006		74,959		11.98		73,000		2,057,548


Total		74,959	$	11.98		73,000

At period end.

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 the exercise of stock options under the Company’s 2001 Stock Incentive Plan. The “price” used for these purposes is the fair market value of those shares on the date of purchase.

On February 5, 2007, the Company’s board of directors amended the existing stock repurchase plan to allow an additional 3.0 million shares to be repurchased. At February 28, 2007, 3,951,000 shares were remaining in the stock repurchase plan to be repurchased

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 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 2003 conversion.


	At December 31,
	2006		2005		2004		2003		2002
	(In thousands except number of shares and per share amounts)
Selected Financial Condition Data:
Total assets	$	3,451,385	$	3,431,377	$	3,445,299	$	3,108,527	$	2,843,328
Loans receivable, net		2,024,325		1,990,492		1,875,885		1,712,278		1,685,662
Loans held for sale		3,787		2,312		4,987		4,056		46,971
Securities available-for-sale, at fair value:
Investment securities		48,290		63,361		68,753		67,854		73,226
Mortgage-related securities		1,064,851		1,087,816		1,266,224		1,053,349		618,123
Foreclosed properties and repossessed assets		1,231		708		1,621		630		750
Goodwill		52,570		52,570		52,570		52,570		52,570
Other intangible assets		3,089		3,750		4,412		5,073		5,734
Mortgage servicing rights		4,653		4,771		4,542		4,698		3,060
Deposits		2,158,641		2,086,822		1,982,881		2,052,290		2,126,655
Borrowings		705,025		765,796		761,525		299,491		354,978
Shareholders’ equity		533,779		544,374		670,454		731,080		323,075
Tangible shareholders’ equity		474,706		484,786		610,698		670,771		264,011
Number of shares outstanding – net of treasury stock⁽¹⁾		60,277,087		62,325,268		73,485,113		78,775,779		79,802,950
Book value per share⁽¹⁾		8.86		8.73		9.12		9.28		4.05
Tangible book value per share⁽¹⁾		7.88		7.78		8.31		8.51		3.31


	For the Year Ended December 31,
	2006		2005		2004		2003		2002
			(In thousands except per share amount)
Selected Operating Data:
Total interest income	$	173,871	$	164,210	$	148,921	$	141,070	$	165,432
Total interest expense		99,091		77,231		58,498		69,482		87,678

Net interest income		74,780		86,979		90,423		71,588		77,754
Provision for loan losses		632		541		1,330		1,304		760

Net interest income after provision for loan losses		74,148		86,438		89,093		70,284		76,994

Total noninterest income		17,568		17,441		16,175		19,618		16,676

Noninterest expense:
Amortization of goodwill		—		—		—		—		—
Amortization of other intangible assets		661		661		661		661		662

Total noninterest expense		61,311		60,837		60,082		55,608		54,169

Income before income taxes		30,405		43,042		45,186		34,294		39,501
Income tax expense		9,808		15,016		15,632		11,695		12,956

Net income	$	20,597	$	28,026	$	29,554	$	22,599	$	26,545

Earnings per share-basic⁽¹⁾	$	0.35	$	0.44	$	0.39	$	0.30	$	0.34
Earnings per share-diluted⁽¹⁾	$	0.34	$	0.43	$	0.38	$	0.29	$	0.34
Cash dividends paid per share⁽¹⁾	$	0.29	$	0.25	$	0.18	$	0.12	$	0.093


	At or for the Year Ended December 31,
	2006			2005			2004			2003			2002

Selected Financial Ratios:
Net interest margin ⁽²⁾		2.25	%		2.62	%		3.00	%		2.58	%		2.88	%
Net interest rate spread		1.72			2.15			2.44			2.17			2.52
Return on average assets		0.59			0.80			0.93			0.76			0.92
Return on average shareholders’ equity		3.89			4.84			4.10			5.45			8.44
Efficiency ratio, excluding amortization of goodwill ⁽³⁾⁽⁴⁾		66.39			58.26			56.36			60.97			57.36
Noninterest expense (excluding amortization of goodwill) as a percent of adjusted average assets⁽³⁾		1.77			1.74			1.88			1.88			1.88
Shareholders’ equity to total assets		15.47			15.86			19.46			23.52			11.36
Tangible shareholders’ equity to adjusted total assets ⁽⁵⁾		13.99			14.38			18.04			22.01			9.48

Selected Asset Quality Ratios:
Non-performing loans to loans receivable, net		0.72	%		0.29	%		0.33	%		0.61	%		0.50	%
Non-performing assets to total assets		0.46			0.19			0.23			0.35			0.32
Allowance for loan losses to non-performing loans		86.74			207.23			222.09			132.77			151.87
Allowance for loan losses to non-performing assets		79.95			184.81			176.46			125.17			139.40
Allowance for loan losses to total loans receivable, net		0.62			0.61			0.74			0.80			0.76
Charge-offs to average loans		0.01			0.12			0.07			0.02			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)		Net interest margin is calculated by dividing net interest income by average earnings assets.

(3)		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.

(4)		Efficiency ratio is calculated by dividing noninterest expense by the sum of net interest income and noninterest income.

(5)		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.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Bank Mutual Corporation (which we sometimes refer to as “we” or the “Company”) is a federally-registered unitary savings and loan bank holding company which holds all of the outstanding shares of Bank Mutual, a federal savings bank (“Bank Mutual” or the “Bank”). The Company is the successor to a federally- chartered corporation of the same name in a 2003 transaction in which the Company converted into a fully shareholder-owned corporation. All references to the Company refer to Bank Mutual Corporation both before and after that transaction.

Comparisons of Financial Condition at December 31, 2006 and 2005

Assets

Bank Mutual Corporation’s total assets at December 31, 2006, were $3.45 billion as compared to $3.43 billion at December 31, 2005. Total assets increased slightly in 2006 primarily as a result of growth in the loan portfolio and in other assets partially offset by a decrease in securities and cash and cash equivalents.

Cash and cash equivalents decreased $24.0 million in 2006 primarily as a result of a decrease in interest-earning deposits at December 31, 2006. The interest-earning deposits decrease was the result of using the interest-earning deposits to fund the loan portfolio growth, to repay borrowings or repurchase our stock.

Investment securities available-for-sale decreased $15.1 million during 2006 as a result of maturing investment securities and using the proceeds from those maturities to fund loan growth, repay borrowings or to repurchase our stock.

Mortgage-related securities available-for-sale decreased $23.0 million in 2006 primarily as a result of using the repayments and prepayments from the mortgage-related securities to fund loan growth, repay borrowings or stock repurchases. The current portfolio has a weighted average yield of approximately 4.50% at December 31, 2006. At December 31, 2006, we had $207.9 million of private label collateralized mortgage obligations (“CMOs”) in our investment portfolio. Our private label CMOs have primarily fixed and adjustable rate one- to-four family mortgage loans as their underlying collateral. Private label 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.”

The following table sets forth our mortgage, consumer and commercial loan originations and purchases:


	During the year ended December 31,
	2006		2005
	(In thousands)
Originations:
Mortgage loans	$	347,296	$	388,106
Consumer loans		158,690		211,629
Commercial business loans		42,888		43,517

Total loans originated		548,874		643,252

Purchases:
Mortgage loans		157,399		258,707


Total loans originated and purchased	$	706,273	$	901,959

Loan originations decreased $94.4 million in 2006 as compared to loan originations in 2005, primarily as a result of increasing interest rates which prompted consumers to reduce the refinancing of their existing loans and fewer home purchases. Mortgage loan originations decreased $40.8 million or 10.5% and consumer loans decreased $52.9 million or 25.0% in 2006 as a result of the reduced refinancing of existing loans and reduced home purchases in our market areas. A majority of the consumer loan originations continued to be first and second mortgage loans. In addition, as we previously disclosed, we discontinued the origination of auto loans through SFC, our 50%-owned subsidiary, in May 2006. We decreased our purchases of mortgage loans during 2006 as a result of the opportunity for higher yields on investments and other loan originations. Properties securing all of the 2006 purchased mortgage loans are located in Wisconsin.

Commercial business loan originations decreased $629,000 or 1.4% in 2006 primarily as a result of rising interest rates and slower growth in the economy which resulted in decreased demand for commercial business loans. We anticipate that we will continue our emphasis on commercial loans, investment real estate and consumer loan originations to aid our asset and liability management and to aid in our overall profitability, although with somewhat more risk than traditional mortgage products.

Loans held for sale at December 31, 2006 as compared to December 31, 2005 increased $1.5 million as a result of fixed rate mortgage loan originations and our policy to sell some of those 15, 20 and 30 year fixed rate mortgage loans. In the second quarter of 2006, we began to retain certain 20 and 30 year fixed interest rate mortgage loans because those loans had characteristics which historically have indicated that they will be outstanding for a relatively short period of time. Most of the other 20 and 30 year fixed interest rate mortgage loan originations that do not have these characteristics are sold in the secondary mortgage market.

Loans receivable increased $33.8 million in 2006 as a result of growth in the one-to four-family, multi-family, and construction and development mortgage loan portfolios. The one-to four-family mortgage loan portfolio increased $75.0 million or 7.2% primarily as a result of reduced fixed rate mortgage loan sales, reduced refinancing of existing loans, mortgage loan purchases from third parties and increased adjustable interest rate mortgage loan originations which are retained in the portfolio.

The multi-family portfolio increased $1.9 million or 1.2% primarily as a result of increased multi-family originations. Management continues to emphasize this portion of the loan portfolio. Specifically, an experienced commercial real estate loan manager was hired late in the second quarter of 2006. Rate competition for commercial real estate loans remains strong and, at times, we have chosen not to match some of the rate offerings which resulted in increased payoffs.

Construction and development mortgage loans increased $32.1 million or 20.7% primarily as a result of increased one- to four-family and multi-family construction loan originations.

The commercial real estate portfolio decreased $8.0 million or 4.6% primarily as a result of decreased loan originations and increased repayments and prepayments. Interest rate competition for commercial real estate continues to be strong and at times, we have chosen not to match some of the interest rate offerings which resulted in increased payoffs.

The consumer loan portfolio decreased $35.5 million or 7.6% primarily as a result of reduced consumer loan originations and the discontinuance of automobile originations through SFC. Historically, consumer loan originations decrease as mortgage loan originations decrease since many of our consumer loans are second mortgage loans and most second mortgages are cross-sold at the time of the first mortgage loan origination. In addition in May of 2006, we discontinued originating indirect automobile loans through our 50%-owned subsidiary, SFC. This decision decreased our automobile loan originations and the outstanding automobile loan portfolio and was in response to more profitable loan or investment alternatives.

The commercial business loan portfolio decreased $5.2 million or 9.1% primarily as a result of increased prepayments. The competition to acquire and retain large commercial loans has also been intense with some of our commercial customers receiving interest rate offerings that we chose not to match. As a result, those loans were paid off or not originated.

Management expects to continue to emphasize consumer, non-residential mortgage loan, multi-family 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.

Goodwill resulted from the acquisitions of First Northern Capital Corp. (“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 2006, 2005 or 2004.

Other intangible assets are composed of core deposit base intangibles which were also the result of the First Northern and First Federal 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” and “—Comparisons of Operating Results for Years Ended December 31, 2006 and 2005—Noninterest Income” below for a further discussion of mortgage servicing rights.

Other assets are comprised of the following:


	At December 31,
	2006		2005
	(In thousands)
Accrued Interest:
Mortgage-related securities	$	4,207	$	4,014
Investment securities		12		117
Loans receivable		9,288		7,589

Total accrued interest		13,507		11,720
Foreclosed properties and repossessed assets		1,231		708
Premises and equipment		50,515		47,588
Federal Home Loan Bank stock, at cost		45,876		48,537
Bank owned life insurance		46,430		20,359
Prepaid and other		46,801		27,978

	$	204,360	$	156,890

Our foreclosed properties and repossessed assets increased to $1.2 million and non-performing loans increased to $14.5 million at December 31, 2006 as compared to $708,000 and $5.8 million at December 31, 2005, respectively. The increase in non-performing loans was primarily the result of two loans to the same borrower, totaling $5.3 million, which became non-performing in the fourth quarter of 2006. See “Item 1. – Business – Asset Quality.” 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 increased $2.9 million in 2006 primarily as a result of adding two new offices. We anticipate that up to three new bank offices will be established in 2007. One 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 decreased $2.7 million because we redeemed some of our shares. FHLB of Chicago stock is redeemed at par. The FHLB of Chicago requires that its members own FHLB of Chicago stock as a condition for borrowing, but we were able to reduce our ownership because of reduced borrowings outstanding. We also had the opportunity to reinvest those dollars into securities or loans which had a higher rate of return. The FHLB of Chicago generally pays dividends not to exceed 90% of its adjusted core income, which is net income excluding gains or losses from non-recurring events. In 2006, the FHLB of Chicago stock paid a dividend that equaled approximately 3.1% or $1.5 million in the aggregate. See “Notes to Consolidated Financial Statements—Note 7. Borrowings.”

Bank owned life insurance (“BOLI”) is an asset that we use 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 and certain other conditions are met. We purchased an additional $25.0 million of BOLI in December of 2006 to help offset increased future employee benefit costs.

Liabilities

Deposits increased $71.8 million in 2006 primarily as a result of an increase in retail certificates of deposit accounts, offset by a reduction in jumbo certificates of deposit and core deposits. At December 31, 2006, wholesale and jumbo CD deposits were $209.5 million as compared to $225.2 million at December 31, 2005. We utilize wholesale and jumbo deposits in lieu of retail deposits when they cost less, fit a specific maturity period or when deposits are needed very quickly. Our retail certificates of deposit increased $125.3 million and our core deposits (checking, savings and money market accounts) decreased $53.4 million as a result of the increased interest rates offered on the certificates of deposit.

Our borrowings decreased $60.8 million in 2006, as a result of repaying borrowings (from the increase in the deposit portfolio), and the decrease in our mortgage-related securities portfolio. At December 31, 2006, $175.0 million of the total $705.0 million of borrowings had a maturity of 16 days (we refinanced the borrowing to a longer maturity date on January 16^th), and $545.0 million of the total borrowings have a fixed interest rate but after an initial period of 6 months to 2 year could be called by the FHLB of Chicago quarterly thereafter. While we expect that we would be able to refinance these borrowings with the FHLB, we cannot provide any assurances that we could do so or as to the terms on which any such refinancing could be made.

Shareholders’ Equity

Shareholders’ equity decreased $10.6 million in 2006 primarily as a result of the repurchase of shares, and dividends paid in 2006 offset by our net earnings.

We repurchased 2,469,333 shares in 2006 at an average price of $11.26 per share. Our existing repurchase plan, at December 31, 2006, had approximately 2.1 million shares authorized but not yet repurchased. On February 5, 2007, we modified the existing stock repurchase plan to allow us to repurchase an additional 3.0 million shares. In 2007, through February 28th, we have repurchased 2,049,000 shares, at an average price of $11.86 per share. At February 28, 2007, we had 4.0 million shares remaining to repurchase in our existing stock repurchase plan.

We increased our quarterly cash dividend to $0.07 per share for the first and second quarter of 2006, and again increased our cash dividend to $0.075 per share for the third and fourth quarter of 2006. The dividend payout ratio for 2006 was 77.5%, and total dividends paid during the year were $16.0 million. In February 2007, we further increased our quarterly dividend to $0.08 per share. Total dollars paid in dividends will not increase proportionately as a result of our share repurchases.

Accumulated other comprehensive income increased $1.9 million in 2006 primarily as a result of increased 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.

Our shareholders’ equity to total assets ratio at December 31, 2006 was 15.5% as compared to 15.9% at December 31, 2005.

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 PAID
	Years ended December 31,
	2006								2005								2004
				Interest		Average						Interest		Average						Interest		Average
	Average			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	$	2,042,534		$	118,175		5.79	%	$	1,970,990		$	107,553		5.46	%	$	1,799,670		$	97,330		5.41	%
Mortgage-related securities		1,134,822			50,017		4.41			1,217,647			51,721		4.25			1,090,363			47,431		4.35
Investment securities (2)		101,987			3,762		3.69			113,670			4,168		3.67			104,681			3,956		3.78
Interest-earning deposits		10,882			483		4.44			11,796			356		3.02			11,834			128		1.08
Federal funds		28,581			1,434		5.02			10,623			412		3.88			5,546			76		1.37

Total interest-earning assets		3,318,806			173,871		5.24			3,324,726			164,210		4.94			3,012,094			148,921		4.95
Noninterest-earning assets		146,649								161,927								175,491

Total average assets	$	3,465,455							$	3,486,653							$	3,187,585


Liabilities and Equity:
Interest-Bearing Liabilities:
Savings deposits	$	215,525			923		0.43		$	244,954			1,048		0.43		$	253,321			1,084		0.43
Money market accounts		258,307			7,620		2.95			283,958			5,548		1.95			335,553			3,301		0.98
Interest-bearing demand accounts		163,446			351		0.21			168,962			369		0.22			164,588			359		0.22
Time deposits		1,368,166			59,818		4.37			1,191,364			42,371		3.56			1,139,368			37,373		3.28

Total deposits		2,005,444			68,712		3.43			1,889,238			49,336		2.61			1,892,830			42,117		2.23
Advance payment by borrowers for taxes and insurance		19,588			24		0.12			19,412			26		0.13			19,759			36		0.18
Borrowings		785,861			30,355		3.86			862,649			27,869		3.23			414,600			16,345		3.94

Total interest-bearing liabilities		2,810,893			99,091		3.52			2,771,299			77,231		2.79			2,327,189			58,498		2.51


Noninterest-Bearing Liabilities
Noninterest-bearing deposits		96,308								103,762								106,224
Other noninterest- bearing liabilities		29,364								32,369								33,638

Total noninterest- bearing liabilities		125,672								136,131								139,862

Total liabilities		2,936,565								2,907,430								2,467,051
Equity		529,890								579,223								720,534

Total average liabilities and equity	$	3,465,455							$	3,486,653							$	3,187,585

Net interest income and net interest rate spread (3)				$	74,780		1.72					$	86,979		2.15					$	90,423		2.44

Net interest-earning assets and net interest margin(4)		507,913					2.25	%	$	553,427					2.62	%	$	684,905					3.00	%

Average interest-earnings assets to average interest- bearing liabilities		1.18	x							1.20	x							1.29	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.

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,
	2006 Compared to 2005
	Increase (Decrease) Due To
	Volume (1)			Rate (2)			Net (3)
	(In thousands)
Interest-earning assets:
Loans receivable	$	3,971		$	6,651		$	10,622
Mortgage-related securities		(3,605	)		1,901			(1,704	)
Investment securities		(431	)		25			(406	)
Interest-earning deposits		(30	)		157			127
Federal funds		902			120			1,022

Total		807			8,854			9,661

Interest-bearing liabilities:
Savings deposits		(125	)		—			(125	)
Money market deposits		(538	)		2,610			2,072
Interest-bearing demand deposits		(12	)		(6	)		(18	)
Time deposits		6,859			10,588			17,447
Advance payment by borrowers for taxes and insurance		—			(2	)		(2	)
Borrowings		(2,632	)		5,118			2,486

Total		3,552			18,308			21,860

Net change in net interest income	$	(2,745	)	$	(9,454	)	$	(12,199	)


	Year Ended December 31,
	2005 Compared to 2004
	Increase (Decrease) Due To
	Volume (1)			Rate (2)			Net (3)
	(In thousands)
Interest-earning assets:
Loans receivable	$	9,315		$	908		$	10,223
Mortgage-related securities		5,431			(1,141	)		4,290
Investment securities		333			(121	)		212
Interest-earning deposits		—			228			228
Federal funds		113			223			336

Total		15,192			97			15,289

Interest-bearing liabilities:
Savings deposits		(36	)		—			(36	)
Money market deposits		(573	)		2,820			2,247
Interest-bearing demand deposits		10			—			10
Time deposits		1,756			3,242			4,998
Advance payment by borrowers for taxes and insurance		(1	)		(9	)		(10	)
Borrowings		14,927			(3,403	)		11,524

Total		16,083			2,650			18,733

Net change in net interest income	$	(891	)	$	(2,553	)	$	(3,444	)

Comparisons of Operating Results for Years Ended December 31, 2006 and 2005

General

Net income was $20.6 million or $0.34 diluted earnings per share for 2006 as compared to $28.0 million or $0.43 diluted earnings per share for 2005. The decrease in net income was primarily the result of decreased net interest margin which reflects the increased cost of borrowings and deposits. This net interest margin decrease was partially offset by an increase in total interest income which resulted from the increased yield on the loan and investment portfolio.

Net Interest Income

Net interest income for 2006 decreased $12.2 million, or 14.0%, to $74.8 million as compared to $87.0 million for 2005. Net interest income decreased primarily as the result of a decreased net interest margin. The net interest margin for 2006 was 2.25% as compared to 2.62% for 2005.

The decrease in the net interest margin for 2006 was primarily the result of the rising cost of deposits, stock repurchases, and a flattening and inversion of the yield curve. The flattened or inverted yield curve reduces our ability to price loan offerings and reprice existing loans and investments at interest rates that would allow us to increase the yield on the loan portfolio faster than the increase in the cost of funds, thus compressing the net interest margin. Stock repurchases reduce capital (which is non-interest bearing) by means of either borrowing (an interest bearing liability) or a reduction in an interest earning asset, thereby compressing the net interest margin.

Total Interest Income

Total interest income for 2006 increased $9.7 million, or 5.9%, to $173.9 million as compared to $164.2 million for 2005. The increase was primarily the result of the increased dollar amount of average loans and investments outstanding, and the increased average yield earned on the loan and investment portfolio in 2006.

Interest income on loans increased $10.6 million, or 9.9%, to $118.2 million as compared to $107.6 million for 2005. The increase was the result of increased average dollars outstanding in the portfolio and increased average yield earned on the loan portfolio. The one- to four-family mortgage loan portfolio increased $75.0 million, the construction and development loan portfolio increased $32.1 million in 2006, and the average yield on the total loan portfolio increased to 5.79% in 2006 from 5.46% in 2005.

Interest income on investment securities decreased $406,000, or 9.7%, as a result of decreased average investment securities outstanding partially offset by an increase in the average yield earned on those investments.

Interest income on mortgage-related securities decreased $1.7 million, or 3.3%, in 2006 as a result of decreased average mortgage-related securities outstanding, partially offset by an increase in the average yield on this portfolio. The decrease in the average portfolio outstanding was primarily the result of using the cash flows from those securities to fund loan portfolio growth, repay borrowings or to repurchase our shares. The increase in the average yield on the mortgage-related securities was the result of purchasing new mortgage-related securities at interest rates that were higher than the existing yield on the portfolio.

Interest income on interest-earning deposits (which includes federal funds sold) increased $1.1 million to $1.9 million in 2006 as a result of the increased dollar amount in federal funds and increased yield on those interest-earning deposits. At times throughout 2006, we increased short-term investments primarily in anticipation of paying off or reducing our borrowings or to fund loans.

Total Interest Expense

Total interest expense increased $21.9 million or 28.3% to $99.1 million for 2006 as compared to 2005. The increase was the result of growth in average deposits and increased average cost of deposits and borrowings. Average deposits increased $116.2 million in 2006. The average cost of deposits and borrowings were 3.52% in 2006 as compared to 2.79% in 2005.

Interest expense on deposits increased $19.4 million or 39.3% to $68.7 million for 2006 as compared to $49.3 million for 2005. The average cost of deposits for 2006 increased to 3.43% as compared to 2.61% for 2005. The Federal Reserve Federal Open Market Committee (“FOMC”) increased short term interest rates seventeen times

since June 2004 or a total of 4.25% through June 2006, after which time there have been no further increases. However during the same period, medium- and long-term interest rates stayed approximately the same causing short-term interest rates to be higher than the medium- and long-term interest rates. This is known as an inverted yield curve. This inversion has caused our deposit costs to increase substantially since most of deposits are priced from the short-term portion of the yield curve. In addition, competition has been strong for deposits with many competitors offering a premium interest rate to acquire deposits. This competition made us increase our offering deposit interest rates which increased our cost on those deposits.

Interest expense on borrowings increased $2.5 million or 8.9% to $30.4 million for 2006 as compared to $27.9 million for 2005. The increase was the result of increased average cost of borrowings throughout 2006 partially offset by a decrease in average borrowings outstanding. Average borrowings decreased in 2006 primarily because we repaid borrowings at times when it was economically advantageous for us to repay borrowings rather than to invest in investment securities or to originate loans. The average cost of borrowings increased in 2006 primarily as a result of increased market interest rates on new or refinanced borrowings.

Provision for Loan Losses

The provision for loan losses increased $91,000 in 2006 primarily as a result of increased non-performing loans.

The total allowance for losses at December 31, 2006 was $12.6 million, or 86.7% of nonperforming loans and 80.0% of nonperforming assets as compared to $12.1 million, or 207.2% of nonperforming loans and 184.8% of nonperforming assets at December 31, 2005. The increase was primarily the result of the $632,000 loan loss provision in 2006, reduced charge-offs, and modest growth in the loan portfolio. Net charge-offs for 2006 were $148,000 as compared to $2.4 million in 2005. The total loan loss allowance to total loans was 0.62% at December 31, 2006 as compared to 0.61% at the end of 2005.

Future provisions for loan losses will continue to be based upon our assessment of the overall loan portfolio and the underlying collateral, trends in nonperforming 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 inherent in the loan portfolio. 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 those portfolios 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 increased $127,000 or 0.7% to $17.6 million as compared to $17.4 million for 2005. The increase was primarily the result of increased service charges on deposits partially offset by decreased gains on the sale of investments and loans.

Service charges on deposits increased $1.3 million in 2006 primarily as a result of increased pricing of deposit service charges partially offset by a decrease in the number of checking accounts and an increased customer utilization of on-line banking and check cards. On-line banking and real time check card purchase authorizations have allowed customers to manage their accounts better and reduce their service charge fees.

Brokerage and insurance commissions decreased slightly in 2006 primarily as a result of decreased customer securities sales.

Loan fees and servicing revenue increased $186,000 in 2006 primarily as a result of decreased amortization of mortgage servicing rights. Amortization of mortgage servicing rights follows repayments or prepayments of the underlying loans so as prepayments decrease so will the amortization of mortgage servicing rights or vice-versa. There were no impairments to the mortgage servicing rights in 2006. Mortgage servicing rights normally become impaired from increased prepayments on mortgage loans which reduces the anticipated servicing fee income over the life of the loan.

Gains on the sale of investments decreased $1.1 million in 2006 as a result of decreased sales of equity securities.

Gains on the sales of loans decreased $731,000 in 2006 as a result of decreased fixed rate mortgage loan sales. Loan sales in 2006 were $89.5 million as compared to $143.7 million in 2005.

Other income increased $558,000 in 2006 primarily as the result of increased fees earned on check cards (debit cards), income on Bank owned life insurance (which we purchased an additional $25.0 million in December of 2006), and miscellaneous other income.

Noninterest Expense

Total noninterest expense increased $474,000 or 0.8% to $61.3 million in 2006 primarily as a result of increased other expenses.

Compensation expense decreased $205,000 in 2006 primarily as a result of the completion of vesting of grants under the 2001 Stock Incentive Plan (restricted stock) in 2006; and lack of annual bonus under the management incentive (“MIP”) in 2006. Also, in 2005, we incurred expense due to the accelerated vesting of restricted stock and compensation related to a bank officer’s disability and subsequent retirement, which did not recur in 2006. The management recognition plan expense in 2006 was $2.3 million as compared to $3.1 million in 2005. The MIP plan’s minimum threshold targets were not met in 2006 therefore, no MIP amount was expensed. In 2005, the MIP expense was $428,000. The accelerated vesting of restricted stock and compensation expense in 2005 was $417,000. Partially offsetting this decrease was an increase in stock option expense, in accordance with SFAS No. 123(R), of $582,000; an increase in health care costs; and an increase in funding of the retirement plan.

Occupancy and equipment expense decreased slightly in 2006 primarily as a result of a decrease in our data processing expense and a decrease in our equipment depreciation. These decreases were partially offset by the increased occupancy costs associated with adding two new offices in 2006.

Other expenses increased $721,000 or 6.0% in 2006 primarily as a result of an increase in write-offs of overdrafts on check cards, increased marketing expense and increased consulting expense. In 2006, we changed our overdraft policy on check cards which significantly improved our fees on overdrafts; however, it also increased the amount of write-offs on these accounts. The increase in write-offs in 2006 was $421,000. Marketing expense increased $288,000 in 2006 primarily as a result of increased competition for deposit and loans. Consulting expense increased approximately $220,000 primarily as a result of continuing costs associated with a loan and deposit pricing model and the payment of finders fees for newly hired investment real estate and commercial bankers.

Income Taxes

The effective tax rate for 2006 was 32.3%, as compared to an effective tax rate of 34.9% in 2005. In 2006, income tax expense was reduced by $812,000 primarily as a result of a refund of federal income taxes paid in prior years.

Bank owned life insurance income is permanently tax deferred if the policy is held to the participant’s death and other conditions are met. 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 and loans, 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 subsidiaries of Wisconsin banks. 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 Wisconsin banks; its audit of Bank Mutual, has not yet been concluded, is not being actively pursued, 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 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 Department 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 institutions in the state.

The Company has previously engaged in discussions with the Department and has asked the Department to consider some specific factors which the Company believes may distinguish it from many other institutions.

Depending upon the terms and circumstances or the outcome of potential litigation, 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, and that the Company would likely prevail against the Department should it attempt to tax the income of our Nevada subsidiaries in Wisconsin. However, we can provide no assurances of this result. We also may incur further costs in the future to address these issues.

Comparisons of Operating Results for Years Ended December 31, 2005 and 2004

General

Net income was $28.0 million for 2005 as compared to $29.6 million for 2004; however, diluted earnings per share increased to $0.43 for 2005 as compared to $0.38 for 2004. The decrease in net income was primarily the result of decreased net interest margin which reflects the cost of borrowings for stock repurchases and the rising cost of deposits. This earnings decrease was partially offset by an increase in interest income from the increase in the loan portfolio, a decrease in the provisions for loan loses and gains on the sale of investments and loans. Diluted earnings per share increased for 2005 as a result of stock repurchases.

Net Interest Income

Net interest income for 2005 decreased $3.4 million, or 3.8% to $87.0 million as compared to $90.4 million for 2004. Net interest income decreased primarily as the result of a decreased net interest margin. The net interest margin for 2005 was 2.62% as compared to 3.00% for 2004.

The decrease in the net interest margin for 2005 was primarily the result of the rising cost of deposits, stock repurchases, and a flattening yield curve. The flattening yield curve reduces our ability to price loan offerings and reprice existing loans at interest rates that would allow us to increase the yield on the loan portfolio faster than the increase in the cost of funds, thus compressing the net interest margin. Stock repurchases reduced capital by creation of an interest bearing liability or reduces an interest earning asset, thereby compressing the net interest margin.

Total Interest Income

Total interest income for 2005 increased $15.3 million, or 10.3%, to $164.2 million as compared to $148.9 million for 2004. The increase was primarily the result of the increased dollar amount of average loans and investments outstanding, and the average yield earned on the loan portfolio in 2005, partially offset by a decrease in the average yield on the mortgage-related securities portfolio.

Interest income on loans increased $10.2 million, or 10.5%, to $107.6 million as compared to $97.3 million for 2004. The increase was the result of increased average dollars outstanding in the portfolio and increased average yield earned on the loan portfolio. The one- to four-family mortgage loan portfolio increased $145.4 million in 2005 and the average yield on the total loan portfolio increased to 5.46% in 2005 from 5.41% in 2004.

Interest income on investment securities increased $212,000 or 5.4% as a result of increased average investment securities outstanding partially offset by a decrease in the average yield earned on those investments.

Interest income on mortgage-related securities increased $4.3 million or 9.0% in 2005 as a result of increased average mortgage-related securities outstanding, partially offset by a decrease in the average yield on this portfolio. The increase in the average portfolio outstanding was primarily the result of investing approximately $200.0 million in mortgage-related securities at the end of 2004. The decrease in the average yield on the mortgage-related securities portfolio was primarily a result of the reinvestment yield on new mortgage-related securities being at interest rates that were less than the existing yield on the portfolio.

Interest income on interest-earning deposits (which includes federal funds sold) increased $564,000 to $768,000 in 2005 as a result of the increased dollar amount in federal funds and increased yield on those interest-earning deposits. At times throughout 2005, short-term investments were increased primarily in anticipation of paying off or reducing a borrowing or to fund loans.

Interest Expense

Interest expense on deposits increased $7.2 million or 17.1% to $49.3 million for 2005 as compared to $42.1 million for 2004. The average cost of deposits for 2005 increased to 2.61% as compared to 2.23% for 2004, reflecting the FMOC’s continuing increase in short-term interest rates in late 2004 and throughout 2005. In addition, competition was strong for deposits with many competitors offering a premium interest rate to acquire deposits, which caused us to increase our deposit interest rates, which increased our cost on those deposits.

Interest expense on borrowings increased $11.5 million or 70.5% to $27.9 million for 2005 as compared to $16.3 million for 2004. The increase was the result of increased average borrowings outstanding throughout 2005. Average borrowings increased in 2005 primarily as a result of a two year $200.0 million borrowing in the fourth quarter of 2004. In the last quarter of 2005, we began to repay borrowings as seasonal loan demand decreased and the lack of investment opportunities with reasonable earning potential. The average cost of borrowings decreased in 2005 primarily as a result of reduced market interest rates which allowed new borrowings to be at reduced interest rates.

Provision for Loan Losses

The provision for loan losses decreased $789,000 in 2005 primarily as a result of a decrease in multi-family, commercial real estate, consumer and commercial business loan portfolios, all which have a higher risk than the one- to four-family mortgage loan portfolio. As a result of the reduced risk in the loan portfolio, this reduced risk allowed us to reduce our provision for loan losses. When the riskier components of the loan portfolio increase we will need to increase our provision for loan losses

The total allowance for losses at December 31, 2005 was $12.1 million, or 207.2% of nonperforming loans and 184.8% of nonperforming assets as compared to $13.9 million, or 222.1% of non performing loans and 176.5% of nonperforming assets at December 31, 2004. The decrease was primarily the result of a $2.1 million charge-off of a commercial business loan in the second quarter of 2005. The total loan loss allowance to total loans was 0.61% at December 31, 2005 as compared to 0.74% at the end of 2004.

Noninterest Income

Total noninterest income increased $1.3 million or 7.8% to $17.4 million as compared to $16.2 million for 2004. The increase was primarily the result of increased gains on the sales of investments.

Service charges on deposits increased $180,000 in 2005 primarily as a result of increased pricing of deposit service charges partially offset by a decrease in the number of checking accounts and an increased customer utilization of on-line banking and check cards. On-line banking and real time check card purchase authorizations have allowed customers to manage their accounts better and reduce their service charge fees.

Brokerage and insurance commissions decreased $405,000 in 2005 primarily as a result of decreased annuity sales. Interest rates on annuities increased more slowly than interest rates on deposits, thereby reducing the consumer demand for annuity products and our focus of having annuities purchased with non-Bank Mutual deposits.

Loan fees and servicing revenue decreased $266,000 in 2005 primarily as a result of a large prepayment fee on a construction and development loan in 2004. There were no impairments to the mortgage servicing rights in 2005. Mortgage servicing rights normally become impaired from increased prepayments on mortgage loans, which reduces the anticipated servicing fee income over the life of the loan.

Gains on the sale of investments increased $1.2 million in 2005 as a result of increased sales of equity securities.

Gains on the sales of loans increased $294,000 in 2005 as a result of increased fixed rate mortgage loan sales. Loan sales in 2005 were $143.7 as compared to $120.5 million in 2004.

In 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 third party, in which we maintain a 50% interest, to develop the land.

The loss on the retirement of debt in 2004 was a restructuring of $200.0 million of FHLB borrowing. We did not incur any prepayment penalties on debt restructuring in 2005.

Other income increased $447,000 in 2005 primarily as the result of increased fees earned on check cards (debit cards), income on Bank owned life insurance, and miscellaneous other income taxes.

Noninterest Expense

Total noninterest expense increased $755,000 or 1.3% to $60.8 million in 2005 primarily as a result of increased compensation expenses.

Compensation expense increased $1.5 million in 2005 primarily as a result of increased cost of management recognition plan (“MRP”) expense, retirement expense, health care expense and reduced deferral of loan origination cost. The MRP expense increased $965,000 in 2005 as a result of the issuance of 955,000 restricted shares in May 2004 pursuant to the 2004 Stock Incentive Plan and the accelerated vesting of restricted stock related to a bank officer’s disability and subsequent retirement. The accelerated vesting of restricted stock and compensation expense resulted in an additional $417,000 expense in 2005. Retirement expense increased approximately $200,000 in 2005 primarily as a result of the decreased investment interest rate used in the future value calculation on the assets in the retirement plan. Deferred loan origination cost (this is an offset to expense) decreased approximately $423,000 in 2005 as a result of reduced loan originations from our retail office network. Each loan that is originated by our retail office network has an incremental compensation and benefit cost deferral, and as loan originations decrease the incremental compensation and benefit cost deferral also decreases.

Occupancy and equipment expense decreased $271,000 primarily as a result of a write-off in 2004 of a portion of one of our existing offices which was replaced with a new office and reduced depreciation expense on equipment in 2005. A large number of desktop computers were purchased in 2002 and 2003 and became or are becoming fully depreciated. Partially offsetting these expenses are increases in office building depreciation and office equipment resulting from opening three new offices in 2005. We anticipate opening an additional three new offices in 2006, which will increase our occupancy and equipment expense.

Other expenses decreased $433,000 in 2005 as a result of a decrease in real estate owned expense and a decrease in numerous other expenses. The decrease in real estate owned expenses is primarily a result of the reduced operating cost of one commercial loan that had defaulted.

Income Taxes

The effective tax rate for 2005 was 34.9%, as compared to an effective tax rate of 34.6% in 2004.

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 2006, we began to pay off borrowings with some of the cash received from our securities portfolio and growth in the retail deposit portfolio.

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 2006, loan prepayments decreased because of the rising 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 were the purchase of mortgage-related securities, making and purchasing additional loans for the loan portfolio, and to a lesser extent, the purchase of investment securities. These 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, 2006, 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, 2006, Bank Mutual had a risk-based total capital ratio of 23.54% and a leverage ratio of 11.97%. See “Notes to Consolidated Financial Statements—Note 8. Shareholders’ Equity.” We believe that our relatively high capital levels, as compared to industry standards, provide us with the flexibility to increase leverage through borrowings, and to prudently repurchase shares, as we have with share repurchase programs in 2006 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 component of its 2004 and 2001 Stock Incentive Plans. See “Notes to Consolidated Financial Statements—Note 1. Summary of Significant Accounting Policies.” Shareholders’ equity decreased by $16.4 million of accumulated other comprehensive income, consisting primarily of net unrealized losses, net of taxes, on securities available-for-sale. Bank Mutual Corporation in 2006 repurchased 2,469,333 shares, for an aggregate of $27.8 million under its stock repurchase programs. Thus far in fiscal 2007, through February 28, 2007, we repurchased 2,049,000 shares of our common stock, for an aggregate of $24.3 million.

Cash and cash equivalents decreased $24.0 million during 2006 to $45.5 million at December 31, 2006. The Company provided $3.3 million from investing activities, primarily as a result of principal repayments on mortgage-related securities partially offset by purchases of mortgage-related securities, and an increase in the loan portfolio. The cash from operating activities of $9.8 million is primarily a result of our net income for the year, and non-cash expenses, offset by a net increase in other assets. Cash used by financing activities of $37.0 million resulted primarily from the repayments on long-term borrowings and repurchases of our stock, offset by net proceeds of the borrowings and an increase 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.

The following table presents, as of December 31, 2006, 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 In
			One to		Three to		Over
	One Year		Three		Five		Five
	Or Less		Years		Years		Years			Total
	(In thousands)
Deposits without a stated maturity (a)	$	727,585	$	—	$	—	$	—		$	727,585
Certificates of deposits (a)		1,243,485		157,496		30,075		—			1,431,056
Borrowed funds (a)		279,650		1,025		—		424,350	^(b)		705,025
Operating leases		1,171		1,691		965		1,308			5,135
Purchase obligations		2,160		4,320		720		—			7,200
Deferred retirement plans and deferred compensation plans		689		2,055		2,645		9,603			14,992


(a)		Excludes interest to be paid in the periods indicated.

(b)		Contains $370.0 million of borrowings that after an initial locked interest rate period of 6 months to 2 years, contain quarterly call features.

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, 2006. Further discussion of these commitments is included in the “Notes to the Consolidated Financial Statements – Note 13. Financial Instruments with Off-Balance Sheet Risk.”


	Payments Due In
			One to		Three to		Over
	One Year		Three		Five		Five
	Or Less		Years		Years		Years		Total
	(In thousands)
Commitments to extend credit:
Commercial	$	17,334	$	—	$	—	$	—	$	17,334
Residential real estate		25,888		—		—		—		25,888
Revolving home equity and credit card lines		156,378		—		—		—		156,378
Standby letters of credit		125				—		—		125
Commercial letters of credit		25,941		—		—		—		25,941
Unused commercial lines of credit		4,258		—		—		—		4,258
Net commitments to sell mortgage loans		10,031		—		—		—		10,031

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.

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.

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 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 bifurcated 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 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.

Quarterly Financial Information

The following table sets forth certain unaudited quarterly data for the periods indicated:


	Quarter Ended
	March 31		June 30		September 30		December 31
	(In thousands, except per share amounts)
2006
Interest income	$	41,638	$	43,618	$	44,498	$	44,117
Interest expense		22,230		24,105		25,591		27,165

Net interest income		19,408		19,513		18,907		16,952
Provision for loan losses		63		56		178		335

Net income after provision for loan losses		19,345		19,457		18,729		16,617
Total noninterest income		4,376		4,117		4,629		4,446
Total noninterest expense		15,463		15,090		15,429		15,329

Income before income taxes		8,258		8,484		7,929		5,734
Income taxes		2,892		3,005		2,814		1,097

Net income	$	5,366	$	5,479	$	5,115	$	4,637

Earnings per share — Basic	$	0.09	$	0.09	$	0.09	$	0.08

Earnings per share — Diluted	$	0.09	$	0.09	$	0.09	$	0.08

Cash dividend paid per share	$	0.07	$	0.07	$	0.075	$	0.075


2005
Interest income	$	39,958	$	40,968	$	41,591	$	41,693
Interest expense		16,806		18,650		20,332		21,443

Net interest income		23,152		22,318		21,259		20,250
Provision for loan losses		117		270		92		62

Net income after provision for loan losses		23,035		22,048		21,167		20,188
Total noninterest income		4,921		3,787		4,376		4,357
Total noninterest expense		15,990		14,887		15,012		14,948

Income before income taxes		11,966		10,948		10,531		9,597
Income taxes		4,077		3,750		3,619		3,570

Net income	$	7,889	$	7,198	$	6,912	$	6,027

Earnings per share — Basic	$	0.12	$	0.12	$	0.11	$	0.10

Earnings per share — Diluted	$	0.11	$	0.11	$	0.11	$	0.10

Cash dividend paid per share	$	0.06	$	0.06	$	0.065	$	0.065

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.”

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 with 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 state and local economies.

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 regulatory 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 been concentrated in 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, 20, and 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.

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, 2006, 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 $738.2 million. This represented a negative cumulative one-year interest rate sensitivity gap of 21.4%, and a ratio of interest-earning assets maturing or repricing within one year to interest-bearing liabilities maturing or repricing within one year of 64.1%.

The following table presents the amounts of our interest-earning assets and interest-bearing liabilities outstanding at December 31, 2006, 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.

Borrowings — based upon the earlier of call date or final maturity.


	At December 31, 2006
	Within			Three to			More Than			More Than			Over
	Three			Twelve			One Year -			Three Years -			Five
	Months			Months			Three Years			Five Years			Years			Total
	(Dollars in thousands)
Interest-earning assets:
Loans receivable:
Mortgage loans:
Fixed	$	37,294		$	90,144		$	204,764		$	97,578		$	132,446		$	562,226
Adjustable		104,853			351,829			349,546			181,563			3,968			991,759
Consumer loans		89,150			116,516			150,032			48,119			27,429			431,246
Commercial and industrial loans		9,161			18,239			20,480			3,591			585			52,056
Interest-earning deposits		1,022			—			—			—			—			1,022
Investment securities		49,218			—			—			—			—			49,218
Mortgage-related securities:
Fixed		70,310			206,750			355,931			150,424			178,315			961,730
Adjustable		126,903			—			—			—			—			126,903
Other interest-earning assets		45,876			—			—			—			—			45,876

Total interest-earning assets		533,787			783,478			1,080,753			481,275			342,743			3,222,036


Noninterest-bearing and interest- bearing liabilities:
Noninterest-bearing demand accounts		4,768			13,041			27,054			18,641			41,317			104,821
Interest-bearing liabilities:
Deposits:
Interest-bearing demand accounts		7,925			21,676			44,966			30,983			68,641			174,191
Savings accounts		10,574			28,323			55,775			35,840			69,504			200,016
Money market accounts		248,233			—			—			—			—			248,233
Time deposits		515,682			752,549			124,139			29,892			—			1,422,262
Advance payments by borrowers for taxes and insurance		—			2,199			—			—			—			2,199
Borrowings		325,205			125,288			202,964			2,158			49,410			705,025

Total interest-bearing liabilities		1,112,387			943,076			454,898			117,514			228,872			2,856,747

Interest rate sensitivity gap	$	(578,600	)	$	(159,598	)	$	625,855		$	363,761		$	113,871		$	365,289


Cumulative interest rate sensitivity gap	$	(578,600	)	$	(738,198	)	$	(112,343	)	$	251,418		$	365,289


Cumulative interest rate sensitivity gap as a percentage total assets		(16.76	)%		(21.38	)%		(3.25	)%		7.28	%		10.58	%
Cumulative interest-earning assets as a percentage of interest bearing liabilities		47.99	%		64.09	%		95.52	%		109.57	%		112.79	%

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.

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, 2006. 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 Equity
									as Percent of
	Present Value of Equity								Present Value of Assets
Change in	Dollar		Dollar			Percent			Present Value			Percent
Interest Rates	Amount		Change			Change			Ratio			Change
(Basis Points)	(Dollars in thousands)
+300	$	344,290	$	(223,767	)		(39.40	)%		11.04	%		(34.20	)%
+200		421,959		(146,098	)		(25.70	)		13.15			(21.60	)
+100		494,793		(73,264	)		(12.90	)		15.01			(10.50	)
0		568,057		—			—			16.77			—
-100		605,801		37,744			6.60			17.55			4.60
-200		599,015		30,958			5.40			17.10			2.00
-300		574,995		6,938			1.20			16.23			(3.30	)

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.

Item 8. Financial Statements and Supplementary Data

Report of Ernst & Young LLP, on Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of
Bank Mutual Corporation and Subsidiaries

We have audited the accompanying consolidated statements of financial condition of Bank Mutual Corporation and Subsidiaries (the “Company”) as of December 31, 2006 and 2005, 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, 2006. 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 Bank Mutual Corporation and Subsidiaries as of December 31, 2006 and 2005, the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, in 2006 the Company changed its method of accounting for stock-based compensation to adopt Statement of Financial Accounting Standards No. 123 (Revised), Share Based Payments, changed its method of accounting for pension plans to adopt Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, and adopted the provisions of Securities and Exchange Commission Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Bank Mutual Corporation and Subsidiaries’ internal control over financial reporting and management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2007 expressed an unqualified opinion on management’s assessment of internal control over financial reporting and an adverse opinion on the effectiveness of internal control over financial reporting.

/s/ Ernst & Young LLP

Milwaukee, Wisconsin
March 12, 2007

Bank Mutual corporation and Subsidiaries

Consolidated Statements of Financial Condition


	December 31
	2006			2005
	(In Thousands)
Assets
Cash and due from banks	$	44,438		$	41,543
Interest-earning deposits		1,022			27,872

Cash and cash equivalents		45,460			69,415
Securities available-for-sale, at fair value:
Investment securities		48,290			63,361
Mortgage-related securities		1,064,851			1,087,816
Loans held for sale		3,787			2,312
Loans receivable, net		2,024,325			1,990,492
Goodwill		52,570			52,570
Other intangible assets		3,089			3,750
Mortgage servicing rights		4,653			4,771
Other assets		204,360			156,890

	$	3,451,385		$	3,431,377


Liabilities and shareholders’ equity
Liabilities:
Deposits	$	2,158,641		$	2,086,822
Borrowings		705,025			765,796
Advance payments by borrowers for taxes and insurance		2,199			2,529
Other liabilities		49,223			29,513

		2,915,088			2,884,660

Minority interest in real estate development		2,518			2,343


Shareholders’ equity:
Preferred stock – $.01 par value:
Authorized– 20,000,000 shares in 2006 and 2005
Issued and outstanding – none in 2006 and 2005		–			–
Common stock – $.01 par value:
Authorized– 200,000,000 shares in 2006 and 2005
Issued – 78,783,849 shares in 2006 and 2005
Outstanding – 60,277,087 shares in 2006 and 62,325,268 in 2005		788			788
Additional paid-in capital		496,302			497,589
Retained earnings		273,454			269,913
Unearned ESOP shares		(3,066	)		(3,966	)
Accumulated other comprehensive income		(15,426	)		(17,346	)
Unearned deferred compensation		—			(6,955	)
Treasury stock – 18,506,762 shares in 2006 and 16,458,581 in 2005		(218,273	)		(195,649	)

Total shareholders’ equity		533,779			544,374

	$	3,451,385		$	3,431,377

See accompanying notes to consolidated financial statements.

Bank Mutual Corporation and Subsidiaries

Consolidated Statements of Income


	Year ended December 31
	2006		2005		2004
	(In Thousands, Except Per Share Amounts)
Interest income:
Loans	$	118,175	$	107,553	$	97,330
Investment securities		3,762		4,168		3,956
Mortgage-related securities		50,017		51,721		47,431
Interest-earning deposits		1,917		768		204

Total interest income		173,871		164,210		148,921

Interest expense:
Deposits		68,712		49,336		42,117
Borrowings		30,355		27,869		16,345
Advance payments by borrowers for taxes and insurance		24		26		36

Total interest expense		99,091		77,231		58,498

Net interest income		74,780		86,979		90,423
Provision for loan losses		632		541		1,330

Net interest income after provision for loan losses		74,148		86,438		89,093

Noninterest income:
Service charges on deposits		6,085		4,810		4,630
Brokerage and insurance commissions		2,400		2,470		2,875
Loan related fees and servicing revenue		1,550		1,364		1,590
Gain on sales of loans		1,132		1,863		1,569
Gain on sales of securities		694		1,785		537
Gain on sale of real estate		—		—		2,009
Loss on retirement of debt		—		—		(1,737	)
Other		5,707		5,149		4,702

Total noninterest income		17,568		17,441		16,175

Noninterest expenses:
Compensation, payroll taxes and other employee benefits		37,468		37,673		36,214
Occupancy and equipment		10,539		10,581		10,982
Amortization of other intangible assets		661		661		661
Other		12,643		11,922		12,225

Total noninterest expenses		61,311		60,837		60,082

Income before income taxes		30,405		43,042		45,186
Income taxes		9,808		15,016		15,632

Net income	$	20,597	$	28,026	$	29,554

Per share data:
Earnings per share – basic	$	0.35	$	0.44	$	0.39

Earnings per share – diluted	$	0.34	$	0.43	$	0.38

Cash dividends per share paid	$	0.29	$	0.25	$	0.18

See accompanying notes to consolidated financial statements.

Bank Mutual Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity


			Additional						Unearned
	Common		Paid-In			Retained			ESOP
	Stock		Capital			Earnings			Shares
	(In Thousands, Except Per Share Amounts)
Balances at January 1, 2004	$	788	$	495,990		$	241,958		$	(5,766	)
Comprehensive income:
Net income		—		—			29,554			—
Other comprehensive income
Change in net unrealized gain (loss) on securities available-for-sale, net of deferred income tax liability 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			—			901
Exercise 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	)
Comprehensive income:
Net income		—		—			28,026			—
Other comprehensive income
Change in net unrealized gain (loss) on securities available-for-sale, net of deferred income tax liability of $7,663		—		—			—			—
Minimum pension liability, net of deferred income tax benefit of $411		—		—			—			—
Total comprehensive income		—		—			—			—
Purchase of treasury stock		—		—			—			—
Committed ESOP shares		—		2,748			—			899
Exercise of stock options		—		(1,017	)		—			—
Amortization of deferred compensation		—		—			—			—
Cash dividends ($0.25 per share)		—		—			(16,223	)		—

Balances at December 31, 2005	$	788	$	497,589		$	269,913		$	(3,966	)
Impact of adoption of SAB No. 108		—		—			(1,101	)		—
Comprehensive income:
Net income		—		—			20,597			—
Other comprehensive income
Change in net unrealized gain (loss) on securities available-for-sale, net of deferred income tax benefit of $622		—		—			—			—
Pension asset, net of deferred income tax liability of $457		—		—			—			—
Total comprehensive income		—		—			—			—
Purchase of treasury stock		—		—			—			—
Committed ESOP shares		—		2,977			—			—
Exercise of stock options		—		(2,557	)		—			—
Share based payments		—		5,248			—			900
Impact of adoption of SFAS No. 123R		—		(6,955	)		—			—
Cash dividends ($0.29 per share)		—		—			(15,955	)		—

Balances at December 31, 2006	$	788	$	496,302		$	273,454		$	(3,066	)

Bank Mutual Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity


	Accumulated Other			Unearned
	Comprehensive			Deferred			Treasury
	Income (Loss)			Compensation			Stock			Total
	(In Thousands, Except Per Share Amounts)
Balances at January 1, 2004	$	149		$	(2,039	)	$	—		$	731,080
Comprehensive income:
Net income		—			—			—			29,554
Other comprehensive income
Change in net unrealized gain (loss) on securities available-for-sale, net of deferred income tax liability 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		—			—			—			24,561
Purchase of shares for the ESOP		—			—			(78,859	)		(78,859	)
Issuance of management recognition plan shares		—			(10,193	)		10,215			—
Committed ESOP Shares		—			—			—			3,701
Exercise of stock options		—			—			4,127			1,217
Amortization of deferred compensation		—			2,156			—			2,156
Cash dividends ($0.18 per share)		—			—			—			(13,402	)

Balances at December 31, 2004	$	(4,844	)	$	(10,076	)	$	(64,517	)	$	670,454
Comprehensive income:
Net income		—			—			—			28,026
Other comprehensive income
Change in net unrealized gain (loss) on securities available-for-sale, net of deferred income tax liability of $7,663		(13,116	)		—			—			(13,116	)
Minimum pension liability, net of deferred income tax benefit of $411		614			—			—			614

Total comprehensive income		—			—			—			15,524
Purchase of treasury stock		—			—			(134,542	)		(134,542	)
Committed ESOP shares		—			—			—			3,647
Exercise of stock options		—			—			3,410			2,393
Amortization of deferred compensation		—			3,121			—			3,121
Cash dividends ($0.25 per share)		—			—			—			(16,223	)

Balances at December 31, 2005	$	(17,346	)	$	(6,955	)	$	(195,649	)	$	544,374
Impact of adoption of SAB No. 108		—			—			—			(1,101	)
Comprehensive income:
Net income		—			—			—			20,597
Other comprehensive income
Change in net unrealized gain (loss) on securities available-for-sale, net of deferred income tax benefit of $622		1,214			—			—			1,214
Pension asset, net of deferred income tax liability of $457		706			—			—			706

Total comprehensive income		—			—			—			22,517
Purchase of treasury stock		—			—			(27,828	)		(27,828	)
Committed ESOP shares		—			—			—			2,977
Exercise of stock options		—			—			5,249			2,692
Share based payments		—			—			(45	)		6,103
Impact of adoption of SFAS No. 123R		—			6,955			—			—
Cash dividends ($0.29 per share)		—			—			—			(15,955	)

Balance at December 31, 2006	$	(15,426	)	$	—		$	(218,273	)	$	533,779

Bank Mutual Corporation and Subsidiaries

Consolidated Statements of Cash Flows


	Year ended December 31
	2006			2005			2004
	(In Thousands)
Operating activities:
Net income	$	20,597		$	28,026		$	29,554
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		632			541			1,330
Provision for depreciation		2,644			2,699			3,253
Amortization of other intangible assets		661			661			661
Net decrease (increase) in mortgage servicing rights		118			(228	)		156
Amortization of cost of stock benefit plans		9,080			6,768			5,857
Net (discount) premium amortization on securities		(826	)		144			355
Net increase in Federal Home Loan Bank stock		—			(10,351	)		(2,688	)
Loans originated for sale		(90,988	)		(141,048	)		(121,473	)
Proceeds from loan sales		90,645			145,586			122,111
Net gain on sale of available-for-sale securities		(694	)		(1,785	)		(537	)
Gain on sales of loans originated for sale		(1,132	)		(1,863	)		(1,569	)
Gain on sale of investment real estate		—			—			(2,009	)
Gain on sale of real estate owned		(33	)		(44	)		(19	)
Adoption of SAB 108		(1,101	)		—			—
Increase in other liabilities		26,616			14,049			5,166
Increase in other assets		(44,682	)		(12,941	)		(14,633	)
Increase in accrued interest receivable		(1,787	)		(369	)		(530	)

Net cash provided by operating activities		9,750			29,845			24,985

Investing activities:
Net purchases of investments in mutual funds		(264	)		(1,493	)		(968	)
Proceeds from maturities of investment securities		14,721			60,780			27,000
Purchases of investment securities		—			(55,428	)		(25,512	)
Purchases of mortgage-related securities		(198,460	)		(193,857	)		(523,334	)
Principal repayments on mortgage-related securities		224,693			352,866			302,848
Proceeds from sale of investment securities		702			1,804			537
Net increase in loans receivable		(35,894	)		(115,686	)		(159,892	)
Redemption of FHLB stock		2,661			—			—
Proceeds from sale of investment real estate		—			—			2,182
Proceeds from sale of foreclosed properties		737			1,341			3,223
Net purchases of premises and equipment		(5,581	)		(6,345	)		(2,029	)

Net cash provided (used) by investing activities		3,315			43,982			(375,945	)

Bank Mutual Corporation and Subsidiaries

Consolidated Statements of Cash Flows


	Year ended December 31
	2006			2005			2004
	(In Thousands)
Financing activities:
Net increase (decrease) in deposits	$	65,172		$	102,381		$	(68,767	)
Net (decrease) increase in short-term borrowings		(25,000	)		(87,600	)		287,600
Proceeds from long-term borrowings		398,075			110,232			406,446
Repayments on long-term borrowings		(433,846	)		(18,361	)		(232,012	)
Net decrease in advance payments by borrowers for taxes and insurance		(330	)		(267	)		(191	)
Proceeds from exercise of stock options		1,940			2,393			1,217
Excess tax benefit from exercise of stock options		752			—			—
Cash dividends		(15,955	)		(16,223	)		(13,402	)
Purchase of treasury stock		(27,828	)		(134,542	)		(78,859	)

Net cash (used) provided by financing activities		(37,020	)		(41,987	)		302,032

(Decrease) increase in cash and cash equivalents		(23,955	)		31,840			(48,928	)
Cash and cash equivalents at beginning of year		69,415			37,575			86,503

Cash and cash equivalents at end of year	$	45,460		$	69,415		$	37,575

Supplemental information:
Interest paid on deposits and borrowings	$	92,022		$	75,100		$	58,719
Income taxes paid		10,786			13,040			13,881
Loans transferred to foreclosed properties and repossessed assets		1,429			538			5,045
Issuance of management recognition plan shares		—			—			10,193

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(Dollars in Thousands, Except Per Share Amounts)

1. Summary of Significant Accounting Policies

Business

Bank Mutual Corporation (the “Company”), a Wisconsin corporation, is a federally-registered unitary savings and loan bank holding company which holds all of the outstanding shares of Bank Mutual, a federal savings bank (“Bank Mutual” or the “Bank”). The Company was formed in 2003 and is the successor to a federally-chartered corporation of the same name in a 2003 transaction in which the Company converted into a fully shareholder-owned corporation. All references to the Company refer to Bank Mutual Corporation both before and after that transaction.

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 have been prepared in accordance with accounting principles generally accepted in the United States. 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: BancMutual Financial & Investment Services, Inc. (f/k/a “Lake Financial and Insurance Services, Inc.”), Mutual Investment Corporation, MC Development Ltd., and First Northern Investments Inc. Significant intercompany accounts and transactions have been eliminated in consolidation. Bank Mutual also owns a 50% interest in two entities, Savings Financial Corporation, which is accounted for using the equity method, and Arrowood Development, LLC, which is a variable interest entity and is consolidated into the financial statements as required by FASB Interpretation No. 46 (Revised), “Consolidation of Variable Interest Entities” (“FIN 46”).

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. Under Regulation D, the Bank is required to maintain cash and reserve balances with the Federal Reserve Bank. The average amount of reserve balances for the years ended December 31, 2006 and 2005 was approximately $686 and $985, respectively.

Federal Home Loan Bank Stock

Stock of the Federal Home Loan Bank of Chicago (“FHLB”) is owned due to regulatory requirements and carried at cost, which is its redeemable value, and is included in Other Assets.

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 accumulated other comprehensive income in shareholders’ equity.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(Dollars in Thousands, Except Per Share Amounts)

1. Summary of Significant Accounting Policies (continued)

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 accretion or 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. Loans are shown net of the allowance for loan losses.

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 in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.”

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.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(Dollars in Thousands, Except Per Share Amounts)

1. Summary of Significant Accounting Policies (continued)

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 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 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.

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.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(Dollars in Thousands, Except Per Share Amounts)

1. Summary of Significant Accounting Policies (continued)

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 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.

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.

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 for basic EPS calculations. 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 also considered outstanding for basic EPS. Nonvested MRP and stock option shares are considered dilutive potential common shares 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.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(Dollars in Thousands, Except Per Share Amounts)

1. Summary of Significant Accounting Policies (continued)

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 of 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 from the 2001 Plan during the years ended December 31, 2006 and 2005. All outstanding MRPs under the 2001 Plan were fully vested by November 2006 and therefore no 2001 MRPs are outstanding at December 31, 2006. No further MRPs may be granted under the 2001 Plan.

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 and 4,400 shares were subsequently forfeited. The outstanding 2004 MRP grants had a fair value of $6,663 at December 31, 2006. The 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 $2,334 for the year ended December 31, 2006 and $3,121 for the year ended December 31, 2005. The remaining unamortized cost of the MRP is reflected as a reduction of additional paid-in capital.

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. All outstanding options under the 2001 Plan have now fully vested; no further options may be granted under the 2001 Plan. 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 which expire May 3, 2014. On July 5, 2006, options for an additional 50,000 shares were granted under the 2004 Plan at an exercise price of $12.234 per share which, expire July 5, 2016. Options granted under the 2004 Plan generally vest over five years from the date of grant.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(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, 2006, 2005 and 2004.


	For the Year Ended December 31
	2006				2005				2004
	Stock		Weighted		Stock		Weighted		Stock		Weighted
	Options		Avg. Cost		Options		Avg. Cost		Options		Avg. Cost
Outstanding at beginning of year		4,919,051	$	6.8170		5,276,953	$	6.5760		3,298,590	$	3.2056
Granted		50,000	$	12.2340		—		—		2,382,000	$	10.6730
Exercised		436,813	$	4.7236		354,702	$	3.2056		403,637	$	3.2056
Forfeited		7,000	$	10.6730		3,200	$	10.6730		—		—

Outstanding at end of year		4,525,238	$	7.0730		4,919,051	$	6.8170		5,276,953	$	6.5760


	At December 31, 2006
	Unexercisable Stock Options				Exercisable Stock Options
			Remaining
Price	Shares		Contractual Life		Shares		Exercise Price
$3.2056		—		—		2,192,238	$	3.2056
$10.6730		1,372,200	7.4 years			910,800	$	10.6730
$12.2340		50,000	9.5 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:


	2006			2005			2004
Risk-free interest rate		4.81 — 5.30	%		4.81 — 5.30	%		4.81 — 5.30	%
Dividend yield		2.00	%		2.00	%		2.00	%
Expected stock volatility		12.40 — 26.30	%		22.40 — 26.30	%		22.40 — 26.30	%
Expected years until exercise		3.00 — 7.25			4.00 — 8.25			5.00 — 9.25

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, therefore, changes in the subjective input assumptions can materially affect the fair value estimate.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(Dollars in Thousands, Except Per Share Amounts)

1. Summary of Significant Accounting Policies (continued)

On December 16, 2004, FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004) (“SFAS No. 123 (R)”), “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. Prior to 2006, the Company accounted for the stock options in accordance with APB Opinion 25’s intrinsic method, as allowed under SFAS No. 123, and, therefore, no compensation cost had been recognized in connection with stock options granted in any year prior to 2006. The Company adopted SFAS 123(R) using the modified prospective method effective January 1, 2006. Accordingly, the adoption of SFAS No. 123(R)’s fair value method reduced the Company’s 2006 net income by approximately $463.

SFAS 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 previous literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption.

Pursuant to SFAS No. 123 disclosure requirements, pro forma net income and basic and diluted 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 31
	2005		2004

Net income:
As reported	$	28,026	$	29,554
Pro forma	$	27,086	$	28,689
Basic earnings per share:
As reported	$	0.44	$	0.39
Pro forma	$	0.43	$	0.38
Diluted earnings per share:
As reported	$	0.43	$	0.38
Pro forma	$	0.42	$	0.37

Recent Accounting Changes

In November 2005, the FASB issued Staff Position FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP FAS 115-1”). FSP FAS 115-1 was issued to address the steps in determining when an investment is considered impaired, whether the impairment is other-than-temporary, and the measurement of an impairment loss. FSP FAS 115-1 discusses accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain quantitative and qualitative disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP FAS 115-1 clarifies that an investor should recognize an impairment loss when the impairment loss is deemed other-than-temporary, even if the decision to sell has not been made. FSP FAS 115-1 replaces the impairment evaluation guidance set forth in paragraphs 10-18 of Emerging Issues Task Force Issue No. 03-1 (“EITF 03-1”) and amends existing other-than-temporary impairment guidance, including that provided in FASB Statement No. 115,

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(Dollars in Thousands, Except Per Share Amounts)

1. Summary of Significant Accounting Policies (continued)

“Accounting for Debt and Equity Securities,” and APB 18, “The Equity Method of Accounting for Investments in Common Stock.” FSP FAS 115-1 was effective for reporting periods beginning after December 15, 2005. In addition to the guidance under FSP FAS 115-1, the disclosure requirements under EITF 01-1 remain in effect. FSP FAS 115-1 was adopted January 1, 2006 and it did not have a material impact on the Company’s financial position, results of operations, or liquidity.

In July, 2006, FASB issued its final interpretation on, “Accounting for Uncertain Tax Positions – an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies and prescribes a threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The FASB interpretation is effective for fiscal years beginning after December 15, 2006. The Company has not completed the process of evaluating the effect that will result from adopting FIN 48. The Company is therefore unable to disclose the effects that adopting FIN 48 will have on the Company’s financial position, results of operations, or liquidity. The Company will adopt FIN 48 effective January 1, 2007.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”), which provides guidance regarding the process of quantifying financial misstatements and addresses the diversity in practice in quantifying financial statement misstatements and the potential under current practices for the build up of improper amounts on the balance sheet.

The techniques most commonly used in practice to accumulate and quantify misstatements are generally referred to as “rollover” and “iron curtain” approaches. The rollover approach quantifies a misstatement based on the amount of the error originating in the current year income statements. This approach ignores the effect of correcting the portion of the current year balance sheet misstatement that originated in prior years. The iron curtain approach quantifies a misstatement based on the effects of correcting the misstatement existing on the balance sheet at the end of the current year, irrespective of the misstatement’s year(s) of origination. This approach ignores the effect on the current period income statements.

The SEC staff has indicated in SAB No. 108 that it does not believe that the exclusive reliance on either the rollover or iron curtain approach appropriately quantifies all misstatements that could be material to users of financial statements. The staff believes registrants must quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements on the current year financial statements. The staff believes that this can be accomplished by quantifying an error under both the rollover and iron curtain approaches as described above and by evaluating the error measured under each approach. Application of the guidance is required beginning with the first fiscal year ending after November 15, 2006. The Company adopted SAB No. 108 on December 31, 2006. See Note 16 for the impact of SAB No. 108 on the Company’s consolidated financial statements.

On September 15, 2006, FASB issued SFAS No. 157 “Fair Value Measurements” which gives guidance for using fair value to measure assets and liabilities and expands disclosures about the use of fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company has not completed the process of evaluating SFAS No. 157 and is therefore unable to disclose the effects that adopting Statement No. 157 will have on the Company’s financial position, results of operations or liquidity.

On September 29, 2006, FASB issued SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” which requires a company to: (a) recognize in its statement of financial condition an asset for a defined benefit postretirement plan’s over funded status or a liability for a plan’s underfunded status; (b) measure a defined benefit postretirement plan’s assets and obligations that determine its funded status as of the end of the employers’ fiscal year; and (c) recognize changes in the funded status of a defined benefit postretirement plan

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(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			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

At December 31, 2006:
Investment securities:
Mutual funds	$	47,775	$	—	$	(1,183	)	$	46,592
Stock in federal agencies		1,442		256		—			1,698

Total investment securities		49,217		256		(1,183	)		48,290
Mortgage-related securities:
Federal Home Loan Mortgage Corporation		453,452		89		(12,137	)		441,404
Federal National Mortgage Association		382,197		779		(9,582	)		373,394
Private placement CMOs		209,659		182		(1,939	)		207,902
Government National Mortgage Association		43,325		7		(1,181	)		42,151

Total mortgage-related securities		1,088,633		1,057		(24,839	)		1,064,851

Total	$	1,137,850	$	1,313	$	(26,022	)	$	1,113,141

The following schedule identifies securities by time in which the securities had a gross unrealized loss.


	Less than 12 months							Greater than 12 months
	In an unrealized loss position							In an unrealized loss position
															Total			Total
	Unrealized							Unrealized			Number		Estimated		Unrealized			Estimated
	Loss			Number		Estimated		Loss			of		Fair		Loss			Fair
	Amount			of Securities		Fair Value		Amount			Securities		Value		Amount			Value

Investment securities:
Mutual funds	$	(2	)		1	$	706	$	(1,181	)		2	$	45,886	$	(1,183	)	$	46,592

Total investment securities		(2	)		1		706		(1,181	)		2		45,886		(1,183	)		46,592
Mortgage-related securities:
Federal Home Loan Mortgage Corporation		(82	)		2		15,302		(12,055	)		111		401,030		(12,137	)		416,332
Federal National Mortgage Association		(1	)		5		550		(9,581	)		81		304,033		(9,582	)		304,583
Government National Mortgage Association		—			—		—		(1,181	)		10		41,468		(1,181	)		41,468
Private placement CMOs		(222	)		7		62,842		(1,717	)		17		104,253		(1,939	)		167,095

Total mortgage-related securities		(305	)		14		78,694		(24,534	)		219		850,784		(24,839	)		929,478

Total	$	(307	)		15	$	79,400	$	(25,715	)		221	$	896,670	$	(26,022	)	$	976,070

The Company does not believe any individual unrealized loss as of December 31, 2006 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 3% or less of their respective amortized cost basis. The Company has the intent and ability to hold the securities contained in the previous table for the time necessary to recover the amortized cost.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(Dollars in Thousands, Except Per Share Amounts)

2. Securities, Available-for-Sale (continued)


			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

At December 31, 2005:
Investment securities:
U.S. government and federal agency obligations	$	14,720	$	—	$	(135	)	$	14,585
Mutual funds		47,512		—		(1,104	)		46,408
Stock in federal agencies		1,450		918		—			2,368

Total investment securities		63,682		918		(1,239	)		63,361
Mortgage-related securities:
Federal Home Loan Mortgage Corporation		506,116		155		(12,966	)		493,305
Federal National Mortgage Association		419,552		915		(10,831	)		409,636
Private Placement CMOs		124,335		—		(2,033	)		122,302
Government National Mortgage Association		64,037		8		(1,472	)		62,573

Total mortgage-related securities		1,114,040		1,078		(27,302	)		1,087,816

Total	$	1,177,722	$	1,996	$	(28,541	)	$	1,151,177

The amortized cost and fair values of securities by contractual maturity at December 31, 2006, are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay obligations with or without call or prepayment penalties.


	Amortized		Fair
	Cost		Value

Due in one year or less	$	—	$	—
Due after one year through five years		—		—
Due after five years through ten years		—		—
Mutual funds		47,775		46,592
Stock in federal agencies		1,442		1,698
Mortgage-related securities		1,088,633		1,064,851

	$	1,137,850	$	1,113,141

The following table summarizes the adjustment to other comprehensive income and the related tax effect for securities available-for-sale for each of the three years ended December 31:


	2006		2005			2004

Change in unrealized holding gain (loss) on available-for-sale securities during the period
Unrealized net gains (losses)	$	1,836	$	(20,779	)	$	(5,837	)
Related tax expense (benefit)		622		(7,663	)		(2,036	)

Change in other comprehensive income	$	1,214	$	(13,116	)	$	(3,801	)

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(Dollars in Thousands, Except Per Share Amounts)

2. Securities, Available-for-Sale (continued)

Investment securities with a fair value of approximately $40,138 and $170,778 at December 31, 2006 and 2005, were pledged to secure deposits, borrowings and for other purposes as permitted or required by law.

3. Loans Receivable

Loans receivable consist of the following:


	December 31
	2006			2005

Mortgage loans:
One-to-four family	$	1,123,905		$	1,048,881
Multifamily		157,768			155,908
Commercial real estate		167,089			175,090
Construction and development		187,323			155,205

Total mortgage real estate loans		1,636,085			1,535,084
Consumer and other loans:
Fixed equity		227,811			246,460
Home equity lines of credit		91,730			88,266
Student		20,404			19,821
Home improvement		33,287			30,067
Automobile		46,752			69,237
Other		11,262			12,944

Total consumer and other loans		431,246			466,795
Total commercial business loans		52,056			57,247

Total loans receivable		2,119,387			2,059,126
Less:
Undisbursed loan proceeds		85,897			60,014
Allowance for loan losses		12,574			12,090
Unearned loan fees and discounts		(3,409	)		(3,470	)

		95,062			68,634

Total loans receivable – net	$	2,024,325		$	1,990,492

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, 2006 were $14,497 and at December 31, 2005, were $5,347.

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


	Year ended December 31
	2006			2005			2004

Balance at beginning of year	$	12,090		$	13,923		$	13,771
Provisions		632			541			1,330
Charge-offs		(367	)		(2,431	)		(1,253	)
Recoveries		219			57			75

Balance at end of year	$	12,574		$	12,090		$	13,923

The unpaid principal balance of loans serviced for others was $676,319, $657,270, and $620,055 at December 31, 2006, 2005 and 2004, respectively. These loans are not reflected in the consolidated financial statements.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(Dollars in Thousands, Except Per Share Amounts)

3. Loans Receivable (continued)

A loan is considered impaired when, in management’s judgment, it becomes probable that all contractual principal and interest will not be collected. The following table presents data on impaired loans:


	December 31
	2006		2005

Impaired loans for which an allowance has been provided	$	14,920	$	7,280
Impaired loans for which no allowance has been provided		2,338		2,430

Total loans determined to be impaired	$	17,258	$	9,710

Allowance for loan losses related to impaired loans	$	2,672	$	2,392


	Year ended December 31
	2006		2005		2004

Average recorded investment in impaired loans	$	6,507	$	10,141	$	8,706

Cash basis interest income recognized from impaired loans	$	179	$	233	$	293

4. Goodwill, Other Intangible Assets and Mortgage Servicing Rights

Goodwill is not amortized but is subject to impairment tests on at least an annual basis. No goodwill impairments were determined in 2006, 2005 or 2004. The carrying value of goodwill for 2006, 2005, and 2004 was $52,570.

Deposit base intangibles had a carrying amount and a value net of accumulated amortization of $3,089 at December 31, 2006.

The carrying amount of mortgage servicing rights net of accumulated amortization and the associated valuation allowance at December 31, 2006 is presented in the following table.


	2006			2005			2004

Mortgage servicing rights at beginning of year	$	4,771		$	4,542		$	4,698
Additions		1,040			1,777			1,529
Amortization		(1,158	)		(1,548	)		(1,685	)

Mortgage servicing rights at end of year		4,653			4,771			4,542
Valuation allowance		—			—			—

Balance	$	4,653		$	4,771		$	4,542

In 2006 and 2005, there were no permanent impairments.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(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, 2006. 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:


	Mortgage
	Servicing		Deposit Base
	Rights		Intangibles		Total

Twelve months ended December 31, 2006 (actual)	$	1,158	$	661	$	1,819

Estimate for year ending December 31,
2007	$	837	$	661	$	1,498
2008		837		618		1,455
2009		836		405		1,241
2010		827		405		1,232
2011		635		405		1,040
Thereafter		681		595		1,276

	$	4,653	$	3,089	$	7,742

5. Other Assets

Other Assets are summarized as follows:


	December 31
	2006		2005

Accrued interest:
Mortgage-related securities	$	4,207	$	4,014
Investment securities		12		117
Loans receivable		9,288		7,589

Total accrued interest		13,507		11,720
Foreclosed properties and repossessed assets		1,231		708
Premises and equipment		50,515		47,588
Federal Home Loan Bank stock, at cost		45,876		48,537
Bank owned life insurance		46,430		20,359
Prepaid and other		46,801		27,978

	$	204,360	$	156,890

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(Dollars in Thousands, Except Per Share Amounts)

5. Other Assets (continued)

Foreclosed properties and repossessed assets are summarized as follows:


	December 31
	2006		2005

Acquired by foreclosure or in lieu of foreclosure	$	1,222	$	702
Repossessed collateral		9		6

	$	1,231	$	708

Premises and equipment are summarized as follows:


	December 31
	2006		2005

Land and land improvements	$	15,577	$	14,451
Office buildings		47,405		44,614
Furniture and equipment		17,643		16,225
Leasehold improvements		944		944

		81,569		76,234
Less accumulated depreciation and amortization		31,054		28,646

	$	50,515	$	47,588

Depreciation expense for 2006, 2005, and 2004 was $2,644, $2,699, and $3,253, respectively.

Bank Mutual leases various branch offices, office facilities and equipment under noncancelable operating leases which expire on various dates through 2018. 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, 2006:


2007	$	1,171
2008		928
2009		763
2010		574
2011		391
Thereafter		1,308

Total	$	5,135

Rental expenses totaled $886, $873, and $931 for 2006, 2005 and 2004, respectively.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(Dollars in Thousands, Except Per Share Amounts)

6. Deposits

Deposits are summarized as follows:


	December 31
	2006		2005

Checking accounts:
Noninterest-bearing	$	104,821	$	110,583
Interest-bearing		174,206		174,620

		279,027		285,203

Money market accounts		248,542		271,418
Savings accounts		200,016		224,408

Certificate accounts:
Due within one year		1,243,485		718,634
After one but within two years		82,273		453,386
After two but within three years		75,223		45,496
After three but within four years		20,889		66,397
After four but within five years		9,186		21,880
After five years		—		—

		1,431,056		1,305,793

	$	2,158,641	$	2,086,822

The aggregate amount of certificate accounts with balances of one hundred thousand dollars or more is approximately $259,790 and $189,106 at December 31, 2006 and 2005, respectively.

Interest expense on deposits was as follows:


	Year ended December 31
	2006		2005		2004

Interest-bearing checking accounts	$	351	$	369	$	359
Money market accounts		7,620		5,548		3,301
Savings accounts		923		1,048		1,084
Certificate accounts		59,818		42,371		37,373

	$	68,712	$	49,336	$	42,117

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(Dollars in Thousands, Except Per Share Amounts)

7. Borrowings

Borrowings consist of the following:


	December 31
	2006					2005
			Weighted-					Weighted-
			Average					Average
	Balance		Rate			Balance		Rate

Federal Home Loan Bank advances maturing:
2006	$	—		—		$	607,955		3.35	%
2007		279,650		4.79	%		104,650		4.08
2008		1,025		5.90			1,025		5.90
2009		—		—			—		—
2010		—		—			—		—
Thereafter		424,350		4.24			52,166		5.18
Open-line of credit		—		—			—		—
Other borrowings		—		—			—		—

	$	705,025				$	765,796

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; twenty (20) times the FHLB capital stock owned by Bank Mutual; the total of 60% of the book value of certain multi-family mortgage loans and 75% of the book value of one- to four-family mortgage loans; and 97% of certain mortgage-related securities.

Bank Mutual has a $5.0 million line of credit with another financial institution. At December 31, 2006 and 2005, 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.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(Dollars in Thousands, Except Per Share Amounts)

8. Shareholders’ Equity (continued)

Quantitative measures established by federal regulation to ensure capital 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, 2006, that Bank Mutual met all capital adequacy requirements.


											To Be Well Capitalized
						For Capital					Under Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Bank Mutual
As of December 31, 2006:
Total capital (to risk-weighted assets)	$	421,112		24.27	%	$	138,817		8.00	%	$	173,521		10.00	%
Tier 1 capital (to risk-weighted assets)		408,538		23.54			69,408		4.00			104,113		6.00
Tier 1 capital (to average assets)		408,538		11.97			136,559		4.00			170,699		5.00

Bank Mutual
As of December 31, 2005:
Total capital (to risk-weighted assets)	$	421,835		24.96	%	$	135,188		8.00	%	$	168,985		10.00	%
Tier 1 capital (to risk-weighted assets)		409,745		24.25			67,594		4.00			101,391		6.00
Tier 1 capital (to average assets)		409,745		12.07			135,829		4.00			169,786		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.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(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 Mutual
	Risk-			Tier I
	Based			(Core)
	Capital			Capital

As of December 31, 2006:
Equity per bank records	$	451,298		$	451,298
Unrealized gains on investments		15,553			15,553
FAS 158 adjustment reversal		(127	)		(127	)
Goodwill and intangibles		(54,420	)		(54,420	)
Investment in “nonincludable” subsidiaries		(3,487	)		(3,487	)
Disallowed servicing assets		(279	)		(279	)
Allowance for loan losses		12,574			—

Regulatory capital	$	421,112		$	408,538

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 31
	2006		2005		2004

Basic earnings per share
Net income	$	20,597	$	28,026	$	29,554

Weighted average shares outstanding		58,710,159		62,238,425		74,672,199
Allocated ESOP shares during the period		327,493		327,194		327,194
Vested MRP shares during the period		277,996		428,305		328,384

		59,315,648		62,993,924		75,327,777


Basic earnings per share	$	0.35	$	0.44	$	0.39


Diluted earnings per share
Net income	$	20,597	$	28,026	$	29,554


Weighted average shares outstanding used in basic earnings per share		59,315,648		62,993,924		75,327,777
Net dilutive effect of:
Stock option shares		1,625,082		1,747,484		1,958,592
Unvested MRP shares		58,881		135,009		292,133

		60,999,611		64,876,417		77,578,502


Diluted earnings per share	$	0.34	$	0.43	$	0.38

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(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 $144 in 2006, $146 in 2005, and $159 in 2004.

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.

Adoption of Statement No. 158

On December 31, 2006, the Company adopted the recognition and disclosure provisions of Statement No. 158. Statement No. 158 required the Company to recognize the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of its pension plan in the December 31, 2006 statement of financial position, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The adjustment to accumulated other comprehensive income at adoption represents the net unrecognized actuarial losses, unrecognized prior service costs, and unrecognized transition obligation remaining from the initial adoption of Statement No. 87, all of which were previously netted against the plan’s funded status in the Company’s statement of financial position pursuant to the provisions of Statement No. 87. These amounts will be subsequently recognized as net periodic pension cost pursuant to the Company’s historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic pension cost in the same periods will be recognized as a component of other comprehensive income. Those amounts will be subsequently recognized as a component of net periodic pension cost on the same basis as the amounts recognized in accumulated other comprehensive income at adoption of Statement No. 158.

The incremental effects of adopting the provisions of Statement No. 158 on the Company’s statement of financial position at December 31, 2006 are presented in the following table. The adoption of Statement No. 158 had no effect on the Company’s consolidated statement of income for the year ended December 31, 2006, or for any prior period presented, and it will not materially effect the Company’s operating results in future periods. Had the Company not been required to adopt Statement No. 158 at December 31, 2006, it would have recognized an additional minimum liability pursuant to the provisions of Statement No. 87. The effect of recognizing the additional minimum liability is included in the table below in the column labeled “Prior to Application to Statement No. 158.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(Dollars in Thousands, Except Per Share Amounts)

10. Employee Benefit Plans (continued)

The overfunded status of the qualified plan of $1,134 at December 31, 2006 is recognized in the accompanying statement of financial position as prepaid pension expense. No plan assets are expected to be returned to the Company during the fiscal year ended December 31, 2007.

The following tables set forth the defined benefit pension plan’s funded status and net periodic benefit cost:


	Qualified						Supplemental
	Pension Plan						Pension Plan
	2006			2005			2006			2005

Change in Benefit Obligation
Benefit obligation at beginning of year	$	23,682		$	20,831		$	6,694		$	6,245
Service cost		1,888			1,779			170			158
Interest cost		1,289			1,237			360			367
Actuarial loss (gain)		(1,387	)		1,522			(230	)		(1,128	)
Amendments		—			(1,175	)		—			1,175
Benefits paid		(641	)		(512	)		(298	)		(123	)

Benefit obligation at end of year	$	24,831		$	23,682		$	6,696		$	6,694


Change in Plan Assets
Fair value of plan assets at beginning of year	$	25,558		$	24,836		$	—		$	—
Actual return on plan assets		1,048			797			—			—
Employer contributions		—			437			297			123
Benefits paid		(641	)		(512	)		(297	)		(123	)

Fair value of plan assets at end of year		25,965			25,558			—			—

Funded status at the end of the year	$	1,134		$	1,876		$	(6,696	)	$	(6,694	)

Accumulated Benefit Obligations

The accumulated benefit obligations for the defined benefit pension plan were $22,128 and $20,841 at October 31, 2006 and 2005, respectively.


	2006			2005

Weighted-average assumptions used in cost calculations:
Discount rate		6.00	%		5.50	%
Rate of increase in compensation levels		3.50	%		3.50	%
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.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(Dollars in Thousands, Except Per Share Amounts)

10. Employee Benefit Plans (continued)

Using an actuarial measurement date of October 31, components of net periodic benefit cost follow:


	2006			2005			2004

Qualified Pension Plan
Service cost	$	1,887		$	1,779		$	1,518
Interest cost		1,289			1,236			1,114
Actual return on plan assets		(1,048	)		(797	)		(1,964	)
Amortization of prior service cost		30			(1,121	)		59
Asset gain (loss)		(724	)		(926	)		576

Net periodic cost	$	1,434		$	171		$	1,303

Supplemental Pension Plan
Service cost	$	170		$	159		$	141
Interest cost		360			367			280
Amortization of prior service cost		70			1,244			70
Amortization of gain from prior period		—			261			—

Net periodic cost	$	600		$	2,031		$	491

Pension plan assets which consist primarily of immediate participation guarantee contracts with an insurance company are actively managed by investment professionals.

At December 31, 2006, the projected benefit payments for each of the plans are as follows:


	Qualified		Supplemental
	Plan		Plan		Total

2007	$	614	$	375	$	989
2008		739		766		1,505
2009		887		766		1,653
2010		1,044		766		1,810
2011		1,200		766		1,966
2012 – 2016		8,948		3,261		12,209

	$	13,432	$	6,700	$	20,132

The Company values its pension plan annually at October 31. As discussed in Note 1, SFAS No. 158 will require the measurement of plan assets and benefit obligation as of the date of the fiscal year-end beginning for fiscal years ending after December 15, 2008. The pension plan weighted-average asset allocations at October 31, 2006 and 2005, by asset category are as follows:


	At October 31
	2006			2005

Asset Category-Qualified Plan
Equity securities		7.7	%		6.1	%
Immediate participation guarantee contracts		92.3			93.9


Total		100.0	%		100.0	%

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(Dollars in Thousands, Except Per Share Amounts)

10. Employee Benefit Plans (continued)

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 2007 contribution will be determined based on a number of factors, including the results of the Actuarial Valuation Report as of January 1, 2007. At this time, the amount of the 2007 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. All 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, a bank acquired in October of 2000, also had supplemental retirement plans for several executives. Total expense relating to these plans for the year ended December 31, 2006 and 2005 was $119 and $161, respectively.

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, 2001, the ESOP borrowed an additional $8,362 and purchased an additional 3,037,600 shares. In January 2002, 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. ESOP expense for the year ended December 31, 2006 was $3,877; for the year ended December 31, 2005 was $3,640; and for the year ended December 31, 2004 was $3,695.

The following table summarizes shares of Company common stock held by the ESOP at December 31.


	2006		2005		2004

Shares allocated to participants in fiscal year		327,493		327,194		327,194
Unallocated and unearned shares		1,107,927		1,435,420		1,762,614
Fair value of unearned ESOP shares	$	13,417	$	15,215	$	21,451

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(Dollars in Thousands, Except Per Share Amounts)

12. Income Taxes

The provision for income taxes consists of the following:


	Year ended December 31
	2006			2005			2004

Current:
Federal	$	11,518		$	13,968		$	14,269
State		84			96			400

		11,602			14,064			14,669
Deferred expense (benefit):
Federal		(1,789	)		954			976
State		(5	)		(2	)		(13	)

		(1,794	)		952			963

	$	9,808		$	15,016		$	15,632

For state income tax purposes, certain subsidiaries have net operating loss carryovers of $25,840 available to offset against future income. The carryovers expire in the years 2007 through 2021 if unused.

The income tax provision differs from the provision computed at the federal statutory corporate rate as follows:


	Year ended December 31
	2006			2005			2004

Income before provision for income taxes	$	30,405		$	43,042		$	45,186

Tax expense at federal statutory rate	$	10,642		$	15,065		$	15,815
Increase (decrease) in taxes resulting from:
State income taxes – net of federal tax benefit		51			87			291
Bank Owned Life insurance		(399	)		(362	)		(382	)
Executive compensation in excess of Section 162(m) limit		376			350			—
Tax returns and reserve adjustment for uncertain tax provisions		(930	)		—			—
Other		68			(124	)		(92	)

Provision for income taxes	$	9,808		$	15,016		$	15,632

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.

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(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 31
	2006		2005

Unused consumer lines of credit	$	156,378	$	153,133
Unused commercial lines of credit		25,941		16,523
Commitments to extend credit:
Fixed rate		19,891		18,569
Adjustable rate		23,330		49,380
Undisbursed commercial loans		4,258		5,930

Forward commitments to sell mortgage loans of $10,031 at December 31, 2006, 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, 2005 were $3,943.

100

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(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 value for demand deposits equal book value. Fair values for other deposits are estimated using a discounted cash flow calculation that applies current market borrowing interest rates to a schedule of aggregated expected monthly maturities on deposits. The advance payments by borrowers for taxes and insurance are equal to their carrying amounts at the reporting date.

101

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(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 31
	2006				2005
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value

Cash and cash equivalents	$	45,460	$	45,460	$	41,543	$	41,543
Investment and mortgage-related securities		1,113,141		1,113,141		1,151,177		1,151,177
Loans receivable, net		2,024,325		2,014,996		1,990,492		1,972,640
Loans held for sale		3,787		3,787		2,312		2,312
Mortgage servicing rights		4,653		7,340		4,771		7,527
Federal Home Loan Bank stock		45,876		45,876		48,537		48,537
Accrued interest receivable		13,507		13,507		11,720		11,720
Deposits and accrued interest		2,158,641		2,085,299		2,086,822		2,044,991
Advance payments by borrowers		2,199		2,199		2,529		2,529
Borrowings		705,025		701,958		765,796		758,428

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.

102

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(Dollars in Thousands, Except Per Share Amounts)

15. Condensed Parent Company Only Financial Statements

STATEMENT OF FINANCIAL CONDITION


	December 31
	2006			2005

Assets:
Cash and cash equivalents	$	58,403		$	76,958
Investment in subsidiaries		451,299			451,600
Due from subsidiaries		19,359			12,506
Receivable from ESOP		3,047			3,947
Other assets		1,671			6

	$	533,779		$	545,017

Liabilities and shareholders’ equity:
Liabilities:
Other liabilities	$	—		$	643

Shareholders’ equity:
Preferred stock — $.01 par value Authorized– 20,000,000 shares in 2006 and 2005 Issued and outstanding – none in 2006 and 2005		—			—
Common stock – $.01 par value:
Authorized – 200,000,000 shares in 2006 and 2005 Issued – 78,783,849 shares in 2006 and 2005 Outstanding – 60,277,087 in 2006 and 62,325,268 shares in 2005		788			788
Additional paid-in capital		496,302			497,589
Retained earnings		273,454			269,913
Unearned ESOP shares		(3,066	)		(3,966	)
Accumulated other comprehensive income		(15,426	)		(17,346	)
Unearned deferred compensation		—			(6,955	)
Treasury stock – 18,506,762 shares in 2006 and 16,458,581 shares in 2004		(218,273	)		(195,649	)

Total shareholders’ equity		533,779			544,374

	$	533,779		$	545,017

103

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(Dollars in Thousands, Except Per Share Amounts)

15. Condensed Parent Company Only Financial Statements (continued)

STATEMENT OF INCOME


	Year ended December 31
	2006		2005		2004

Interest income	$	2,290	$	1,854	$	2,735
Equity in earnings of subsidiaries		20,080		27,754		28,394
Gain on sale of investments		—		—		537
Other		40		—		5

Total income		22,410		29,608		31,671

Total expenses		1,466		1,399		1,335

Income before provision for income taxes		20,944		28,209		30,336
Provision for income taxes		347		183		782

Net income	$	20,597	$	28,026	$	29,554

STATEMENT OF CASH FLOWS


	Year ended December 31
	2006			2005			2004

Operating activities:
Net income	$	20,597		$	28,026		$	29,554
Adjustment to reconcile net income to net cash provided by (used in) operating activities:
Equity in earnings of subsidiaries		(20,080	)		(27,754	)		(28,394	)
Amortization of cost of stock benefit plans		9,080			6,768			5,857
Decrease in due from subsidiaries		(6,853	)		(6,114	)		(4,397	)
Adoption of SAB No. 108		(1,101	)		—			—
Change in other operating activities and liabilities		(1,207	)		166			836

Net cash provided in operating activities		436			1,092			3,456

Investing activities:
Stock proceeds invested in subsidiary		—			—			—
Dividends from Company subsidiaries		21,200			83,200			13,600

Net cash provided by investing activities		21,200			83,200			13,600

Financing activities:
Cash dividends		(15,955	)		(16,223	)		(13,402	)
Purchase of treasury stock		(27,828	)		(134,542	)		(78,859	)
Proceeds from exercise of stock options		1,940			2,393			1,217
Excess tax benefit from exercise of stock options		752			—			—
Payments received on ESOP		900			900			900

Net cash used by financing activities		(40,191	)		(147,472	)		(90,144	)

Decrease in cash and cash equivalents		(18,555	)		(63,180	)		(73,088	)
Cash and cash equivalents at beginning of year		76,958			140,138			213,226

Cash and cash equivalents at end of year	$	58,403		$	76,958		$	140,138

104

Bank Mutual Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006
(Dollars in Thousands, Except Per Share Amounts)

16. Adoption of SEC Staff Accounting Bulletin No. 108 (“SAB No. 108”)

The Company adopted SAB No. 108 as of December 31, 2006. In accordance with SAB No. 108, the Company decreased its January 1, 2006 retained earnings by $1,101, which decreased shareholders’ equity to $543,273 from $544,374 at that date. This $1,101 cumulative adjustment was the result of accounting errors related to the non-qualified pension plans. A prepaid benefit asset of $1,626 was eliminated and a deferred tax asset of $525 was created. These errors caused immaterial understatements in prior years of pension expense, but the cumulative effect of correcting these errors was material to the 2006 consolidated financial statement.

In evaluating materiality and determining the appropriateness of applying SAB No. 108 to these errors, the Company considered materiality both qualitatively and quantitatively as proscribed by the SEC’s Staff Accounting Bulletin No. 99 (“SAB No. 99”). Evaluation of materiality requires the Company to consider all the relevant circumstances including qualitative factors which may cause misstatements of quantitatively small amounts to be material.

105

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 were not 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, because of the material weakness in internal control described below under “Change in Internal Control Over Financial Reporting” and “Management’s Report on Internal Control Over Financial Reporting. However, subsequent to December 31, 2006, Bank Mutual Corporation has made the changes also described in “Management’s Report on Internal Control Over Financial Reporting” below. Notwithstanding the existence of that material weakness, management has concluded that the Company’s disclosure controls and procedures were effective in preparation of this Report on Form 10-K.

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. However, in order to address the material weakness in the Company’s application and monitoring accounting policies, key personnel involved in the financial reporting process have enhanced the controls by which authoritative accounting guidance is monitored and applied on a regular basis.

106

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, 2006, based on the criteria established in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

In performing this assessment, management considered the implications of certain errors identified by the Company’s independent registered public accounting firm in conjunction with their audit of the Company’s consolidated financial statements for the year ended December 31, 2006. These errors related to the accounting policies for defined benefit plans as required by SFAS No. 87 “Employers’ Accounting for Pensions” and the incorrect application of these accounting policies to the Company’s non-qualified pension plans. This incorrect application of accounting policies resulted in the Company overstating an asset and understating expense. The error has been corrected in accordance with SAB No. 108, whereby shareholders’ equity and other assets have been adjusted as of January 1, 2006.

A material weakness in internal control over financial reporting is a significant deficiency (within the meaning of the Public Company Accounting Oversight Board (“PCAOB”) Auditing Standard No. 2), or combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. PCAOB Auditing Standard No. 2 identifies a number of circumstances that, because of their likely significant negative effect on internal control over financial reporting, are to be regarded as at least significant deficiencies as well as strong indicators that a material weakness exists. Management evaluated the Company’s assessment of its system of internal control and has concluded that the control deficiency over the application of its accounting policies for the accounting of non-qualified pension plans that resulted in the above-described errors represented a material weakness. Solely as a result of this material weakness, management has concluded that, as of December 31, 2006, the Company’s internal control over financial reporting was not effective based on the criteria set forth by the COSO of the Treadway Commission in Internal Control — Integrated Framework.

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 on the following page as part of this Item 9A.

107

Ernst & Young LLP, Report on Effectiveness of Internal Control Over Financial Reporting

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of
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 (the “Company”) did not maintain effective internal control over financial reporting as of December 31, 2006, because of the effect of the material weakness identified in management’s assessment related to insufficient controls over the correct application of accounting policies to the nonqualified pension plans, 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.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management’s assessment: In its assessment as of December 31, 2006, management identified as a material weakness the Company’s insufficient controls over the application of accounting policies to the non-qualified defined benefit plans. As a result of this material weakness in internal control, Bank Mutual Corporation concluded an adjustment should be made to the current year financial statements in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, as described in Notes 1 and 16 to the consolidated financial statements set forth in Part IV Item 15, “Exhibits and Financial Statement Schedules”. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2006 consolidated financial statements, and this report does not affect our report dated March 12, 2007 on those consolidated financial statements.

108

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 7, 2007 (the “2007 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 “Election of Directors—Board Meetings and Committees—Compensation Committee Interlocks and Insider Participation”, “Directors’ Compensation”, “Compensation Discussion and Analysis”, and “Executive Compensation” in the 2007 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” in the 2007 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, 2006.

Number of securities

remaining available

Number of securities

for future issuance under

to be issued upon

Weighted-average

equity compensation

exercise of

exercise price of

plans (excluding

outstanding options,

securities reflected

Plan category

warrants and rights (1)

warrants and rights

in 1^st column) (2)

Equity compensation plans approved by security holders

4,525,238

7.08

1,773,362

Equity compensation plans not approved by security holders

Total

4,525,238

7.08

1,773,362


(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,” and Insider Participation” and “Certain Transactions and Relationships with the Company” in the 2007 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 2007 Annual Meeting Proxy Statement.

110

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, 2006 and 2005.

Consolidated Statements of Income — Years Ended December 31, 2006, 2005 and 2004.

Consolidated Statements of Changes In Shareholders’ Equity — Years Ended December 31, 2006, 2005 and 2004.

Consolidated Statements of Cash Flows — Years Ended December 31, 2006, 2005 and 2004.

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.

111

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 CORPORATION
March 15, 2007

	By:	/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.		/s/ Raymond W. Dwyer, Jr.

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

/s/ Rick B. Colberg		/s/ Thomas J. Lopina, Sr.

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

/s/ Marlene M. Scholz		/s/ William J. Mielke

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

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

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

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

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

/s/ Jelmer G. Swoboda

Jelmer G. Swoboda, Director


*		Each of the above signatures is affixed as of March 15, 2007.

112

BANK MUTUAL CORPORATION
(“Bank Mutual Corporation” or the “Company”)**
Commission File No. 000-32107

EXHIBIT INDEX

2006 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, 2006:


		Incorporated Herein	Filed
Exhibit	Description	By Reference To	Herewith
3(i)	Restated Articles of Incorporation, as last amended May 29, 2003, of Bank Mutual Corporation (the “Articles”)	Exhibit 3(i) to the Company’s Registration Statement on Form S-1, Registration No. 333-105685 (the “2003 S-1”)

3(ii)	Bylaws, as last amended May 29, 2003, of Bank Mutual Corporation	Exhibit 3(ii) to 2003 S-1

4.1	The Articles	Exhibit 3(i) above

4.2	The Plan	Exhibit 2.1 above

10.1*	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-1

10.4*	Agreement regarding deferred compensation dated May 16, 1988 between Mutual Savings Bank and Michael T. Crowley, Sr.	Exhibit 10.4 to 2000 S-1

10.5(a)*	Employment Agreement between Mutual Savings Bank and Michael T. Crowley Jr. (continuing , as amended, through 2009)	Exhibit 10.5(a) to 2000 S-1

10.5(b)*	Amendment thereto dated February 17, 1998	Exhibit 10.5(b) to 2000 S-1

EI-1


		Incorporated Herein	Filed
Exhibit	Description	By Reference To	Herewith
10.6*	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 2007)	Exhibit 10.7 to 2000 S-1

10.7(a)*	Employment Agreement between First Northern Savings Bank and Rick B. Colberg dated as of November 1, 2000 (continuing, as amended, through 2007)	Exhibit 10.9 to Bank Mutual’s Annual Report on Form 10-K for the year ended December 31, 2000 (“2000 10-K”)

10.7(b)*	Amendment thereto, dated as of August 2, 2002	Exhibit 10.9(b) to 2003 10-K

10.7(c)*	Second Amendment thereto, dated as of August 19, 2003	Exhibit 10.9(c) to 2003 10-K

10.8(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-K

10.8(b)*	Form of Amendment No. 1 thereto dated as of September 20, 1995	Exhibit 10.11(b) to 2000 10-K

10.8(c)*	Form of Amendment No. 2 thereto, dated as of October 15, 1998	Exhibit 10.6.4 to FNCC 1998 10-K

10.9(a)*	Non-Qualified Deferred Retirement Plan for Directors of First Northern Savings Bank	Exhibit 10.10(a) to 2000 10-K

10.9(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”)

10.10*	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

10.11(a)*	Bank Mutual Corporation 2004 Stock Incentive Plan	Exhibit A to Proxy Statement for 2004 Annual Meeting of Shareholders

10.11(b)*	Form of Option Agreement thereunder - Bank Mutual Corporation 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”)

EI-2


		Incorporated Herein	Filed
Exhibit	Description	By Reference To	Herewith
10.11(c)*	Form of Option Agreement thereunder - Bank Mutual Corporation Incentive Stock Option Agreement	Exhibit 10.1(c ) to the 6-30-04 10-Q

10.11(d)*	Form of Restricted Stock Agreement thereunder — Bank Mutual Corporation Directors Management Recognition Award	Exhibit 10.1(d) to the 6-30-04 10-Q

10.11(e)*	Form of Restricted Stock Agreement thereunder — Bank Mutual Corporation Officers Management Recognition Award	Exhibit 10.1(e) to the 6-30-04 10-Q

10.12*	Mutual Savings Bank/First Northern Savings Bank Management Incentive Compensation Plan	Exhibit 10.12(b) to Post-Effective Amendment No. 1 to S-1

21.1	List of Subsidiaries		X

23.1	Consent of Ernst & Young LLP		X

24.1	Powers of Attorney	Signature Page

31.1	Sarbanes-Oxley Act Section 302 Certification signed by the Chairman, President and Chief Executive Officer of Bank Mutual Corporation		X

31.2	Sarbanes-Oxley Act Section 302 Certification signed by the Chief Financial Officer of Bank Mutual Corporation		X

32.1	Certification pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by the Chairman, President and Chief Executive Officer of Bank Mutual Corporation		X

32.2	Certification pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by the Chief Financial Officer of Bank Mutual Corporation		X


*		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-3


	Period Ending
Index	12/31/01		12/31/02		12/31/03		12/31/04		12/31/05		12/31/06
Bank Mutual Corporation		100.00		154.04		282.11		306.32		272.89		319.51
NASDAQ Composite		100.00		68.76		103.67		113.16		115.57		127.58
SNL Midwest Thrift Index		100.00		128.91		179.09		197.78		193.27		219.35


		PAGE
ITEM

PART I
1.	Business	3-32
1A.	Risk Factors	33-35
1B.	Unresolved Staff Comments	35
2.	Properties	36-39
3.	Legal Proceedings	40
4.	Submission of Matters to a Vote of Security Holders	40
	Executive Officers of the Registrant	40

PART II

5.	Market for Registrant’s Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities	41-43
6.	Selected Financial Data	44-45
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46-62
7A.	Quantitative and Qualitative Disclosures About Market Risk	63-66
8.	Financial Statements and Supplementary Data	67-105
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	106
9A.	Controls and Procedures (including Management’s and Independent Auditors Report on Effectiveness of Internal Control Over Financial Reporting)
		106-109
9B.	Other Information	109

PART III

10.	Directors and Executive Officers of the Registrant	110
11.	Executive Compensation	110
12.	Security Ownership of Certain Beneficial Owners and Management	110
13.	Certain Relationships and Related Transactions	110
14.	Principal Accountant Fees and Services	110

PART IV

15.	Exhibits and Financial Statement Schedules	111
	Signatures	112
List of Subsidiaries
Consent of Ernst & Young LLP
Section 302 Certification
Section 302 Certification
Section 906 Certification
Section 906 Certification


	At December 31, 2006
	Prior to
	Adopting						As Reported at
	Statement 158			Reclassifications			December 31, 2006

Other assets	$	206,371		$	(2,011)	)	$	204,360
Other liabilities		46,506			2,717			49,223
Accumulated other comprehensive income		(14,720	)		(706	)		(15,426	)


Name of Subsidiary		Jurisdiction of Incorporation/Charter
Bank Mutual (1)		USA
First Northern Investments, Inc.		Nevada
BancMutual Financial & Insurance Services, Inc.		Wisconsin
MC Development LTD		Wisconsin
Mutual Investment Corporation		Nevada


Name of Subsidiary		Jurisdiction of Incorporation/Charter
Savings Financial Corporation (50% owned)		Wisconsin
Arrowood Development LLC (50% owned) (2)		Wisconsin

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

	c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: March 15, 2007

/s/ Michael T. Crowley, Jr.

Michael T. Crowley, Jr.,
Chairman, President and Chief Executive Officer


Date: March 15, 2007

/s/ Rick B. Colberg

Rick B. Colberg,
Chief Financial Officer


/s/ Michael T. Crowley, Jr.

Michael T. Crowley, Jr.
Chief Executive Officer
March 15, 2007


/s/ Rick B. Colberg

Rick B. Colberg
Chief Financial Officer
March 15, 2007