BANK MUTUAL CORP - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2004

¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 000-31207

BANK MUTUAL CORPORATION

(Exact name of registrant as specified in its charter)

Wisconsin

39-2004336

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

4949 West Brown Deer Road

Milwaukee, WI 53223

(414) 354-1500

(Address, including Zip Code, and telephone number,

including area code, of registrant’s principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

The number of shares outstanding of the issuer’s common stock $0.01 par value per share, was 78,783,849 shares, at April 30, 2004.

BANK MUTUAL CORPORATION

10-Q INDEX


		Page No.
PART I.	FINANCIAL INFORMATION

Item l.	Financial Statements

	Unaudited Consolidated Statements of Financial Condition as of March 31, 2004 and December 31, 2003	3

	Unaudited Consolidated Statements of Income for the three months ended March 31, 2004 and 2003	4

	Unaudited Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2004 and 2003	5

	Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003	6-7

	Notes to Unaudited Consolidated Financial Statements	8-20

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21-36

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37-40

Item 4.	Controls and Procedures	41

PART II.	OTHER INFORMATION

Item 2	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	42

Item 4	Submission of Matters to a Vote of Security Holders	42

Item 6.	Exhibits and Reports on Form 8-K	43

	Signatures	44

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

BANK MUTUAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


	March 31 2004			December 31 2003
	*(In thousands)*
Assets
Cash and due from banks	$	30,466		$	36,384
Federal funds sold		—			30,000
Interest-earning deposits		1,024			20,119

Cash and cash equivalents		31,490			86,503
Securities available-for-sale, at fair value:
Investment securities		68,824			67,833
Mortgage-related securities		1,095,249			1,053,349
Loans held for sale		12,784			4,056
Loans receivable, net		1,698,587			1,712,278
Goodwill		52,570			52,570
Other intangible assets		4,907			5,073
Mortgage servicing rights		4,453			4,698
Other assets		125,125			122,167

	$	3,093,989		$	3,108,527

Liabilities and shareholders’ equity
Liabilities:
Deposits	$	2,007,445		$	2,052,290
Borrowings		299,919			299,491
Advance payments by borrowers for taxes and insurance		10,674			2,987
Other liabilities		34,559			22,679

		2,352,597			2,377,447

Shareholders’ equity:
Preferred stock – $.01 par value:
Authorized– 20,000,000 shares in 2004 and 10,000,000 in 2003 Issued and outstanding – none in 2004 and 2003
Common stock – $.01 par value:		—			—
Authorized– 200,000,000 shares in 2004 and 100,000,000 in 2003 Issued – 78,783,849 shares in 2004 and 78,775,779 in 2003
Outstanding – 78,783,849 shares in 2004; and 78,775,779 in 2003		788			788
Additional paid-in capital		496,628			495,990
Retained earnings		245,964			241,958
Unearned ESOP shares		(5,469	)		(5,766	)
Accumulated other comprehensive income		5,321			149
Unearned deferred compensation		(1,840	)		(2,039	)

Total shareholders’ equity		741,392			731,080

	$	3,093,989		$	3,108,527

See Notes to Unaudited Consolidated Financial Statements.

BANK MUTUAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME


	Three Months Ended March 31
	2004		2003
	(In thousands, except per share data)
Interest income:
Loans	$	23,897	$	27,685
Investment securities		1,030		1,182
Mortgage-related securities		11,626		7,353
Interest-earning deposits		108		476

Total interest income		36,661		36,696

Interest expense:
Deposits		10,724		13,893
Borrowings		3,841		4,607
Advance payments by borrowers for taxes and insurance		4		10

Total interest expense		14,569		18,510

Net interest income		22,092		18,186
Provision for loan losses		490		258

Net interest income after provision for loan losses		21,602		17,928

Noninterest income:
Service charges on deposits		1,073		1,030
Brokerage and insurance commissions		772		677
Loan related fees and servicing revenue		535		(84	)
Gain on sales of loans		380		1,767
Other		1,087		1,115

Total noninterest income		3,847		4,505

Noninterest expenses:
Compensation, payroll taxes and other employee benefits		8,599		7,682
Occupancy and equipment		2,812		2,664
Amortization of other intangible assets		165		165
Other		3,177		2,870

Total noninterest expenses		14,753		13,381

Income before income taxes		10,696		9,052
Income taxes		3,622		3,183

Net income	$	7,074	$	5,869

Per share data:
Earnings per share – basic	$	0.09	$	0.08

Earnings per share – diluted	$	0.09	$	0.08

Cash dividends paid	$	0.040	$	0.027

See Notes to Unaudited Consolidated Financial Statements.

BANK MUTUAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY


	Common Stock		Additional Paid-In Capital			Retained Earnings			Unearned ESOP Shares			Accumulated Other Comprehensive Income			Unearned Deferred Compensation			Treasury Stock			Total
	*(In thousands)*
For the Three Months Ended March 31, 2004
Balance at January 1, 2004	$	788	$	495,990		$	241,958		$	(5,766	)	$	149		$	(2,039	)	$	—		$	731,080
Comprehensive income
Net income		—		—			7,074			—			—			—			—			7,074
Other comprehensive income
Change in net unrealized gain on securities available-for-sale, net of deferred income tax liability of $2,965		—		—			—			—			5,172			—			—			5,172

Total comprehensive income		—		—			—			—			—			—			—			12,246
Committed ESOP shares		—		612			—			297			—			—			—			909
Exercise of stock options		—		26			—			—			—			—			—			26
Amortization of deferred compensation		—		—			—			—			—			199			—			199
Cash dividends ($0.040 per share)		—		—			(3,068	)		—			—			—			—			(3,068	)

Balance at March 31, 2004	$	788	$	496,628		$	245,964		$	(5,469	)	$	5,321		$	(1,840	)	$	—		$	741,392

For the Three Months Ended March 31, 2003
Balance at January 1, 2003	$	820	$	108,477		$	224,932		$	(6,647	)	$	10,487		$	(3,133	)	$	(11,861	)	$	323,075
Comprehensive income:
Net income		—		—			5,869			—			—			—			—			5,869
Other comprehensive income
Change in net unrealized gain on securities available-for-sale, net of deferred income tax liability of $1,633		—		—			—			—			(5,347	)		—			—			(5,347	)

Total comprehensive income		—		—			—			—			—			—			—			522
Purchase of treasury stock		—		—			—			—			—			—			(8,012	)		(8,012	)
Committed ESOP shares		—		230			—			297			—			—			—			527
Exercise of stock options		—		(5	)		—			—			—			—			17			12
Amortization of deferred compensation		—		—			—			—			—			262			(44	)		218
Cash dividends ($0.027 per share)		—		—			(1,023	)		—			—			—			—			(1,023	)

Balance at March 31, 2003	$	820	$	108,702		$	229,778		$	(6,350	)	$	5,140		$	(2,871	)	$	(19,900	)	$	315,319

See Notes to Unaudited Consolidated Financial Statements.

BANK MUTUAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Three Months Ended March 31
	2004			2003
	*(In thousands)*
Operating activities:
Net income	$	7,074		$	5,869
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		490			258
Provision for depreciation		775			722
Amortization of intangibles		165			165
Net change in mortgage servicing rights		246			(115	)
Amortization of cost of stock benefit plans		1,108			745
Net discount amortization on securities		148			653
Net change in loans originated or held for sale		(8,348	)		(7,121	)
Gains on sales of loans		(380	)		(1,767	)
Gain on sale of real estate owned		—			(24	)
Increase in other liabilities		9,008			14,054
Increase in other assets		(7,687	)		(3,935	)
(Increase) decrease in accrued interest receivable		(33	)		601

Net cash provided by operating activities		2,566			10,105

Investing activities:
Net purchases of mutual funds		(229	)		(10,223	)
Proceeds from maturities of investment securities		23,300			2,750
Purchases of investment securities		(24,015	)		(700	)
Purchases of mortgage-related securities		(89,627	)		(147,367	)
Principal repayments on mortgage-related securities		55,671			131,971
Net (increase) decrease in loans receivable		17,044			(8,844	)
Proceeds from sale of foreclosed properties		1,094			290
Net increase in Federal Home Loan Bank stock		(576	)		(933	)
Net purchases of premises and equipment		(374	)		(1,249	)

Net cash used by investing activities		(17,712	)		(34,305	)

BANK MUTUAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)


	Three Months Ended March 31
	2004			2003
	*(In thousands)*
Financing activities:
Net increase (decrease) in deposits	$	(44,940	)	$	17,084
Net increase (decrease) in short-term borrowings		6,500			(22,679	)
Proceeds from long-term borrowings		3,979			—
Repayments on long-term borrowings		(10,051	)		(2,455	)
Net increase in advance payments by borrowers for taxes and insurance		7,687			8,732
Proceeds from exercise of stock options		26			12
Cash dividends		(3,068	)		(1,023	)
Purchase of treasury stock		—			(8,012	)

Net cash used by financing activities		(39,867	)		(8,341	)

Decrease in cash and cash equivalents		(55,013	)		(32,541	)
Cash and cash equivalents at beginning of period		86,503			241,759

Cash and cash equivalents at end of period	$	31,490		$	209,218

Supplemental information:
Interest paid on deposits	$	10,629		$	13,619
Income taxes paid		115			1,121
Loans transferred to foreclosed properties and repossessed assets		3,843			350

See Notes to Unaudited Consolidated Financial Statements.

BANK MUTUAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 1 - Basis of Presentation

The consolidated financial statements include the accounts of Bank Mutual Corporation and its wholly-owned subsidiary Bank Mutual (the “Bank”) and the Bank’s subsidiaries.

From November 1, 2000 until October 29, 2003, Bank Mutual Corporation was an OTS chartered United States corporation which became the mid-tier holding company in the regulatory restructuring of Mutual Savings Bank, into mutual holding company form. Until October 29, 2003, Bank Mutual Bancorp, MHC (the “MHC”), a U.S.-chartered mutual holding company of which Mutual Savings Bank’s depositors held all of the voting and membership rights, owned 52.2% of Bank Mutual Corporation’s outstanding common stock.

On November 1, 2000, Bank Mutual Corporation also acquired First Northern Capital Corp., the parent of First Northern Savings Bank. On March 16, 2003, Mutual Savings Bank and First Northern Savings Bank combined to form a single OTS chartered savings bank subsidiary of Bank Mutual Corporation called Bank Mutual (“Bank Mutual” or the “Bank”).

On October 29, 2003, Bank Mutual Corporation completed a conversion and reorganization from a mutual holding company form, established a new Wisconsin chartered Bank Mutual Corporation and, in effect, sold the MHC’s interest in Bank Mutual Corporation to the public. Existing Bank Mutual Corporation shareholders exchanged each existing share for 3.6686 shares of the new Bank Mutual Corporation. The total number of shares issued and exchanged in the offering and conversion was 78,707,669 shares.

All share and per share numbers in these financial statements have been adjusted to reflect the full conversion transaction and related 3.6686 for 1 share exchange.

As used herein, the “Company” refers to Bank Mutual Corporation both before and after the full conversion transaction

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, Rule 10-01 of Regulation S-X and the instructions to Form 10-Q. The financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial information. In the opinion of Bank Mutual Corporation, the accompanying Unaudited Consolidated Statements of Financial Condition, Unaudited Consolidated Statements of Income, Unaudited Consolidated Statements of Shareholders’ Equity and Unaudited Consolidated Statements of Cash Flows contain all adjustments, which are of a normal recurring nature, necessary to present fairly the consolidated financial position of Bank Mutual Corporation and subsidiaries at March 31, 2004 and December 31, 2003, the results of their income for the three ended March 31, 2004 and 2003, the changes in shareholders’ equity for the three months ended

March 31, 2004 and 2003, and their cash flows for the three months ended March 31, 2004 and 2003. The accompanying Unaudited Consolidated Financial Statements and related notes should be read in conjunction with Bank Mutual Corporation’s 2003 Annual Report on Form 10-K. Operating results for the three months ended March 31, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

Note 2 - Securities Available-for-Sale

The amortized cost and fair value of investment securities available-for-sale are as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
At March 31, 2004:
Investment securities:
U.S. government and federal agency obligations	$	22,165	$	278	$	(0	)	$	22,443
Mutual funds		45,280		23		(339	)		44,964
Federal Home Loan Mortgage Corporation stock		1,440		—		(23	)		1,417

Total investment securities		68,885		301		(362	)		68,824
Mortgage-related securities:
Federal Home Loan Mortgage Corporation		552,305		5,703		(3,206	)		554,802
Federal National Mortgage Association		447,626		6,787		(2,043	)		452,370
Private Placement CMOs		331		2		—			333
Government National Mortgage Association		86,718		1,098		(72	)		87,744

Total mortgage-related securities		1,086,980		13,590		(5,321	)		1,095,249

Total	$	1,155,865	$	13,891	$	(5,683	)	$	1,164,073


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
At December 31, 2003:
Investment securities:
U.S. government and federal agency obligations	$	21,434	$	352	$	(50	)	$	21,736
Mutual funds		45,051		20		(374	)		44,697
Federal Home Loan Mortgage Corporation stock		1,440		—		(40	)		1,400

Total investment securities		67,925		372		(464	)		67,833
Mortgage-related securities:
Federal Home Loan Mortgage Corporation		518,893		3,053		(3,774	)		518,172
Federal National Mortgage Association		444,167		4,700		(3,371	)		445,496
Private Placement CMOs		537		6		—			543
Government National Mortgage Association		89,589		322		(773	)		89,138

Total mortgage-related securities		1,053,186		8,081		(7,918	)		1,053,349

Total	$	1,121,111	$	8,453	$	(8,382	)	$	1,121,182

The amortized cost and fair values of investment securities by contractual maturity at March 31, 2004, are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay obligations with or without call or prepayment penalties.


	Amortized Cost		Fair Value
Due in one year or less	$	5,695	$	5,851
Due after one year through five years		16,470		16,592
Due after five years through ten years		—		—
Mutual funds		45,280		44,964
Federal Home Loan Mortgage Corporation stock		1,440		1,417
Mortgage-related securities		1,086,980		1,095,249

	$	1,155,865	$	1,164,073

Note 3 - Loans Receivable

Loans receivable consist of the following:


	March 31 2004		December 31 2003
Mortgage loans:
One-to-four family	$	794,749	$	793,247
Multifamily		136,795		124,494
Commercial real estate		206,768		209,293
Construction and development		97,033		122,436

Total mortgage loans		1,235,345		1,249,470
Consumer loans and other loans:
Fixed equity		255,677		252,550
Home equity lines of credit		79,998		78,567
Student		21,351		20,546
Home improvement		13,776		12,605
Automobile		65,770		67,630
Other		17,731		18,623

Total consumer loans		454,303		450,521
Total commercial business loans		69,346		75,022

Total loans receivable		1,758,994		1,775,013
Less:
Undisbursed loan proceeds		46,077		47,743
Allowance for loan losses		13,388		13,771
Unearned loan fees and discounts		942		1,221

		60,407		62,735

Total loans receivable, net	$	1,698,587	$	1,712,278

Bank Mutual Corporation’s mortgage loans and home equity loans are primarily secured by properties housing one-to-four families which are generally located in Bank Mutual Corporation’s local lending areas in Wisconsin and Minnesota.

Note 4 – Goodwill, Other Intangible Assets and Mortgage Servicing Rights

The carrying amount of mortgage servicing rights net of accumulated amortization and the associated valuation allowance at March 31, 2004 and December 31, 2003 are presented in the following table.


	March 31 2004			December 31 2003
Mortgage servicing rights at beginning of year	$	4,698		$	6,149
Capitalized servicing rights		338			4,480
Amortization of servicing rights		(409	)		(5,931	)

Mortgage servicing rights at end of period		4,627			4,698
Valuation allowance		(174	)		—

Balance	$	4,453		$	4,698

The carrying amounts of the intangible assets, net of accumulated amortization, valuation allowance and net carrying amounts of intangible assets at March 31, 2004 are presented in the following table.


Intangible Assets	Intangible Asset Amount Net of Accumulated Amortization		Valuation Allowance			Carrying Amount
Goodwill	$	52,570	$	—		$	52,570
Mortgage servicing rights		4,627		(174	)		4,453
Deposit base intangibles		4,907		—			4,907

Total	$	62,104	$	(174	)	$	61,930

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 March 31, 2004. Future amortization expense may be significantly different depending upon changes in the mortgage servicing portfolio, mortgage interest rates and market conditions.

The following table shows the current period and estimated future amortization expense for amortizable intangible assets:


	Mortgage Servicing Rights		Deposit Base Intangibles		Total
	*(In thousands)*
Three months ended March 31, 2004 (actual)	$	409	$	165	$	574

Nine months ending December 31, 2004 (estimate)	$	676	$	496	$	1,172

Estimate for year ending December 31,
2005		896		661		1,557
2006		893		661		1,554
2007		889		661		1,550
2008		855		618		1,473
2009		402		405		807
Thereafter		16		1,405		1,421

	$	4,627	$	4,907	$	9,534

Note 5 - Other Assets

Other Assets are summarized as follows:


	March 31 2004		December 31 2003
Accrued interest:
Mortgage-related securities	$	4,060	$	4,034
Investment securities		177		200
Loans receivable		6,617		6,586

Total accrued interest		10,854		10,820
Foreclosed properties and repossessed assets		2,575		630
Premises and equipment		44,795		45,196
Federal Home Loan Bank stock, at cost		36,074		35,498
Bank owned life insurance		18,558		18,268
Other		12,269		11,755

	$	125,125	$	122,167

Note 6 - Deposits

Deposits are summarized as follows:


	March 31 2004		December 31 2003
Checking accounts:
Noninterest-bearing	$	107,106	$	110,099
Interest-bearing		151,544		157,231

		258,650		267,330
Money market accounts		349,086		358,003
Savings accounts		249,349		240,543
Certificate accounts:
Due within one year		495,297		510,195
After one but within two years		335,772		318,652
After two but within three years		162,392		140,604
After three but within four years		136,841		192,203
After four but within five years		20,058		24,760
After five years		—		—

		1,150,360		1,186,414

	$	2,007,445	$	2,052,290

Note 7 - Borrowings

Borrowings consist of the following:


	March 31 2004				December 31 2003
	Balance		Weighted- Average Rate		Balance		Weighted- Average Rate
Federal Home Loan Bank advances maturing:
2004	$	221,785	5.62	%	$	231,775	5.61	%
2005		17,997	5.20			17,996	5.20
2006		7,949	4.85			7,948	4.85
2007		—	—			—	—
2008		1,024	5.90			1,024	5.90
Thereafter		44,664	5.22			40,748	5.23
Open-line of credit		6,500	1.33			—	—

	$	299,919			$	299,491

The majority of advances that mature in the year 2004 are callable at any time at the option of the FHLB.

The Bank is required to maintain unencumbered mortgage loans in its portfolio aggregating at least 167% of the amount of outstanding advances from the FHLB as collateral. The Bank’s borrowings at the FHLB are limited to the lesser of 35% of total assets or 60% of the book value of certain mortgage loans. In addition, these advances are collateralized by FHLB stock of $36,074 and $35,498 at March 31, 2004 and December 31, 2003, respectively.

Note 8 - Shareholders’ Equity

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. OTS can initiate certain mandatory, and possible additional discretionary actions, which, if undertaken, could have a direct material effect on Bank Mutual Corporation’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the OTS about components, risk weightings and other factors.

Quantitative measures established by federal regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital to risk-weighted assets (as these terms are defined in regulations), and of Tier I capital to total assets (as these terms are defined in regulations). Management believes, as of March 31, 2004, that the Bank meets or exceeds all capital adequacy requirements to which it is subject.


	Actual				Required For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
The Bank
As of March 31, 2004:
Total risk-based capital (to risk-weighted assets)	$	466,471	30.80	%	$	121,172	8.00	%	$	151,466	10.00	%
Tier I capital (to risk-weighted assets)		455,192	30.05			60,586	4.00			90,879	6.00
Tier I capital (to average assets)		455,192	15.05			121,016	4.00			151,269	5.00

Bank Mutual Corporation is not aware of any conditions or events which would change the Bank’s status as well capitalized. There are no conditions or events that management believes have changed the Bank’s category.

Following are reconciliations of the Bank’s equity under generally accepted accounting principles to capital as determined by regulators:


	The Bank
	Risk- Based Capital			Tier I (Core) Capital
As of March 31, 2004:
Equity per Bank records	$	518,333		$	518,333
Unrealized gains on investments		(5,321	)		(5,321	)
Goodwill and deposit base intangibles, net of deferred taxes		(55,514	)		(55,514	)
Investment in “nonincludable” subsidiaries		(2,039	)		(2,039	)
Disallowed servicing assets		(267	)		(267	)
Equity investments required to be deducted		(2,109	)		—
Allowance for loan losses		13,388			—

Regulatory capital	$	466,471		$	455,192

Note 9 – Earnings Per Share

The computation of basic and diluted earnings per share is presented in the following table:


	Three Months Ended March 31
	2004		2003
	*(Dollars in thousands)*
Basic Earnings Per Share
Net Income	$	7,074	$	5,869

Weighted average shares outstanding net of unallocated ESOP and unvested MRP shares		76,177,305		75,961,881
Allocated ESOP shares for period		81,799		81,799
Vested MRP shares for period		50,262		59,673

		76,309,366		76,103,353

Basic earnings per share	$	0.09	$	0.08

Diluted Earnings Per Share
Net Income	$	7,074	$	5,869

Weighted average shares outstanding used in basic earnings per share		76,309,366		76,103,353
Net dilutive effect of:
Stock option shares		1,955,078		1,597,070
Unvested MRP shares		303,217		324,154

		78,567,661		78,024,577

Diluted earnings per share	$	0.09	$	0.08

Note 10 – Employee Benefit Plans

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 $41 in the first quarter of 2004 and $47 in the same period in 2003.

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.

The following table set forth the net periodic benefit cost:


	Three Months Ended March 31
	2004			2003
Service cost	$	420		$	355
Interest cost		369			315
Expected return on plan assets		(418	)		(392	)
Amortization of prior service cost		32			32
Amortization of net (gain) loss		43			(11	)
Asset gain		—			29

Net periodic benefit cost	$	446		$	328

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

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.

The amount of the 2004 contribution will be determined based on a number of factors, including the results of the Actuarial Valuation Report as of January 1, 2004. At this time, the amount of the 2004 contribution is not known.

Bank Mutual has a deferred retirement plan, which was formerly a Mutual Savings Bank Plan, for non-officer directors who have provided at least five years of service. Four of the five existing eligible directors’ benefits have vested. In the event a director dies prior to completion of these payments, payments will go to the director’s heirs. Bank Mutual has funded these arrangements through “rabbi trust” arrangements, and based on actuarial analyses believes these obligations are adequately funded.

First Northern Savings Bank also had an unfunded deferred retirement plan for their non-employee directors. All members of First Northern Savings Bank’s Board of Directors were eligible under the plan. Directors of predecessor institutions who were members of an advisory board were eligible at the discretion of First Northern Savings Bank. Currently there are four retired advisory board members in the plan. This plan was terminated as a consequence of the merger of First Northern Savings Bank into Bank Mutual and former First Northern Savings Bank directors began to receive payments.

First Northern Savings Bank also had supplemental retirement plans for several executives.

In May 2001, Bank Mutual Corporation shareholders approved the 2001 Stock Incentive Plan, providing for the grant of stock options up to 4,089,935 shares and restricted stock (“MRP”) awards up to 1,226,977 shares. Of these, 1,210,630 MRP shares were granted during the year ended December 31, 2001 to employees in management positions, directors and other key employees of which 124,737 shares were subsequently forfeited. No MRP shares were granted during the quarter ended March 31, 2004 or during the year ended December 31, 2003. The outstanding MRP grants had a fair value of $7.0 million at March 31, 2004. The grants under the MRP are being amortized to compensation expense as Bank Mutual Corporation’s employees become vested in the awarded shares.

The amount of MRP awards amortized to expense was $172,000 for the first quarter of 2004 and $172,965 for the same period in 2003. The remaining unamortized cost of the MRP is unearned deferred compensation and is reflected as a reduction of shareholders’ equity.

Options to purchase 4,050,122 shares were granted on May 8, 2001 at an exercise price of $3.2056. Options for 3,290,520 shares remain outstanding at March 31, 2004, of which options for 1,167,869 shares were vested. In addition, options for 523,345 shares were exercised and options for 236,257 shares have been forfeited.

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:


	For the Three Months Ended March 31
	2004		2003
Risk-free interest rate	5.30	%	5.30	%
Dividend yield	2.00	%	2.00	%
Expected stock volatility	26.30	%	26.30	%
Expected years until exercise	5.75		6.75

The Black-Scholes option valuation model was developed for use in estimating the fair value of publicly 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 Corporation’s stock options have characteristics significantly different from traded options and inasmuch, changes in the subjective input assumptions can materially affect the fair value estimate. In management’s opinion, the existing model does not necessarily provide a reliable single measure of the fair value of its stock options.

Bank Mutual Corporation accounts for the stock options in accordance with APB Opinion 25, as allowed under SAS No. 123, and, therefore, no compensation cost has been recognized in connection with stock options granted in any year. Pursuant to SAS No. 123 disclosure requirements as amended by SAS No. 148, pro forma net income and earnings per share are presented below as if compensation cost for stock options was determined under the fair value method and amortized to expense over the options’ vesting periods.


	For the Three Months Ended March 31
	2004		2003
Net income:
As reported	$	7,074	$	5,869
Pro forma	$	6,894	$	5,689
Basic earnings per share:
As reported	$	0.09	$	0.08
Pro forma	$	0.09	$	0.07
Diluted earnings per share:
As reported	$	0.09	$	0.08
Pro forma	$	0.09	$	0.07

The pro forma amounts may not be indicative of the effect on reported net income and earnings per share for future years as current options vest over five years.

Note 11 – Financial Instruments with Off-Balance Sheet Risk

Off-balance sheet financial instruments or obligations whose contract amounts represent credit and/or interest rate risk at March 31, 2004 and December 31, 2003 are as follows:


	March 31 2004		December 31 2003
Unused consumer lines of credit	$	153,492	$	153,068
Unused commercial lines of credit		13,685		12,919
Commitments to extend credit:
Fixed rate		24,342		17,115
Adjustable rate		35,467		35,838
Undisbursed commercial loans		35,312		28,992
Credit enhancement under the Federal Home Loan Bank of Chicago Mortgage Partnership Finance program		3		3

Forward commitments to sell mortgage loans of $27.9 million at March 31, 2004, represent commitments obtained by the Bank from a secondary market agency to purchase mortgages from the Bank. Commitments to sell loans expose the Bank 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. There were $8.3 million of forward commitments at December 31, 2003.

Note 12 – Recent Accounting Developments

Securities Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 105, “Application of Accounting Principles to Loan Commitments” was issued on March 9, 2004 and is effective for commitments to originate mortgage loans to be held for sale that are entered into after March 31, 2004. SAB No. 105 requires that fair-value measurement include only differences between the guaranteed interest rate in the loan commitment and a market interest rate, excluding expected future cash flows related to the customers relationship or loan servicing. Because of the SAB’s limit on the types of cash flows that can be considered in the fair-value measurement, mortgage-loan commitments could be recognized as liabilities if the guaranteed rate in the commitment is less than the market interest rate. In addition, SAB No. 105 requires registrants to disclose their accounting policy for loan commitments pursuant to APB Opinion No. 22, including methods and assumptions used to estimate fair value and any associated hedging strategies, as required by Statement No. 107, Statement No. 133 and Item No. 305 of Regulation S-K (Quantitative and Qualitative Disclosures About Market Risk). The provisions of SAB No. 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. Bank Mutual anticipates this SAB will have minimal impact on financial condition or the results of operations.

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

Cautionary Statement Regarding Forward-Looking Information

This document contains various forward-looking statements concerning Bank Mutual Corporation’s prospects that are based on the current expectations and beliefs of management. Forward-looking statements may also be made by Bank Mutual Corporation from time to time in other reports and documents as well as oral presentations. When used in written documents or oral presentations, the words “anticipate,” “believe,” “estimate,” “expect,” “objective,” “projection” and similar expressions or use of 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 Bank Mutual Corporation’s control, that could cause Bank Mutual Corporation’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 Bank Mutual Corporation: general economic conditions; negative developments affecting particular borrowers; legislative and regulatory initiatives; monetary and fiscal policies of the federal government; deposit flows; disintermediation; the cost of funds and changes in those costs; 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; changes in the quality or composition of Bank Mutual’s loan and investment portfolios; general economic and political developments; and other factors referred to in the reports filed by Bank Mutual Corporation with the Securities and Exchange Commission (particularly under “Risk Factors” in Item 7 of Bank Mutual Corporation’s 2003 Annual Report on Form 10-K).

Overview

From November 1, 2000 until October 29, 2003, Bank Mutual Corporation was an OTS chartered United States corporation which became the mid-tier holding company in the regulatory restructuring of the Bank, then known as “Mutual Savings Bank,” into mutual holding company form. Until October 29, 2003, Bank Mutual Bancorp, MHC (the “MHC”), a U.S.-chartered mutual holding company of which the Bank’s depositors held all of the voting and membership rights, and owned 52.2% of Bank Mutual Corporation’s outstanding common stock.

Recent Conversion

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 their shares for the new Bank Mutual Corporation shares. The total number of shares issued and exchanged in the offering is approximately 78,707,669 shares. Unless otherwise indicated, all shares and per share numbers in these financial statements have been restated to reflect the conversion and the related 3.6686 for 1 share exchange.

Significant Accounting Policies

There are a number of accounting policies that we established which require us to use our judgment and make estimates. Some of the more significant policies are as follows:

•

Establishing the amount of the allowance for loan losses requires the use of our judgment. The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses inherent in the loan portfolio and is based on the size and current risk characteristics of the loan portfolio, an assessment of individual problem loans and actual loss experience, current economic events in specific industries and geographical areas, including unemployment levels, and other pertinent factors, including regulatory guidance and general economic conditions. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends, all of which may be susceptible to significant change. Loan losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for loan losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors. Evaluations are conducted at least quarterly and more often if deemed necessary. If we misjudge a major component and experience a loss, it will likely affect our earnings. Developments affecting loans can also cause the allowance to vary significantly between quarters. We consistently challenge ourselves in the review of the risk components to identify any changes in trends and their cause.

•

Another valuation that requires our judgment relates to mortgage servicing rights. Mortgage servicing rights are recorded as an asset when loans are sold with servicing rights retained. The total cost of loans sold is allocated between the loan balance and the servicing asset based on their relative fair values. The capitalized value of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net future servicing revenue. Mortgage servicing rights are carried at the lower of the initial carrying value, adjusted for amortization, or estimated fair value. The carrying values are periodically evaluated for impairment. For purposes of measuring impairment, the servicing rights are stratified into pools based on term and interest rate. Impairment represents the excess of the remaining capitalized cost of a stratified pool over its fair value, and is recorded through a valuation allowance. The fair value of each servicing rights pool is calculated based on the present value of estimated future cash flows using a discount rate, given current market conditions. Estimates of fair value include assumptions about prepayment speeds, interest rates and other factors which are subject to change over time. Changes in these underlying assumptions could cause 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.

Comparison of Financial Condition at March 31, 2004 and December 31, 2003

Total Assets. Bank Mutual Corporation’s total assets decreased $14.5 million in the first quarter of 2004, primarily as a result of the decrease in the loans receivable and a decrease in federal funds sold used to fund the decrease in deposits. Total assets at March 31, 2004 were $3.09 billion as compared to $3.11 billion at December 31, 2003.

Cash and Cash Equivalents. Cash and cash equivalents decreased $55.0 million in the first quarter of 2004 primarily as a result of using cash equivalents to purchase mortgage-related securities and to fund the decrease in deposits. The cash had been invested in short-term investments and overnight funds.

Securities Available-for-Sale. Investment securities increased $991,000 in the first three months of 2004 primarily as a result of investing in government agency securities.

Mortgage-related securities increased $41.9 million primarily as a result of investing federal funds sold and interest-earning deposits into mortgage-related securities.

At March 31, 2004, we had $333,000 of privately issued CMOs in our investment portfolio. Privately issued CMOs have more credit risk than government agency issued CMOs and, therefore, have a higher risk of loss. If a loss would occur, the loss would be charged to earnings in the period in which it was incurred.

Loans Held for Sale. Loans held for sale increased $8.7 million as a result of fixed rate mortgage loan originations exceeding the sales of fixed rate mortgage loans. Currently, we sell all of our 30 and 20 year fixed rate mortgage loan originations and some of our 15 year fixed rate mortgage loan originations.

Loans Receivable. Loans receivable decreased $13.7 million in the first quarter of 2004 primarily as a result of a decrease in construction and development mortgage loans and commercial business loans.

The mortgage loan portfolio decreased $14.1 million in the first quarter of 2004 primarily as a result of a decrease in the construction and development and commercial real estate loan portfolio. The construction and development loan portfolio decreased $25.4 million in the first three months of 2004 primarily as a result of a large loan, in the amount of $20.9 million, being paid off. We anticipate that loan originations in this category will improve in the second quarter of 2004, particularly if construction of new homes continues to be as strong as it was in the month of March 2004.

The commercial real estate portfolio decreased $2.5 million in the first quarter of 2004 primarily as a result of reduced originations and continued repayment and prepayments of commercial real estate loans.

Our one-to-four family loan portfolio increased $1.5 million primarily as a result of purchasing $13.5 million of single family loans. We supplement our loan originations with purchased single family loans (in Wisconsin and adjacent states), which consist mostly of three- to five-year adjustable rate mortgage loans.

The consumer loan portfolio increase of $3.8 million primarily was the result of reduced refinancing of first mortgage loans (consumers historically consolidate their debt into the first mortgage loan) coupled with $64.7 million of originations. The home equity loans, home equity lines of credit and home improvement loans portfolio increased. This increase was partially offset by a reduction in the automobile loan portfolio. We continue to emphasize and market the 10 year fully amortizing fixed rate home equity loan.

The commercial loan portfolio decreased $5.7 million in the first quarter of 2004 primarily as a result of reduced originations, transfer of $1.6 million from the portfolio to foreclosed properties and continued repayments.

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

LOAN ORIGINATIONS AND PURCHASES


	Three Months Ended March 31
	2004		2003
	*(In thousands)*
Originations:
Mortgage loans	$	108,695	$	236,429
Consumer loans		64,682		65,724
Commercial business loans		4,006		15,494

Total loan originations		177,383		317,647

Purchases:
Mortgage loans		13,497		—

Total loans purchased		13,497		—

Total loans originated and purchased	$	190,880	$	317,647

Management will continue to emphasize consumer, non-residential mortgage loan and commercial 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. In addition, we continued to add origination personnel to assist in the loan growth.

Deposits. Deposits decreased $44.8 million in the first three months of 2004 as a result of pricing our deposit offerings more toward market averages rather than above average pricing of deposits and the recent improved performance of the stock market. We also believe that deposit growth (or shrinkage) in the balance of 2004 and future periods will depend, in significant part, on the performance of other investment alternatives and world events.

Borrowings. Borrowings increased $428,000 in the first quarter of 2004 as a result of borrowing overnight to fund the decrease in deposits. Our overnight borrowings were $6.5 million at March 31, 2004 and we primarily borrow from the Federal Home Loan Bank of Chicago.

Advance Payments by Borrowers for Taxes and Insurance. Advance payments by borrowers for taxes and insurance (“escrow”) increased $7.7 million in the first quarter of 2004. The increase of escrow dollars was the result of payments received for customers’ escrow accounts and is seasonally normal.

Shareholders’ Equity. Shareholders’ equity increased $10.3 million in the first quarter of 2004, primarily as a result of our net income and an increase in comprehensive income partially offset by cash dividends paid. Bank Mutual paid a cash dividend of $0.04 per share on March 2, 2004, to shareholders of record on February 18, 2004. The dividend payout ratio was 43.4% in the first quarter of 2004.

Accumulated other comprehensive income increased $5.2 million in the first quarter of 2004 primarily as a result of the investment portfolio having higher unrealized gains, net of deferred taxes at March 31, 2004.

The Office of Thrift Supervision (“OTS”) recently denied our request for a waiver to permit us to repurchase shares prior to the first anniversary of our conversion to a fully shareholder owned company in October of 2003. We have requested that the OTS reconsider this order, but we cannot assure that the OTS will change its position. Therefore, except for the repurchases of up to 1.6 million shares which may be made relating to restricted stock awards under our recently approved 2004 Stock Incentive Plan, we will not be able to repurchase our shares until October 29, 2004.

ASSET QUALITY

The following table summarizes non-performing loans and assets:

NON-PERFORMING LOANS AND ASSETS


	At March 31 2004			At December 31 2003
	*(Dollars in thousands)*
Non-accrual mortgage loans	$	1,198		$	1,518
Non-accrual consumer loans		791			961
Non-accrual commercial business loans		4,191			6,809
Accruing loans delinquent 90 days or more		996			1,084

Total non-performing loans		7,176			10,372

Foreclosed properties and repossessed assets, net		2,575			630

Total non-performing assets	$	9,751		$	11,002

Non-performing loans to total loans		0.42	%		0.61	%

Non-performing assets to total assets		0.32	%		0.35	%

Additional interest income that would have been recognized if non-accrual loans had been current	$	404		$	384

Allowance for loan losses as a percent of non-performing assets		137.30	%		125.17	%

Total non-performing loans decreased as of March 31, 2004, as compared to December 31, 2003, primarily as a result of reclassifying two commercial business loans, totaling $1.6 million to

foreclosed properties and repossessed assets (which are included in non-performing assets but not non-performing loans). This action primarily related to several loans to one borrower which we previously identified and disclosed as being monitored, and which became non-performing during the fourth quarter of 2003. The decrease in non-performing mortgage loans was also the result of reclassifying a net amount of $345,000 in mortgage loans to foreclosed properties. The decrease in non-performing consumer loans was a result of reduced delinquencies. Total non-performing assets also decreased primarily as a result of the decrease in non-performing loans, although some non-performing loans were transferred to non-performing assets. We believe non-performing loans and assets, expressed as a percentage of total loans and assets, are below national averages for financial institutions, due in part to our loan underwriting standards.

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

ALLOWANCE FOR LOAN LOSSES


	At and for the Three Months Ended March 31, 2004			At and for the Three Months Ended March 31, 2003
	*(Dollars in thousands)*
Balance at the beginning of the period	$	13,771		$	12,743
Provisions for the period		490			258
Charge-offs:
Mortgage loans		(18	)		—
Consumer loans		(85	)		(86	)
Commercial business loans		(800	)		(19	)

Total charge-offs		(903	)		(105	)
Recoveries:
Mortgage loans		9			113
Consumer loans		21			9
Commercial business loans		—			—

Total recoveries		30			122

Net recoveries (charge-offs)		(873	)		17

Balance at the end of the period	$	13,388		$	13,018

Net recoveries (charge-offs) to average loans		(0.20	)%		0.00	%

Allowance as a percent of total loans		0.79	%		0.77	%

Allowance as a percent of non-performing loans		186.57	%		151.87	%

The charge-off of $800,000 of commercial business loans was the result of writing off a portion of a commercial loan before reclassifying it to foreclosed properties and repossessed assets.

The allowance for loan losses has been determined in accordance with accounting principles generally accepted in the United States. We are responsible for the timely and periodic determination of the amount of the allowance required. Future provisions for loan losses will continue to be based upon our assessment of the overall loan portfolio and the underlying collateral, trends in non-performing loans, current economic conditions and other relevant

factors. To the best of management’s knowledge, all known and inherent losses have been recorded. 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 multifamily and commercial loan portfolios increase, additional provisions would likely be added to the loan loss allowances as they carry a higher risk of loss. The dollar amount of the typical commercial real estate, development and commercial loan tends to be larger than our average single family loan and, therefore, any loss that we experience on these loans could be larger than what we have historically experienced on our single family loans. Depending on the type of commercial loan, the collateral may appeal only to a specialized group of people or businesses and, therefore, limit the number of potential buyers of the collateral, or in the case of collateral that is comprised of inventory, the liquidation of the collateral may be more uncertain. See “Non-performing Loans” for factors affecting some particular loans which affected the loan loss provisions for the periods discussed. Also, see “Significant Accounting Policies” for a discussion on or use of judgment in determining the amount of the allowance for loan losses.

Average Balance Sheet and Yield/Rate Analysis

The following table presents certain information regarding Bank Mutual Corporation’s financial condition and net interest income at and for the three months ended March 31, 2004 and 2003. The table presents the average yield on interest-earning assets and the average cost of interest-bearing liabilities for the periods indicated. The yields and costs are derived by dividing income or expense by the average balance of interest-earnings assets or interest-bearing liabilities respectively, for the periods shown. The average balances are derived from daily balances over the periods indicated. Interest income includes fees, which we considered adjustments to yields. Net interest spread is the difference between the yield on interest-earning assets and the rate paid on interest-bearing liabilities. Net interest margin is derived by dividing net interest income by net interest-earning assets. No tax equivalent adjustments were made since we do not have any tax exempt investments.

AVERAGE BALANCE SHEET, INTEREST AND RATE PAID


	Three Months Ended March 31
	2004						2003
	Average Balance		Interest Earned/ Paid		Average Yield/ Rate		Average Balance		Interest Earned/ Paid		Average Yield/ Rate
	*(Dollars in thousands)*
Assets:
Interest-earning assets:
Loans receivable (1)	$	1,723,231	$	23,897	5.55	%	$	1,753,760	$	27,685	6.31	%
Mortgage-related securities		1,049,945		11,626	4.43			628,236		7,353	4.68
Investment securities (2)		106,945		1,030	3.85			111,024		1,182	4.26
Interest-earning deposits		18,508		41	0.89			32,170		75	0.93
Federal funds		26,923		67	1.00			131,556		401	1.22

Total interest earning assets		2,925,552		36,661	5.02			2,656,746		36,696	5.52
Noninterest-earning assets		173,925						178,340

Total average assets	$	3,099,477					$	2,835,086

Liabilities and equity:
Interest-bearing liabilities:
Savings deposits	$	241,330		258	0.43		$	232,267		367	0.63
Money market accounts		353,866		872	0.99			354,279		1,346	1.52
Interest-bearing demand accounts		152,647		83	0.22			140,401		132	0.38
Time deposits		1,162,812		9,511	3.27			1,293,510		12,048	3.73

Total deposits		1,910,655		10,724	2.25			2,020,457		13,893	2.75
Advance payments by borrowers for taxes and insurance		6,518		4	0.25			7,356		10	0.54
Borrowings		298,433		3,841	5.15			332,389		4,607	5.54

Total Interest-bearing liabilities		2,215,606		14,569	2.63			2,360,202		18,510	3.14

Noninterest-bearing liabilities:
Noninterest-bearing deposits		105,095						102,079
Other noninterest-bearing liabilities		41,168						54,455

Total noninterest-bearing liabilities		146,263						156,534

Total liabilities		2,361,869						2,516,736
Shareholders’ equity		737,608						318,350

Total average liabilities and equity	$	3,099,477					$	2,835,086

Net interest income and net interest rate spread (3)			$	22,092	2.39	%			$	18,186	2.38

Net interest margin (4)					3.02	%					2.74	%

Average interest-earning assets to average interest-bearing liabilities		1.32x						1.13x

(1)	For the purposes of these computations, non-accruing loans and loans held for sale are included in the average loans outstanding.

(2)	Federal Home Loan Bank 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 rate on interest-bearing liabilities.

(4)	Net interest margin is determined by dividing annualized net interest income by total interest-earning assets.

Rate Volume Analysis of Net Interest Income

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.


	Three Months Ended
	March 31, 2004 Compared to March 31, 2003
	Increase (Decrease) Due To:
	Volume (1)			Rate (2)			Net (3)
	*(In thousands)*
Interest-earning assets:
Loans receivable	$	(475	)	$	(3,313	)	$	(3,788	)
Mortgage-related securities		4,689			(416	)		4,273
Investment securities		(42	)		(110	)		(152	)
Interest-earning deposits		(31	)		(3	)		(34	)
Federal funds		(272	)		(62	)		(334	)

Total	$	3,869		$	(3,904	)	$	(35	)

Interest-bearing liabilities:
Savings deposits	$	13		$	(122	)	$	(109	)
Money market deposits		(2	)		(472	)		(474	)
Interest-bearing demand deposits		11			(60	)		(49	)
Time deposits		(1,151	)		(1,386	)		(2,537	)

Total deposits		(1,129	)		(2,040	)		(3,169	)
Advance payments by borrowers for taxes and insurance		(1	)		(5	)		(6	)
Borrowings		(450	)		(316	)		(766	)

Total		(1,580	)		(2,361	)		(3,941	)

Net change in net interest income	$	5,449		$	(1,543	)	$	3,906

Comparison of Operating Results for the Three Months Ended March 31, 2004 and 2003

General. Net income was $7.1 million for the first quarter of 2004 as compared to $5.9 million for the first quarter of 2003. The increase was primarily the result of investing the $404.8 million of capital received from the Company’s stock offering in October 2003, which resulted in increases in interest income and the net interest margin. This increase was partially offset by the reduction in the gains on the sales of loans, an increase in the provision for loan losses, and an increase in operating expenses.

Net Interest Income. Net interest income increased $3.9 million, or 21.5%, to $22.1 million in the first quarter of 2004 as compared to $18.2 million for the same period in 2003. Net interest income increased as a result of an increase in the net interest margin and an increase in the dollar amount of interest earning assets. The net interest margin for the first quarter of 2004 was 3.02% as compared to 2.74% in the same period in 2003. The increase in the net interest margin was primarily the result of investing the $404.8 million of capital received from the stock offering (the capital bears no interest). The increase in the dollar amount of interest earning assets was also the result of the investment of the capital received from the Company’s stock offering. Most of the capital received was invested in mortgage-related securities.

Total Interest Income. Total interest income decreased slightly in the first quarter of 2004 primarily as a result of a decrease in the yields and dollar amounts on the loans; decrease in yields on investments offset by an increase in the dollar amount of mortgage-related securities.

Interest income on loans decreased $3.8 million, or 13.7%, to $23.9 million in the first quarter of 2004 as compared to $27.7 million for the same period in 2003. The decrease was the result of the decreased average dollar amount of the loan portfolio outstanding and a decreased yield on the loan portfolio. The construction and development loan and commercial business loan segment of the total loan portfolio experienced most of the reduction primarily as a result of a loan payoff in the amount of $20.9 million. It is anticipated that as the weather improves, we will increase the size of our construction and development loan portfolio.

Interest income on investment securities decreased $152,000, or 12.9% to $1.0 million as compared to $1.2 million in the same period of 2003. The decrease was primarily the result of reduced average dollars outstanding and a decreased yield on the average portfolio. As maturities of investment securities occurred, they were reinvested into mortgage-related securities or reinvested into investment securities at a yield that was below the existing yield on the portfolio.

Interest income on mortgage-related securities rose substantially in the first quarter of 2004 primarily as a result of the increase in the dollar amount of mortgage-related securities outstanding. This increase in the dollar amount outstanding was primarily the result of investing $404.8 million of capital received in our conversion to a fully shareholder owned company in October of 2003.

Interest income on interest earning deposits (which includes federal funds sold) decreased $368,000 primarily as a result of reduced average dollars outstanding and a decrease in the yields earned. The decrease in the average dollars outstanding was primarily the result of investing the short-term funds into short- to medium-term mortgage-related securities. The interest rates earned on short-term investments decreased in the first quarter of 2004 as compared to the same period in 2003 as a result of reduced market interest rates.

Interest Expense. Interest expense on deposits decreased $3.2 million, or 22.8% as a result of decreased average deposits outstanding and the decreased cost of those deposits. In view of our strong capital position and current alternatives for its deployment, we purposely reduced the interest rates offered on some of our time deposit products to decrease our cost of deposits.

Interest expense on borrowings decreased $766,000 or 16.6% primarily as a result of decreased average borrowings outstanding and the decreased cost of borrowings. Borrowings at March 31, 2004, were $428,000 higher than at December 31, 2003, primarily as a result of overnight borrowings. These overnight borrowings were necessitated as a result of utilizing all our overnight funds to purchase mortgage-related securities and funding the decrease in deposits.

Provisions for Loan Losses. Provisions for loan losses were $490,000 in the first quarter of 2004 as compared to $258,000 for the same period in 2003. The increase in the provision for loan losses was primarily the result of the $800,000 charge-off for a commercial loan that was reclassified to foreclosed properties. This charge-off was the result of adverse developments discussed above, which necessitated the increase in the provisions for loan losses.

The allowance for loan losses at March 31, 2004 was $13.4 million or 186.6% of non-performing loans and 137.3% of non-performing assets. The loan loss allowance to total loans was 0.79% at March 31, 2004 as compared to 0.80% at December 31, 2003.

Noninterest Income. Total noninterest income decreased $658,000 or 14.6%, primarily as a result of decreased gains on the sales of loans partially offset by increased loan related fees and servicing revenue.

Service charges on deposits increased $43,000 in the first quarter of 2004 primarily as a result of deposit pricing fees being increased.

Brokerage and insurance commissions increased $95,000 primarily as a result of increased fixed rate tax deferred annuity sales.

Loan related fees and servicing revenue increased $619,000 in the first quarter of 2004 as compared to the same period in 2003 as a result of reduced mortgage servicing rights impairments and a large prepayment fee on a construction and development loan. The mortgage servicing rights amortization and impairment in the first quarter of 2004 was $583,000 as compared to $902,000 in the first quarter of 2003. The decrease was primarily the result of a reduction in fixed rate mortgage loan payoffs and payments.

The prepayment fees collected in the first quarter of 2004 were $420,000 as compared to $7,000 in the first quarter of 2003. This increase is a result of a large prepayment fee collected from a construction and development loan payoff.

Gain on sales of loans decreased $1.4 million as a result of decreased fixed rate mortgage loan originations and subsequent sales of the fixed rate mortgage loans. We sell most of our 30 and 20 year fixed rate mortgage loans and we currently retain most 15 year fixed rate mortgage loans in our mortgage loan portfolio.

Other noninterest income decreased slightly in the first three months of 2004, primarily as a result of several income sources that were slightly decreased.

Noninterest Expense. Total noninterest expense increased $1.4 million or 10.3% in the first quarter of 2004 primarily as a result of an increase in compensation and related expenses and other expenses.

Compensation, payroll taxes and other employee benefit expense increased $917,000 primarily as a result of: increased ESOP costs as a result of increased fair market value of the allocated shares; decreased loan originations which results in less compensation being deferred to future periods; and the absence in 2004 of last year’s $150,000 recapture of a self-funded health plan reserve.

Occupancy and equipment expense increased $148,000 as a result of a new branch office building opened in the third quarter of 2003, a replacement of an existing office in late 2003 and upgrades to data processing equipment.

Other expenses increased $307,000 primarily as a result of increased marketing, legal, ATM and other expenses.

Income Taxes. The effective tax rate for the first quarter of 2004 was 33.9% as compared to 35.2% for the same period in 2003.

Bank owned life insurance income is permanently tax deferred if the policy is held to the participant’s death. Therefore, the income earned on the life insurance is not included in taxable income for the calculation of tax expense.

Like many Wisconsin financial institutions, we have non-Wisconsin subsidiaries which hold and manage investment assets which have not been subject to Wisconsin tax. The Wisconsin Department of Revenue has instituted an audit program specifically aimed at out of state bank subsidiaries and has indicated that it may withdraw favorable rulings previously issued in connection with such subsidiaries. The Department is conducting audits of many such organizations, including our Nevada subsidiaries. As a result of these developments, the Department appears to take the position that some or all of the income of the out of state subsidiaries is taxable in Wisconsin, which will likely be challenged by financial institutions in the state. If the Department is successful in its efforts, it would result in a substantial negative impact on the earnings of Bank Mutual Corporation.

Although there will likely be challenges to the Department’s actions and interpretations, Bank Mutual’s net income would be reduced if the Department succeeds in those actions. We also may incur costs in the future to address any action taken by the Department.

Impact of Inflation and Changing Prices. The financial statements and accompanying notes of Bank Mutual Corporation have been prepared in accordance with the generally accepted

accounting principles (“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.

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 the Bank borrowing correspondingly more in periods in which its operations generate less cash. In the event these sources of liquidity would become inadequate, we believe that we could access the wholesale deposit market, although there can be no assurances that wholesale deposits would be available if needed.

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 the first three months of 2004, loan prepayments were significantly reduced because of the 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.

We are committed to maintaining a strong liquidity position; therefore, we monitor our liquidity position on a daily basis. Based upon our historical experience and available sources of liquidity, we anticipate that we will have sufficient funds to meet current funding commitments. See also “Qualitative and Quantitative Disclosures about Market Risk – Gap Analysis” in Item 3 hereof, which is incorporated herein by reference, which discusses maturities.

Our primary investing activities are the origination and purchase of one-to four-family real estate loans, multi-family and commercial real estate loans, home equity loans, other consumer loans, commercial business loans, the purchase of mortgage-related securities, and to a lesser extent, the purchase of investment securities. These investing activities are funded by principal payments on mortgage loans and mortgage-related securities, calls and maturities on investment securities, borrowings, deposit growth, and funds provided by our operating activities.

Cash and cash equivalents decreased $55.0 million during the first three months of 2004. Investing activities utilized $17.7 million of cash, primarily as a result of the investment securities and mortgage-related securities purchases, partially offset by principal repayments on mortgage-related securities and on investment securities that matured. Cash utilized by financing activities of $39.9 million resulted primarily from a decrease in deposits and repayments of long-term borrowings. Net cash provided by operating activities of $2.6 million consisted primarily of net income, an increase in the net change of loans originated for sale and an increase in other assets partially offset by an increase in other liabilities.

In the fourth quarter of 2004, we have two $100.0 million borrowings from the FHLB of Chicago maturing. Depending on the availability of funds at that time, we will either pay off the borrowings, renew the borrowings at the FHLB at then current interest rates, or a combination thereof. However, we cannot assure that the borrowings alternatives will be available on acceptable terms.

At March 31, 2004, we exceeded each of the applicable regulatory capital requirements for the Bank. In order to be classified as “well-capitalized” by the FDIC we are required to have a leverage (Tier I) capital to average assets ratio of at least 5.00%. To be classified as a well-capitalized bank by the FDIC, we must also have a total risk-based capital to risk-weighted assets ratio of at least 10.00%. At March 31, 2004, the Bank had a total risk-based capital ratio of 30.80% and a leverage ratio of 15.05%. See Notes to Unaudited Consolidated Financial Statements – “Note 8 - Shareholders’ Equity.”

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

The Company has various financial obligations, including contractual obligations and commitments, that my require future cash payments.

The following table presents, as of March 31, 2004, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.


	Payments Due In
	One Year Or Less		One to Three Years		Three to Five Years		Over Five Years		Total
	*(In thousands)*
Deposits without a stated maturity (a)	$	857,085	$	—	$	—	$	—	$	857,085
Certificates of deposits (a)		495,297		498,164		156,899		—	$	1,150,360
Borrowed funds (a)		228,285		25,946		1,024		44,664		299,919
Operating leases		1,001		1,391		929		657		3,978
Purchase obligations		2,160		4,320		4,320		180		10,980
Deferred retirement plans and deferred compensation plans		220		419		317		7,218		8,174

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

The Company’s operating lease obligations represent short and long-term lease and rental payments for facilities, certain software and data processing and other equipment. Purchase obligations represent obligations under agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms, including:

fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The purchase obligation amounts presented above primarily relate to certain contractual payments for services provided for information technology.

The Company also has obligations under its deferred retirement plan for directors as described in Note 10 to the unaudited consolidated financial statements.

The following table details the amounts and expected maturities of significant commitments as of March 31, 2004.


	Payments Due In
	One Year Or Less		One to Three Years		Three to Five Years		Over Five Years		Total
	*(In thousands)*
Commitments to extend credit:
Commercial	$	17,355	$	—	$	—	$	—	$	17,355
Residential real estate		42,454		—		—		—		42,454
Revolving home equity and credit card lines		153,492		—		—		—		153,492
Standby letters of credit		13,685		—		—		—		13,685
Commercial letters of credit		1,452		547		4		10		2,013
Unused commercial lines of credit		35,312		—		—		—		35,312
Net commitments to sell mortgage loans		27,850		—		—		—		27,850

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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Gap Analysis. Repricing characteristics of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring a financial institution’s interest rate sensitivity “gap.” An asset or liability is said to be “interest rate sensitive” within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period.

A gap is considered positive when the amount of interest-earning assets maturing or repricing within a specific time period exceeds the amount of interest-bearing liabilities maturing or repricing within that specific time period. A gap is considered negative when the amount of interest-bearing liabilities maturing or repricing within a specific time period exceeds the amount of interest-earning assets maturing or repricing within the same period. During a period of rising interest rates, a financial institution with a negative gap position would be expected, absent the effects of other factors, to experience a greater increase in the costs of its liabilities relative to the yields of its assets and thus a decrease in the institution’s net interest income. An institution with a positive gap position would be expected, absent the effect of other factors, to experience the opposite result. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to reduce net interest income.

At March 31, 2004, based on the assumptions below, our interest-earning assets maturing or repricing within one year exceeded our interest-bearing liabilities maturing or repricing within the same period by $19.9 million. This represents a positive cumulative one-year interest rate sensitivity gap of 0.6%, and a ratio of interest-earning assets maturing or repricing within one year to interest-bearing liabilities maturing or repricing within one year of 101.7%. The cumulative gap ratio is significantly affected by $200.0 million of FHLB borrowings which has a quarterly call option and has a final maturity in the fourth quarter of 2004.

The following table presents the amounts of our interest-earning assets and interest-bearing liabilities outstanding at March 31, 2004, which we anticipate to reprice or mature in each of the future time periods shown. The information presented in the following table is based on the following assumptions:

Investment securities - based upon contractual maturities and if applicable, call dates.

ii)

Mortgage-related securities - based upon an independent outside source for determining estimated cash flows (expected prepayment speeds).

iii)

Loans - based upon contractual maturities, repricing dates, 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 historical decay rates.

Noninterest bearing demand accounts were added in the analysis at March 31, 2004 as a result of management’s belief that deposit dollars are being placed in this account that will be reinvested in other interest-bearing liabilities when interest rates rise.

vi)

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


	At March 31, 2004
	Within Three Months			Three to Twelve Months			More Than One Year To Three Years			More Than Three Years To Five Years			Over Five Years			Total
	*(Dollars in thousands)*
Interest-earning assets:
Loans receivable:
Mortgage loans:
Fixed	$	61,026		$	123,474		$	206,220		$	85,131		$	71,772		$	547,623
Adjustable		149,716			230,528			236,196			37,023			762			654,225
Consumer loans		109,303			129,193			138,953			47,287			29,567			454,303
Commercial business loans		23,491			17,059			22,855			4,464			1,477			69,346
Interest-earning deposits		1,024			—			—			—			—			1,024
Investment securities		47,941			4,495			16,470			—			—			68,906
Mortgage-related securities:
Fixed		42,191			170,036			475,256			258,444			114,247			1,060,174
Adjustable		26,806			—			—			—			—			26,806
Other interest-earning assets		36,074			—			—			—			—			36,074

Total interest-earning assets		497,572			674,785			1,095,950			432,349			217,825			2,918,481

Noninterest-bearing and interest-bearing liabilities:
Noninterest-bearing demand accounts		833			2,461			6,288			5,907			91,617			107,106
Interest-bearing liabilities:
Deposits:
Interest-bearing demand accounts		1,179			3,482			8,896			8,358			129,616			151,531
Savings accounts		3,125			5,702			14,569			13,687			212,265			249,348
Money market accounts		348,954			—			—			—			—			348,954
Time deposits		296,682			250,830			444,716			156,634			—			1,148,862
Advance payments by borrowers for taxes and insurance		—			10,674			—			—			—			10,674
Borrowings		28,363			200,215			27,063			2,475			41,838			299,954

Total interest-bearing and noninterest-bearing liabilities		679,136			473,364			501,532			187,061			475,336			2,316,429

Interest rate sensitivity gap	$	(181,564	)	$	201,421		$	594,418		$	245,288		$	(257,511	)	$	602,052

Cumulative interest rate sensitivity gap	$	(181,564	)	$	19,857		$	614,275		$	859,563		$	602,052

Cumulative interest rate sensitivity gap as a percentage of total assets		(5.87	)%		0.64	%		19.86	%		27.80	%		19.47	%

Cumulative interest-earning assets as a percentage of interest bearing liabilities		73.27	%		101.72	%		137.14	%		146.69	%		125.99	%

The methods used in the previous table have some 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.

Net Equity Sensitivity

In addition to the gap analysis table, we also use simulation models to monitor interest rate risk. The models report 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 March 31, 2004. The present value ratio shown in the table is the present value of equity as a percent of the present value of total assets in each of the different rate environments. For purposes of this table, we have made assumptions such as prepayment rates and decay rates similar to those used for the gap analysis table.


	Present Value of Equity							Present Value of Equity as a Percent of Present Value of Assets
	Present Value of Equity
Change in Interest Rates	Dollar Amount		Dollar Change			Percent Change		Present Value Ratio		Percent Change
(Basis Points)	*(Dollars in thousands)*
+300	$	719,832	$	(101,165	)	(12.3	)%	23.94	%	(7.7	)%
+200		756,338		(64,659	)	(7.9	)	24.70		(4.7	)
+100		791,272		(29,725	)	(3.6	)	25.39		(2.1	)
0		820,997		0		0.0		25.93		0.0
-100		827,345		6,348		0.8		25.87		(0.2	)
-200		789,015		(31,981	)	(3.9	)	24.64		(5.0	)
-300		747,427		(73,570	)	(9.0	)	23.33		(10.0	)

As in the case of the gap analysis table, the methods we used in the previous table have some 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 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 4. Controls and Procedures

Disclosure Controls and Procedures: Bank Mutual Corporation’s management, with the participation of Bank Mutual Corporation’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Bank Mutual Corporation’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, Bank Mutual Corporation’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, Bank Mutual Corporation’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by Bank Mutual Corporation in the reports that it files or submits under the Exchange Act.

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 fiscal quarter 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.

PART II. OTHER INFORMATION

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.

(e)

No repurchases of equity securities were made by Bank Mutual Corporation during the quarter. However, as a consequence of the approval of the 2004 Stock Incentive Plan, Bank Mutual Corporation announced that it intends to repurchase in market transactions up to 1,642,521 shares to fund awards of restricted stock under that plan. No specific schedule for the repurchases was adopted or announced

Item 4. Submission of Matters to a Vote of Security Holders.

(a), (c)

At Bank Mutual’s annual meeting of shareholders on May 1, 2004, the three continuing directors who were management’s nominees for re-election were elected to the Bank Mutual Corporation’s Board of Directors for terms ending in 2007. The directors were re-elected with the following votes:


Director’s Name	Votes For	Authority for Voting Withheld
Michael T. Crowley, Sr.	67,847,465	3,062,044
Raymond W. Dwyer, Jr.	68,201,782	2,707,777
J. Gus Swoboda	68,869,361	2,040,149

At the meeting, shareholders also ratified the selection of Ernst & Young LLP as auditors for fiscal 2004, by the following vote:


For:		69,851,964
Against:		441,014
Abstain:		616,531

In addition, shareholders approved the Bank Mutual Corporation 2004 Stock Incentive Plan. The vote on the Plan was as follows:


For:		43,284,100
Against:		8,519,252
Abstain:		920,797
Broker Non-Votes:		18,185,360

(b)

Thomas H. Buestrin, Michael T. Crowley, Jr., Mark C. Herr, Thomas J. Lopina, Sr., William J. Mielke, Robert B. Olson and David J. Rolfs continue as Bank Mutual Corporation directors whose terms expire in 2005 or 2006.

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits: See Exhibit Index, which follows the signature page hereof.

(b)

Reports on Form 8-K: None filed. However in the quarter ended March 31, 2004, the Registrant furnished a Form 8-K January 21, 2004, which is not to be deemed incorporated by reference into other filings, which disclosed Bank Mutual Corporation’s earnings release for the year ended December 31, 2003. In addition, it also furnished a Form 8-K April 23, 2004, which is also not deemed incorporated by reference into other filings, which disclosed Bank Mutual Corporation’s earning release for the quarter ended March 31, 2004.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		BANK MUTUAL CORPORATION
		(Registrant)

Date: May 7, 2004

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

Date: May 7, 2004

		/s/ Rick B. Colberg
		Rick B. Colberg
		Chief Financial Officer

EXHIBIT INDEX

BANK MUTUAL CORPORATION

Form 10-Q for Quarter Ended March 31, 2004


Exhibit No.	Description	Filed Herewith
31.1	Sarbanes-Oxley Act Section 302 Certification signed by the Chairman and Chief Executive Officer of Bank Mutual Corporation	X

31.2	Sarbanes-Oxley Act Section 302 Certification signed by the 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 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