Bank Mutual Corporation Reports Earnings for the Full Year 2007 and Fourth Quarter of 2007

Bank Mutual Corporation (NASDAQ:BKMU) reported net earnings of $17.1 million or $0.31 diluted earnings per share for the year ended December 31, 2007 as compared to $20.6 million or $0.34 diluted earnings per share during 2006. Earnings for the fourth quarter of 2007 were $4.1 million or $0.08 diluted earnings per share as compared to $4.6 million or $0.08 diluted earnings per share for the fourth quarter of 2006. Earnings decreased for the year ended December 31, 2007 primarily as a result of a decrease in the net interest margin and losses totaling $798,000 (net of income tax) on investments in two mutual funds, which invested in mortgage-related securities, that were determined to be other than temporarily impaired, partially offset by the recovery of previous provisions for loan losses and an increase in income adjustment of $445,000 (net of income tax) due to a one time adjustment to the amortization of deferred costs as reported to us by a 50% owned subsidiary. Earnings decreased for the fourth quarter of 2007 primarily as the result of the losses relating to mutual funds discussed above, offset by the income adjustment discussed above. Diluted earnings per share calculations and net income were also affected by Bank Mutual’s ongoing stock repurchase programs. "Fierce competition for shrinking deposits and loan business continued to pressure our net interest margin during most of 2007; however that pressure abated somewhat during the fourth quarter of 2007. Working in our favor were three components of our strategic plan. We boosted fee income. We managed our expenses with extreme discipline. And, our conservative underwriting standards continued to serve us well. We don’t engage in what is generally considered ’subprime mortgage lending‘ and we don’t intend to in the future.” stated Michael T. Crowley, Jr., Chairman, President and Chief Executive Officer of Bank Mutual Corporation. The reported results represent an 8.8% decrease in diluted earnings per share for the year ended December 31, 2007 as compared to 2006. The reported results in diluted earnings per share for the quarters ended December 31, 2007 and 2006 were the same. Net income for the year ended December 31, 2007 decreased 17.0%, and for the three months ended December 31, 2007 decreased 12.2%, as compared to the same periods in 2006. One-to-four family mortgage loan originations and purchases were $272.5 million for the year 2007 and $52.9 million for the fourth quarter of 2007 as compared to $365.9 million for the year 2006 and $57.2 million for the fourth quarter of 2006. The decreased originations and purchases of mortgage loans were the result of a decrease in home sales, purchases and construction. Multi-family and commercial real estate mortgage loan originations were $200.3 million for 2007 and $67.0 million for the fourth quarter of 2007 as compared to $138.8 million for 2006 and $35.3 million for the fourth quarter of 2006. The increased originations were the result of successful marketing efforts and the hiring of additional personnel. Loan sales were $102.9 million for 2007 as compared to $89.5 million for 2006. For the three months ended December 31, 2007 loan sales were $24.9 million as compared to $21.5 million for the same period in 2006. Loan sales increased in both periods because of increased fixed rate mortgage loan originations that resulted from increased demand caused by steady to declining interest rates and a decrease in demand for adjustable rate mortgages. As a result of the increased loan sales, gains on the sales of loans were $1.5 million for the year 2007 and $378,000 for the fourth quarter of 2007 as compared to $1.1 million and $281,000, respectively, for the comparable periods in 2006. Consumer loan originations for 2007 were $119.3 million as compared to $158.7 million for 2006 and $24.7 million for the fourth quarter of 2007 as compared to $32.4 million for the comparable period in 2006. The decreased originations for both periods in 2007 were primarily the result of declining demand in the face of slower growth in homeowners’ equity. The decreased originations for the year ended December 31, 2007 were also due to the discontinuance of indirect automobile loan originations through our 50% owned subsidiary, Savings Financial Corporation in the second quarter of 2006. Commercial business loan originations increased slightly in 2007 to $45.9 million as compared to $42.9 million in 2006, and were at $10.4 million for the fourth quarters of both 2007 and 2006. The increase in the year 2007 was primarily the result the continued emphasis by management to develop this portion of our loan portfolio, including the hiring of new personnel. In total, loan originations and purchases for the year 2007 were $638.0 million as compared to $706.3 million for 2006 and $155.0 million for the fourth quarter of 2007 as compared to $135.3 million for the same period in 2006, with the decrease in the year and increase in the fourth quarter due to the factors discussed above. Total assets were $3.5 billion at both December 31, 2007 and 2006. The investment securities portfolio increased by $51.2 million and the mortgage-related securities portfolio increased by $35.1 million during 2007. The increases were primarily a result of purchasing new investment and mortgage-related securities and an increase in the market value of the portfolios partially offset by repayments within the portfolios and the recognition of losses in the amount of $1.2 million related to investments in mutual funds that were deemed to be other than temporarily impaired at December 31, 2007. Deposits decreased $45.7 million during 2007 to $2.1 billion as compared to $2.2 billion at December 31, 2006. Within the deposit portfolio, certificates of deposit decreased $50.8 million and our core deposits (checking, savings and money market accounts) increased $5.1 million. The decrease in certificates of deposit resulted from our efforts to utilize lower cost funding alternatives as compared to higher cost certificates of deposit. The weighted average cost of deposits increased 0.09% at December 31, 2007 as compared to at December 31, 2006. Borrowings increased to $912.5 million at December 31, 2007 as compared to $705.0 million at December 31, 2006. The additional borrowings were primarily used for funding our stock repurchase programs, funding the decrease in deposits and purchasing investment and mortgage-related securities. We have paid 28 consecutive cash dividends since our initial stock offering. Cash dividends paid in 2007 were $0.33 per share as compared to $0.29 per share for 2006. This cash dividend increase of $0.04 per share in 2007 is a 13.8% increase over the cash dividends paid in 2006. Non-performing loans to total loans at December 31, 2007 decreased to 0.65% as compared to 0.72% at December 31, 2006 and 0.66% at September 30, 2007. This decrease in non-performing loans over the year was primarily the result of one non-performing commercial business loan being paid off in the first quarter of 2007. As a result of this loan being repaid, we recovered a net amount of approximately $929,000 of loan loss provisions in the first quarter of 2007, which was partially offset by additional provisions for loan losses of $51,000 in the second quarter, $388,000 in the third quarter and $218,000 in the fourth quarter of 2007. The additional provisions for loan losses were made in the normal course of business. Our allowance for loan losses at December 31, 2007 was $11.8 million or 91.0% of non-performing loans as compared to $12.6 million or 86.7% of non-performing loans at December 31, 2006. The net interest margin for the year 2007 decreased to 2.07% as compared to 2.25% for 2006. The decreased net interest margin for the year was primarily the result of the rising cost of deposits and our borrowings, the continued flattening and inversion of the yield curve and the effects of our stock repurchase programs. Specifically, the flattening and inversion of the yield curve reduced our ability to price our loan offerings at interest rates that would allow us to increase the yield on our loan portfolio faster than the increase in our cost of funds, thus compressing our net interest margin. For the fourth quarter of 2007, the net interest margin was 2.09% as compared to 2.06% for the fourth quarter of 2006. The increase in the net interest margin for the fourth quarter was due to an increase in the yield on loans and a decrease in the cost of deposits. Income taxes were lower in 2007 as compared to 2006 primarily because of a reduction in pretax income. Book value per share was $8.63 at December 31, 2007. The annualized return on average equity (ROE) for 2007 was 3.57% and 3.63% for the fourth quarter of 2007. The annualized return on average assets (ROA) for 2007 was 0.49% and 0.46% for the fourth quarter of 2007. We repurchased 10,820,448 shares during 2007 at an average price of $11.15 per share. In the fourth quarter of 2007, we repurchased 3,593,500 shares at an average price of $10.42 per share. We regularly review market conditions and costs of funds to determine when share repurchases are appropriate. Further information regarding Bank Mutual Corporation’s assets, liabilities and operations is attached. Bank Mutual Corporation is the fifth largest financial institution holding company headquartered in the state of Wisconsin and its stock is quoted on The Nasdaq Global Select Market® under the symbol "BKMU”. Its subsidiary bank, Bank Mutual, operates 77 offices in the state of Wisconsin and one office in Minnesota. Outlook The following are forward looking statements; see "Cautionary Statements” below. Bank Mutual Corporation’s management has identified a number of factors which may affect the Company’s operations and results in early 2008. They are as follows: There may be an environment of continued economic slow down. If that is the case, there are a number of effects that Bank Mutual, like other financial institutions, would likely experience.             -- Loan originations could continue to decrease, along with related interest and fee income.   -- A slow down in the appreciation of the value of real estate or even a decrease in value may occur. Reduced property prices could negatively affect the volume of home sales, which in turn could affect mortgage loan originations and prepayments.   -- A continuation of stabilized or soft real estate values could also affect the value of the collateral securing our mortgage loans. A decrease in value could in turn lead to increased losses on loans in the event of foreclosures, which would affect our provisions for loan losses and profitability.   -- A general slow down in the economy or a recession may affect our borrowers' ability to repay their loan obligations which could lead to increased loan losses or provisions.   -- If customer demand for real estate loans decreases, our profits may decrease because our alternative investments, primarily mortgage-related securities, earn less income than real estate loans. Bank Mutual will continue to further emphasize consumer loans, and commercial real estate and commercial business loans, all of which can present a higher risk than residential mortgages. Adding personnel to continue this emphasis will increase our costs. However, market conditions and other factors may continue to affect our ability to increase our loan portfolio with these types of loans. Bank Mutual opened two new offices in 2007, and anticipates opening up to two new offices in 2008. The addition of new offices increases our occupancy and related personnel costs going forward. Like many Wisconsin financial institutions, Bank Mutual has non-Wisconsin subsidiaries that hold and manage investment assets, the income from which has not been subject to Wisconsin tax. The Wisconsin Department of Revenue has instituted an audit program specifically aimed at out-of-state investment subsidiaries. Depending upon the terms and circumstances, an adverse resolution of these matters could result in additional Wisconsin tax obligations for prior periods and/or higher Wisconsin taxes going forward, with a substantial negative impact on our earnings. Although we believe we have reported income and paid Wisconsin taxes in accordance with applicable legal requirements and the Department’s long-standing interpretations of them, our 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. Cautionary Statements The discussions in this news release which are not historical statements contain forward-looking statements that involve risk and uncertainties. Statements which are not historical statements include those under "Outlook” and those in the future tense or which use terms such as "believe,” "expect,” and "anticipate.” Bank Mutual Corporation’s actual future results could differ in important and material ways from those discussed. Many factors could cause or contribute to such differences. These factors include changing interest rates and related yield curves, changes in demand for loans or other services, competition from other institutions, the results of our lending activities and loan loss experience, changes in real estate values, negative developments in the credit and lending markets, developments in the war on terrorism and other international developments, other general economic and political developments, those items discussed under "Outlook,” and other factors discussed in our filings with the Securities and Exchange Commission.     BANK MUTUAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION   December 31, December 31, 2007 2006 (In thousands) Assets Cash and due from banks $ 36,235 $ 44,438 Interest-earning deposits 2,714   1,022   Cash and cash equivalents 38,949 45,460 Securities available-for-sale, at fair value: Investment securities 99,450 48,290 Mortgage-related securities 1,099,922 1,064,851 Loans held for sale 7,952 3,787 Loans receivable, net 1,994,556 2,024,325 Goodwill 52,570 52,570 Other intangible assets 2,428 3,089 Mortgage servicing rights 4,708 4,653 Other assets 187,511   204,360   $ 3,488,046   $ 3,451,385     Liabilities and Shareholders' Equity Liabilities: Deposits $ 2,112,968 $ 2,158,641 Borrowings 912,459 705,025 Advance payments by borrowers for taxes and insurance 1,815 2,199 Other liabilities 27,859   49,223   3,055,101   2,915,088     Minority interest in real estate development 2,910   2,518     Shareholders' equity: Preferred stock - $.01 par value: Authorized - 20,000,000 shares in 2007 and 2006 Issued and outstanding - none in 2007 and 2006 - - Common stock - $.01 per value: Authorized - 200,000,000 shares in 2007 and 2006 Issued - 78,783,849 shares in 2007 and 2006 Outstanding - 49,834,756 in 2007 and 60,277,087 in 2006 788 788 Additional paid-in capital 498,408 496,302 Retained earnings 273,330 273,454 Unearned ESOP shares (2,166 ) (3,066 ) Accumulated other comprehensive income (6,069 ) (15,426 ) Treasury stock - 28,949,093 in 2007 and 18,506,762 shares in 2006 (334,256 ) (218,273 ) Total shareholders' equity 430,035 533,779     $ 3,488,046   $ 3,451,385           BANK MUTUAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME       Three MonthsEnded December 31, Twelve MonthsEnded December 31, 2007 2006 2007 2006 (In thousands,except per share data) (In thousands,except per share data)   Interest income: Loans $ 31,347 $ 30,452 $ 122,608 $ 118,175 Investments 1,336 960 4,871 3,762 Mortgage-related securities 13,203 12,227 52,518 50,017 Interest-earning deposits 493   478 2,471   1,917 Total interest income 46,379 44,117 182,468 173,871 Interest expense: Deposits 19,078 18,825 76,011 68,712 Borrowings 9,954 8,332 37,738 30,355 Advance payment by borrowers for taxes and insurance 7   8 22   24 Total interest expense 29,039     27,165 113,771     99,091 Net interest income 17,340 16,952 68,697 74,780 Provision for (recovery of) loan losses 218   335 (272 ) 632 Net interest income after provision for loan losses 17,122 16,617 68,969 74,148 Non-interest income: Service charges on deposits 1,714 1,696 6,612 6,085 Brokerage and insurance commissions 693 632 2,617 2,400 Loan related fees and servicing revenue 418 410 1,560 1,550 Gains (losses) on investments (1,228 ) - (1,228 ) 694 Gain on sales of loans 378 281 1,478 1,132 Real estate investment partnership income - - 1,422 - Other 2,408   1,427 8,500   5,707 Total noninterest income 4,383 4,446 20,961 17,568 Non-interest expenses: Compensation, payroll taxes and other employee benefits 9,426 9,385 38,234 37,468 Occupancy and equipment 2,755 2,615 11,277 10,539 Amortization of other intangible assets 165 165 661 661 Real estate investment partnership cost of sales - - 645 - Other 2,928   3,164 12,726   12,643 Total non-interest expenses 15,274 15,329 63,543 61,311 Minority interest in income of real estate operations 1   - 392   - Income before income taxes 6,230 5,734 25,995 30,405 Income taxes 2,160   1,097 8,892   9,808 Net income $ 4,070   $ 4,637 $ 17,103   $ 20,597   Per share data: Earnings per share-basic $ 0.08   $ 0.08 $ 0.32   $ 0.35 Earnings per share-diluted $ 0.08   $ 0.08 $ 0.31   $ 0.34 Cash dividends paid $ 0.085   $ 0.075 $ 0.330   $ 0.290         Bank Mutual Corporation and Subsidiaries Supplemental Financial Information (Unaudited) (Dollars in thousands except per share amounts and ratios)         For the ThreeMonths EndedDecember 31, 2007 For the TwelveMonths EndedDecember 31, 2007 Originations 2007   2006 2007   2006 Mortgage loans One to four family $ 42,303 $ 40,583 $ 195,923 $ 208,524 Multi-family 16,052 19,281 58,701 81,812 Commercial Real Estate 50,961   $ 15,982   141,603 $ 56,960 Total Mortgage Loans 109,316   75,846   396,227 347,296 Consumer loans 24,654 32,403 119,319 158,690 Commercial business loans 10,399   10,427   45,862 42,888 Total loan originations $ 144,369   $ 118,676   $ 561,408 $ 548,874   Purchases Mortgage loans 10,625   16,607   76,619 157,399 Total loan purchases 10,625   16,607   76,619 157,399 Total loans originated and purchased $ 154,994   $ 135,283   $ 638,027 $ 706,273 Loan Sales $ 24,858   $ 21,538   $ 102,853 $ 89,513   Loan Portfolio Analysis   December 31, December 31, 2007 2006 Mortgage loans: One to four family $ 1,059,307 $ 1,123,905 Multi-family 206,640 157,768 Commercial real estate 202,528 167,089 Construction and development 170,401   187,323   Total mortgage loans 1,638,876 1,636,085 Consumer loans 379,558 431,246 Commercial business loans 53,784   52,056   Total loans receivable 2,072,218 2,119,387 Deductions to gross loans 77,662   95,062   Total loans receivable, net $ 1,994,556   $ 2,024,325       Asset Quality Ratios   December 31, December 31, 2007 2006 Non-performing mortgage loans $ 11,251 $ 11,504 Non-performing consumer loans 930 803 Non-performing commercial business loans 159 1,625 Accruing loans delinquent 90 days or more 602   565   Total non-performing loans $ 12,942   $ 14,497   Total non-performing assets $ 16,629   $ 15,728     Non-performing loans to loans receivable, net 0.65 % 0.72 % Non-performing assets to total assets 0.48 % 0.46 % Allowance for loan losses to non-performing loans 90.98 % 86.74 % Allowance for loan losses to non-performing assets 70.80 % 79.95 % Allowance for loan losses to total loans 0.59 % 0.62 %   Net recoveries (charge-offs ) $ (528 ) $ (148 ) Net recoveries (charge-offs) to avg loans (annualized) -0.03 % -0.01 % Allowance for loan losses $ 11,774 $ 12,574   Deposit Analysis December 31, December 31, 2007 2006 Noninterest-bearing checking $ 97,506 $ 104,821 Interest-bearing checking 170,986 174,206 Savings accounts 183,756 200,016 Money Market accounts 280,442 248,542 Certificate accounts 1,380,278   1,431,056   Total Deposits $ 2,112,968   $ 2,158,641           Bank Mutual Corporation and Subsidiaries Supplemental Financial Information (Unaudited) (Dollars in thousands except per share amounts and ratios)             For theThree Months EndedDecember 31, 2007 For theTwelve Months EndedDecember 31, 2007 Operating Ratios (annualized) 2007 2006 2007 2006 Net interest margin (1) 2.09% 2.06% 2.07% 2.25% Net interest rate spread 1.63% 1.47% 1.57% 1.72% Return on average assets 0.46% 0.54% 0.49% 0.59% Return on average shareholders' equity 3.63% 3.50% 3.57% 3.89% Return on average tangible shareholders' equity (2) 4.17% 3.94% 4.07% 4.39% Efficiency ratio (3) 70.31% 71.64% 70.87% 66.39% Non-interest expense as a percent of average assets 1.74% 1.78% 1.81% 1.77%   (1) Net interest margin is determined by dividing net interest income by average earning assets for the periods indicated. (2) Return on average tangible shareholders' equity is determined by dividing net income by the net shareholders' equity minus goodwill, other intangible assets, mortgage servicing rights and applicable deferred taxes. Since many analysts establish financial matrices utilizing this ratio, Bank Mutual has chosen to provide this information. (3) Efficiency ratio is determined by dividing non-interest expense by the sum of net interest income and non-interest income for the periods indicated.       Other Information For theThree Months EndedDecember 31 For theTwelve Months EndedDecember 31 2007 2006 2007 2006 Average earning assets $ 3,314,458 $ 3,286,418 $ 3,314,412 $ 3,318,806 Average assets $ 3,521,063 $ 3,443,474 $ 3,511,624 $ 3,465,455 Average interest bearing liabilities $ 2,926,287 $ 2,785,426 $ 2,893,960 $ 2,810,893 Average shareholders' equity $ 448,811 $ 529,544 $ 479,000 $ 528,890 Average tangible shareholders' equity (4) $ 390,012 $ 470,397 $ 420,069 $ 469,275 Weighted average number of shares outstanding -used in basic earnings per share 50,624,403 58,268,214 54,109,643 59,315,648 -used in diluted earnings per share 51,708,732 59,929,415 55,397,790 60,999,611   (4) Average tangible shareholders' equity is average total shareholders' equity minus goodwill, other intangible assets, mortgage servicing rights and applicable deferred taxes     Book Value per Share   December 31, December 31, 2007 2006 Number of shares outstanding (net of treasury shares) 49,834,756 60,277,087 Book value per share $ 8.63 $ 8.86     Weighted Average Net Interest Rate Spread   AtDecember 31, AtDecember 31, 2007 2006 Yield on loans 6.26% 6.04% Yield on investments 4.63% 4.47% Combined yield on loans and investments 5.64% 5.48% Cost of deposits 3.61% 3.52% Cost of borrowings 4.27% 4.46% Total cost of funds 3.81% 3.75% Interest rate spread 1.83% 1.73%