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SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549
 FORM 10-K þ Annual Report Pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2004 or o Transition Report Pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from  to Commission file number 0-21292 MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. 
 Wisconsin
    
    39-1413328(State or other jurisdiction of incorporation or
    
    (I.R.S. Employer Identification Number)organization)5445 South Westridge DriveNew Berlin, Wisconsin 53151(Address of principal executive office)Registrants telephone number, including area code: (262) 827-6700Securities registered pursuant to Section 12(b) of the Act: Not ApplicableSecurities registered pursuant to section 12(g) of the Act:Common Stock, par value $1.00 per share(Title of Class)
 Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes þ No o. Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this form 10-K þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2) Yes þ No o. As of June 30, 2004 (the last business day of the Registrants most recently completed second
fiscal quarter) the aggregate market value of the shares (based upon the average bid/ask price)
held by non-affiliates was approximately $98,235,496. As of March 1, 2005, 3,674,054 shares of Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 2005 Annual Meeting of Shareholders of the Registrant are
incorporated by reference into Part III of this report.




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MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. ***** ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2004 PagePart IItem 1. Business
    
    
    3Item 2. Properties
    
    
    9Item 3. Legal Proceedings
    
    
    10Item 4. Submission of Matters to a Vote of Security Holders
    
    
    10Part IIItem 5. Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
    
    
    10Item 6. Selected Financial Data
    
    
    11Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    13Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 8. Financial Statements and Supplementary Data
    
    
    30Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    30Item 9A. Controls and Procedures
    
    
    31Item 9B. Other Information
    
    
    32Part IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    32Item 11. Executive Compensation
    
    
    32Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
    
    
    32Item 13. Certain Relationships and Related Transactions
    
    
    32Item 14. Principal Accountant Fees and Services
    
    
    32Part IVItem 15. Exhibits and Financial Statement Schedules
    
    
    33SignaturesSubsidiariesConsent of Independent Registered Public Accounting FirmCertification of Pursuant to Section 302Certification of Pursuant to Section 302Certification of Pursuant to Section 906Certification of Pursuant to Section 906
 2




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PART I 
 Item 1. Business General Merchants and Manufacturers Bancorporation, Inc. (Merchants) was incorporated in
Wisconsin in 1983 and is a registered bank holding company under the Bank Holding Company Act of
1956. As of December 31, 2004, we had total consolidated assets of $1.4 billion, consolidated
loans of $1.0 billion and consolidated deposits of $1.0 billion. Our executive offices are located
at 5445 South Westridge Drive, New Berlin, Wisconsin 53151 (telephone number (262) 827-6700). We are engaged in the community banking business through our Community Financial Group, which
includes our nine bank subsidiaries. We operate seven bank subsidiaries in Wisconsin, including
Lincoln State Bank; Grafton State Bank; Franklin State Bank; Community Bank Financial; Fortress
Bank of Westby, The Reedsburg Bank and Wisconsin State Bank. We also operate two additional bank
subsidiaries, Fortress Bank of Cresco and Fortress Bank Minnesota, which operate in Iowa and
Minnesota, respectively. Through our banks, we provide a broad range of services to individual and commercial
customers. Collectively, our subsidiary banks enjoy the competitive advantages of being able to
offer the products, services, operational capacity and the lending limit of a larger institution
with the timely personal customer service typically offered by a community bank. In addition to traditional bank products, we offer our customers a broad range of residential
mortgage services through CFG Mortgage, Inc., and a full range of investment, tax and life
insurance products through CFG Financial Services, Inc. Each of these subsidiaries enable our
member banks to provide a full range of financial products to their customers as well as contribute
non-interest income to us. We also operate three additional non-bank operating subsidiaries: Lincoln Neighborhood
Redevelopment Corporation, which was organized in 1988 for the purpose of redeveloping and
rehabilitating certain areas located primarily on the near south side of Milwaukee; Merchants
Merger Corporation which was formed in 1999 to facilitate bank acquisitions and Merchants New
Merger Corporation which was formed to facilitate the Reedsburg Bank acquisition. Growth Strategy Over the last five years, our total assets have increased from $533 million as of
December 31, 1999 to $1.4 billion as of December 31, 2004. In addition to the growth of bank
assets, over the last two years we have also created or acquired a mortgage company, a financial
services company and a tax consultation and tax preparation firm. The key elements of our growth
strategy going forward include acquisitions, internal growth and continued focus on expanding our
non-interest income. AcquisitionsWe believe there are significant opportunities to establish our presence in
additional markets through the acquisition of selected community banks, individual branches and
other financial service businesses, primarily in Wisconsin. We generally look at four qualities
when analyzing a potential acquisition:  
    the profitability of the institution on a historical and forward looking basis;
    the stability and experience of the management team and board of directors;
    the growth potential of the geographical markets in which the institution operates; and
    the asset quality track record of the institution and management. Internal growthWhile we completed acquisitions in each of the last four years, significant
opportunities exist to expand through internal growth by delivering quality products and by
providing personal service to individuals and small to mid-sized businesses. By focusing on
customer service and convenience, we provide the opportunity for clients to receive the
personalized service they find attractive in smaller organizations and still realize many of the
efficiencies available to larger organizations. In addition, we intend to expand through internal growth with the addition of quality
employees and through de novo branching into high growth markets by our existing bank subsidiaries.
During this growth period Merchants has made a significant investment in recruiting and developing
highly qualified and productive commercial loan officers, mortgage loan officers, financial service
representatives and accountants. Non-interest incomeDuring 2004 we consolidated all of our mortgage operations into our
mortgage subsidiary, CFG Mortgage, Inc. The consolidation allows for improved execution in the
secondary market, expanded product offerings and enhanced operational efficiencies. Through CFG
Financial Services, Inc., we have significantly enhanced our ability to provide investment and
insurance products as well as tax consultation and tax preparation services to our current customer
base. Over time, we expect the mortgage and non-traditional bank businesses to significantly
enhance our relationships with current bank clients and also provide our subsidiary banks with
additional opportunities for deposit and loan growth with their non-bank client base. 3




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Recent Acquisition During 2004, we expanded our operations into the Wisconsin markets of Random Lake and
Prairie du Chien through an acquisition. On August 12, 2004, we acquired Random Lake Bancorp,
Limited. (Random Lake) and its wholly-owned subsidiary, Wisconsin State Bank. The purchase price
for Random Lake was $11.5 million including $1.3 million in cash and 334,200 shares of Merchants
common stock valued at $10.2 million based on a $30.50 per share price of Merchants common stock.
At the date of the acquisition Random Lake had assets of $102.3 million, loans of $72.9 million and
deposits of $80.0 million. Our Bank Subsidiaries We currently provide community-oriented, commercial and retail banking services to
individuals as well as to small to mid-size businesses in our communities through 43 banking
facilities in Wisconsin, Iowa & Minnesota. The Banks have consistent products, services and
delivery systems and comply with similar regulatory guidance. As such they are not segments as
that term is defined in Financial Accounting Standards Board Statement No. 131. The table below
provides information regarding each of our banks and their respective markets. Total Assets at
    
    
    
    
    Number ofBank
    
    Year Organized
    
    Year Acquired
    
    December 31, 2004
    
    
    Communities Served
    
    Facilities(dollars in thousands)Lincoln State Bank
    
    1919
    
    1983
    
    $
    434,144
    
    
    Milwaukee, WI
    
    7Muskego, WI
    
    2Brookfield, WI
    
    1Greenfield, WI
    
    2Hales Corners, WI
    
    1New Berlin, WI
    
    2Pewaukee, WI
    
    1West Allis, WI
    
    1Grafton State Bank
    
    1906
    
    1999
    
    $
    177,427
    
    
    Grafton, WI
    
    2Saukville, WI
    
    1Franklin State Bank
    
    1982
    
    1984
    
    $
    91,455
    
    
    Franklin, WI
    
    3Community Bank Financial
    
    1989
    
    2001
    
    $
    95,277
    
    
    Oconto Falls, WI
    
    1Gillett, WI
    
    1Little Suamico, WI
    
    1Cecil, WI
    
    1Fortress Bank of Westby
    
    1992
    
    2002
    
    $
    137,154
    
    
    Westby, WI
    
    2Coon Valley, WI
    
    1West Salem, WI
    
    1Chaseburg, WI
    
    1Fortress Bank of Cresco
    
    1996
    
    2002
    
    $
    69,400
    
    
    Cresco, IA
    
    1Fortress Bank Minnesota
    
    1993
    
    2002
    
    $
    55,808
    
    
    Houston, MN
    
    1Winona, WI
    
    1The Reedsburg Bank
    
    1867
    
    2003
    
    $
    178,547
    
    
    Reedsburg, WI
    
    2North Freedom, WI
    
    1Lime Ridge, WI
    
    1Wisconsin State Bank
    
    1905
    
    2004
    
    $
    100,426
    
    
    Random Lake, WI
    
    1Belgium, WI
    
    1Prairie du Chien, WI
    
    2
 Our Banks Through our banks, we provide a broad range of services to individual and commercial
customers. These services include accepting demand, savings and time deposits, including regular
checking accounts, NOW accounts, money market accounts, savings accounts, certificates of deposit,
individual retirement accounts and club accounts. Our banks also make secured and unsecured
commercial, mortgage, construction and consumer term loans on both a fixed and variable rate basis.
The terms on the loans retained in the banks portfolios generally range from one month to five
years. Our banks also provide lines of credit to commercial borrowers and to individuals through
home equity loans. Lincoln State Bank.Lincoln State Bank operates as a state banking association under the laws
of the State of Wisconsin. It operates seven full service branch offices in the southeastern
Wisconsin communities of Milwaukee, Muskego, New Berlin, Brookfield and Pewaukee. In addition it
operates ten limited hours facilities in Milwaukee and Waukesha Counties. At December 31, 2004,
Lincoln State Bank comprised 32.0% of our consolidated assets. 4




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Grafton State Bank.Grafton State Bank operates as a state banking association under the laws
of the State of Wisconsin. Its principal office and a branch office are located in Grafton,
Wisconsin and another branch office is located in Saukville, Wisconsin. At December 31, 2004,
Grafton State Bank comprised 13.1% of our consolidated assets. Franklin State Bank.Franklin State Bank operates as a state banking association under the
laws of the State of Wisconsin. Its principal office and a branch office are located in Franklin,
Wisconsin. In addition it also operates a limited hours facility in Franklin. At December 31,
2004, Franklin State Bank comprised 6.7% of our consolidated assets. Community Bank Financial. Community Bank Financial (f/k/a Community Bank of Oconto County) is
a full service commercial bank serving all of Oconto County and the eastern portion of Shawano
County. In addition to the main office in the city of Oconto Falls, which is located approximately
25 miles north of Green Bay, Wisconsin, Community Bank Financial operates three branch offices, one
located in the city of Gillett, another located in the town of Little Suamico and another located
in the village of Cecil. At December 31, 2004, Community Bank Financial comprised 7.0% of our
consolidated assets. Fortress Bank of Westby.Fortress Bank of Westby is a full service commercial bank serving
the banking needs of LaCrosse County, southeastern Monroe County and northern Vernon County,
Wisconsin. Fortress Bank of Westby has offices in the southwestern Wisconsin communities of
Westby, Coon Valley, Chaseburg, and West Salem. At December 31, 2004, the Fortress Bank of Westby
comprised 10.1% of our consolidated assets. Fortress Bank of Cresco.Fortress Bank of Cresco is a full service commercial bank serving
the banking needs of eastern Howard County and western Winneshiek County, Iowa from its office in
Cresco, Iowa. At December 31, 2004, Fortress Bank of Cresco comprised 5.1% of our consolidated
assets. Fortress Bank Minnesota.Fortress Bank Minnesota, (f/k/a Fortress Bank, N.A) is a full
service commercial bank serving customers in Houston County and northeast Winona County in
Minnesota from offices in Houston and Winona. At December 31, 2004, Fortress Bank Minnesota,
comprised 4.1% of our consolidated assets. The Reedsburg Bank.The Reedsburg Bank is a full service commercial bank serving the banking
needs of Sauk County, and portions of Juneau, Richland, and Adams Counties, Wisconsin. The
Reedsburg Bank has offices in the Wisconsin communities of Reedsburg, North Freedom and Lime Ridge.
At December 31, 2004, the Reedsburg Bank comprised 13.2% of our consolidated assets. Wisconsin State Bank.Wisconsin State Bank operates as a state banking association under the
laws of the State of Wisconsin. Its principal office is located in Random Lake, Wisconsin and also
has a branch office located in Belgium, Wisconsin and two other branch offices located in Prairie
du Chien, Wisconsin. At December 31, 2004, Wisconsin State Bank comprised 7.4% of our consolidated
assets. Our Operating Subsidiaries CFG Financial Services, Inc.was formed in 2002 to provide tax as well as non-insured
investment and insurance products to customers of the Banks. For the twelve months ended December
31, 2004, CFG Financial Services had revenues of $1.5 million. CFG Mortgage, Inc.was formed in 2002 to act as our mortgage broker. As of December 31, 2004,
CFG Mortgage services $346.0 million of residential mortgages. Lincoln Neighborhood Redevelopment Corporation.The Lincoln Neighborhood Redevelopment
Corporation was formed in June 1988. The Redevelopment Corporation was established to redevelop
and rehabilitate certain areas located on the south-side of Milwaukee by, among other things:  
    providing home mortgage loans to customers with low to moderate income;
    working with local businesses to keep commercial areas strong and attractive;
    pursuing means to preserve and create jobs;
    encouraging appropriate land-use;
    involving community residents in economic planning; and
    retaining and attracting businesses. As of December 31, 2004, the Redevelopment Corporation had assets of $1.4 million, $985,000 in
liabilities and equity of $436,000. Merchants Merger Corp.Merchants Merger Corp. was formed in 1999 to facilitate mergers and
future acquisitions. Merchants New Merger Corp.Merchants New Merger Corp. is the historical Reedsburg
Bancorporation parent company that was renamed following the acquisition. 5




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Other Subsidiaries Lincoln State Bank, Grafton State Bank, Community Bank Financial, Fortress Bank of
Westby, The Reedsburg Bank and Wisconsin State Bank each have a wholly owned subsidiary. In 1991
an investment subsidiary known as M&M  Lincoln Investment Corporation was formed to manage the
majority of Lincoln State Banks investment portfolio and to enhance the overall return of the
portfolio. The subsidiary received a capital contribution of approximately $13 million of
mortgage-backed and other investment securities from Lincoln State Bank in exchange for 100% of the
stock of the subsidiary. In 1992 an investment subsidiary known as Westby Investment Company, Inc.
was formed to manage the majority of the Fortress Bank of Westbys investment portfolio and to
enhance the overall return of the portfolio. The subsidiary received a capital contribution of
approximately $10 million of municipal and other investment securities from the Fortress Bank of
Westby in exchange for 100% of the stock of the subsidiary. In 1992 an investment subsidiary known
as Reedsburg Investment Corp. was formed to manage the majority of the Reedsburg Banks investment
portfolio and to enhance the overall return of the portfolio. The subsidiary received a capital
contribution of approximately $13 million of municipal and other investment securities from the
Reedsburg Bank in exchange for 100% of the stock of the subsidiary. In 1994 an investment
subsidiary known as Random Lake Investments, Inc. was formed to manage the majority of the
Wisconsin State Banks investment portfolio and to enhance the overall return of the portfolio.
The subsidiary received a capital contribution of approximately $7 million of municipal and other
investment securities from Wisconsin State Bank in exchange for 100% of the stock of the
subsidiary. In 1996 an investment subsidiary known as GSB Investments, Inc. was formed to manage
the majority of Grafton State Banks investment portfolio and to enhance the overall return of the
portfolio. The subsidiary received a capital contribution of approximately $10 million of
mortgage-backed and other investment securities from Grafton State Bank in exchange for 100% of the
stock of the subsidiary. In 2001 an investment subsidiary known as CBOC Investments, Inc. was
formed to manage the majority of the Community Bank Financial investment portfolio and to enhance
the overall return of the portfolio. The subsidiary received a capital contribution of
approximately $11 million of municipal and other investment securities from Community Bank
Financial in exchange for 100% of the stock of the subsidiary. These subsidiaries are an intrinsic
component of their respective parent banks and assets thereof are included in the total assets of
the respective Banks above. Competition Our banks serve their surrounding communities in their respective markets located in
Wisconsin, Iowa and Minnesota. There are presently in excess of one hundred other financial
institutions in our service areas that directly compete with one or more of our banks. Our banks
compete with other commercial banks, savings banks, credit unions, mortgage brokers, small-loan
companies, insurance companies, investment banking firms and large retail companies. The principal methods of competition include, interest rates paid on deposits and charged on
loans, personal contacts and efforts to obtain deposits and loans and types and quality of services
provided and convenience of the locations. Employees At December 31, 2004, we (along with our subsidiaries) employed 471 full-time and 100
part-time employees. We provide a wide range of benefits to employees, including educational
activities, and consider our employee relations to be excellent. We conduct extensive training
programs in order to enhance job-related knowledge and skills of our people and to train our
employees with a sales-oriented approach to customers. Eligible employees participate in a 401(k)
plan as well as group life and major medical insurance programs. None of our employees are
represented by a labor union. Supervision and Regulation We are extensively regulated under both federal and state laws. Laws and regulations to
which Merchants and Manufacturers and our banks are subject govern, among other things, the scope
of business, investments, reserve levels, capital levels relative to operations, the nature and
amount of collateral for loans, the establishment of branches, mergers and consolidations and the
payment of dividends. These laws and regulations are intended to protect our depositors. Any
change in applicable laws or regulations may have a material effect on our business and prospects,
and legislative and policy changes may affect our operations. We cannot predict the nature or the
extent of the effects on our business and earnings that fiscal or monetary policies, economic
controls or new federal or state legislation may have in the future. The earnings and business of Merchants and its bank subsidiaries also are affected by the
general economic and political conditions in the United States and abroad and by monetary and
fiscal policies of various federal agencies. The Federal Reserve Board impacts the competitive
conditions under which we operate by determining the cost of funds obtained from money market
sources for lending and investing and by exerting influence on interest rates and credit
conditions. In addition, legislative and economic factors can be expected to have an ongoing
impact on the competitive environment within the financial services industry. The impact of
fluctuating economic conditions and federal regulatory policies on the future profitability of our
organization cannot be predicted with certainty. The following references to statutes and regulations affecting us and the banks are brief
summaries only and do not claim to be complete and are qualified in their entirety by reference to
the statutes and regulations. 6




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Sarbanes-Oxley Act of 2002 On July 30, 2002, President Bush signed the Sarbanes-Oxley Act of 2002 (the
Sarbanes-Oxley Act). This legislation impacts corporate governance of public companies,
affecting their officers and directors, their audit committees, their relationships with their
accountants and the audit function itself. Certain provisions of the Act became effective on July
30, 2002. Others became effective as the SEC adopted appropriate rules. The Sarbanes-Oxley Act
implements a broad range of corporate governance and accounting measures for public companies
designed to promote honesty and transparency in corporate America and better protect investors from
corporate wrongdoing. The Sarbanes-Oxley Acts principal legislation includes: a) the creation of
an independent accounting oversight board to oversee the audit of public companies and auditors who
perform such audits; b) auditor independence provisions which restrict non-audit services that
independent accountants may provide to their audit clients; c) additional corporate governance and
responsibility measures, including: (i) requiring a companys chief executive officer and chief
financial officer to certify financial statements; (ii) prohibiting trading of securities by
officers and directors during periods in which certain employee benefit plans are prohibited from
trading; (iii) requiring a companys chief executive officer and chief financial officer to forfeit
salary and bonuses, including profits on the sale of company securities, in certain situations; and
(iv) protecting whistleblowers and informants; d) expansion of power of the audit committee,
including the requirements that the audit committee: (i) have direct control of the engagement of
the outside auditor; (ii) be able to hire and fire the auditor, and (iii) approve all non-audit
services; e) expanded disclosure requirements, including accelerated reporting of stock
transactions by insiders and the prohibition of most loans to directors and executive officers of
non-financial institutions; mandatory disclosure by analysts of potential conflicts of interest;
and f) a range of enhanced penalties for fraud and other violations. Anti-Money Laundering Laws Our banks are subject to the Bank Secrecy Act and its implementing regulations and other
anti-money laundering laws and regulations, including the USA PATRIOT Act of 2001. Among other
things, these laws and regulations require our banks to take steps to prevent the use of each
institution for facilitating the flow of illegal or illicit money, to report large currency
transactions and to file suspicious activity reports. Each bank also is required to develop and
implement a comprehensive anti-money laundering compliance program. Banks also must have in place
appropriate know your customer policies and procedures. Violations of these requirements can
result in substantial civil and criminal sanctions. The USA PATRIOT Act is designed to deny
terrorists and criminals the ability to obtain access to the United States financial system, and
has significant implications for depository institutions, brokers, dealers and other businesses
involved in the transfer of money. The USA PATRIOT Act mandates or will require financial services
companies to implement additional policies and procedures with respect to, or additional measures
designed to address, any or all of the following matters, among others: money laundering, terrorist
financing, identifying and reporting suspicious activities and currency transactions, and currency
crimes. In addition, provisions of the USA PATRIOT Act require the federal financial institution
regulatory agencies to consider the effectiveness of a financial institutions anti-money
laundering activities when reviewing bank mergers and bank holding company acquisitions. Bank Holding Company Regulation We are a bank holding company registered under the Bank Holding Company Act of 1956, as
amended. Under the Bank Holding Company Act, we are subject to periodic examination by the Federal
Reserve and are required to file periodic reports of our operations and such additional information
as the Federal Reserve may require. Investments and Activities. A bank holding company must obtain approval from the Federal
Reserve before:  acquiring, directly or indirectly, ownership or control of any voting shares of
another bank or bank holding company if, after the acquisition, it would own or control more than
5% of the shares of the bank or bank holding company (unless it already owns or controls the
majority of the shares);  acquiring all or substantially all of the assets of another bank or bank holding company; or  merging or consolidating with another bank holding company. The Federal Reserve will not approve any acquisition, merger or consolidation that would have
a substantially anticompetitive result unless the anticompetitive effects of the proposed
transaction are clearly outweighed by a greater public interest in meeting the convenience and
needs of the community to be served. The Federal Reserve also considers capital adequacy and other
financial and managerial factors in reviewing acquisitions or mergers. With certain exceptions, a bank holding company is also prohibited from:  acquiring or retaining direct or indirect ownership or control of more than 5% of the
voting shares of any company that is not a bank or bank holding company; and  engaging, directly or indirectly, in any business other than that of banking, managing
and controlling banks or furnishing services to banks and their subsidiaries. Bank holding companies may, however, engage in businesses found by the Federal Reserve to be
closely related to the business of banking or of managing or controlling banks. These activities
include: 7




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
    making or servicing loans and certain types of leases;
    engaging in certain insurance and discount brokerage activities;
    performing certain data processing services;
    acting in certain circumstances as a fiduciary or investment or financial advisor;
    owning savings associations; and
    making investments in corporations or projects designed to promote community welfare. We are also authorized to engage in the expanded activities permitted under the
Gramm-Leach-Bliley Act since we elected to become a financial holding company and to otherwise
qualify for financial holding company status. Finally, subject to certain exceptions, the Bank Holding Company Act and the Change in Bank
Control Act, and the Federal Reserves implementing regulations, require Federal Reserve approval
prior to any acquisition of control of a bank holding company, such as Merchants and
Manufacturers. In general, a person or company is presumed to have acquired control if it acquires
as little as 5% of the outstanding shares of a bank or bank holding company and is conclusively
determined to have acquired control if it acquires 25% or more of the outstanding shares of a bank
or bank holding company. Source of Strength. The Federal Reserve expects us to act as a source of financial strength
and support for our bank subsidiaries and to take measures to preserve and protect the banks in
situations where additional investments in the banks may not otherwise be warranted. The Federal
Reserve may require a bank holding company to terminate any activity or relinquish control of a
non-bank subsidiary (other than a non-bank subsidiary of a bank) upon the Federal Reserves
determination that the activity or control constitutes a serious risk to the financial soundness or
stability of any subsidiary depository institution of the bank holding company. Further, federal
bank regulatory authorities have additional discretion to require a bank holding company to divest
itself of any bank or non-bank subsidiary if the agency determines that divestiture may aid the
depository institutions financial condition. Capital Requirements. The Federal Reserve uses capital adequacy guidelines in its examination
and regulation of bank holding companies and banks. If the capital falls below minimum guideline
levels, a bank holding company, among other things, may be denied approval to acquire or establish
additional banks or non-bank businesses. The Federal Reserves capital guidelines establish a
risk-based requirement expressed as a percentage of total risk-weighted assets and a leverage
requirement expressed as a percentage of total assets. The risk-based requirement consists of a
minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must
be Tier 1 capital (which consists principally of shareholders equity). The leverage requirement
consists of a minimum ratio of Tier 1 capital to total assets of 3% for strong bank holding
companies and for bank holding companies that have implemented the Federal Reserves risk based
capital measure for market risk (otherwise the minimum ratio is 4%). The risk-based and leverage standards presently used by the Federal Reserve are minimum
requirements, and higher capital levels may be required if warranted by the particular
circumstances or risk profiles of individual banking organizations. Further, any banking
organization experiencing or anticipating significant growth would be expected to maintain capital
ratios, including tangible capital positions, which is Tier 1 capital less all intangible assets,
well above the minimum levels. Dividends. The Federal Reserve has issued a policy statement concerning the payment of cash
dividends by bank holding companies. The policy statement provides that a bank holding company
experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which
could only be funded in ways that weakened the bank holding companys financial health, such as by
borrowing. Also, the Federal Reserve possesses enforcement powers over bank holding companies and
their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices
or violations of applicable statutes and regulations. Among these powers is the ability to
proscribe the payment of dividends by banks and bank holding companies. Bank Regulations Lincoln State Bank, Grafton State Bank, Franklin State Bank, Community Bank Financial,
Fortress Bank of Westby, The Reedsburg Bank and Wisconsin State Bank operate under Wisconsin state
bank charters and are subject to regulation by the Wisconsin Department of Financial Institutions
Division of Banking and the FDIC. The Fortress Bank of Cresco, Iowa operates under an Iowa state
bank charter and is subject to regulation by the FDIC and the Iowa Division of Banking. Fortress
Bank Minnesota operates under a Minnesota bank charter and is subject to regulation by the FDIC and
the Minnesota Department of Commerce. The state banking regulators detailed above and the FDIC
regulate or monitor all areas of the banks operations, including capital requirements, issuance of
stock, declaration of dividends, interest rates, deposits, record keeping, establishment of
branches, acquisitions, mergers, loans, investments, borrowing, security devices and procedures and
employee responsibility and conduct. The regulators place limitations on activities of the banks
including the issuance of capital notes or debentures and the holding of real estate and personal
property and require the banks to maintain a certain ratio of reserves against deposits. The
regulators also require the banks to file reports annually showing receipts and disbursements of
the banks, in addition to any periodic reports requested. 8




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Available Information We maintain our corporate website at www.mmbancorp.com and we make available, free of charge,
through this website our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports that we file with or furnish to the Securities
and Exchange Commission, as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange Commission. 
 Item 2. Properties In 2004 our corporate headquarters relocated to a 59,000 square feet office building
located in New Berlin, Wisconsin. At this location, we maintain all of our corporate operations
and personnel. Merchants owns this property. The main office of Lincoln State Bank is at located at 3131 South 13th Street, Milwaukee,
Wisconsin in a one-story building. Lincoln State Bank also operates branch offices at 2266 South
13th Street, 5400 West Forest Home Avenue and 1000 North Water Street. These offices are located
in Milwaukee. Another branch of Lincoln State Bank is located in a one-story, 1,700 square foot
building at 13510 Janesville Road, Muskego, Wisconsin. While another branch of Lincoln State Bank
is located at 14000 West National Avenue, New Berlin, Wisconsin. The New Berlin branch is
approximately 7,000 square feet. In 1995 Lincoln State Bank opened two other full-service branches
one located Brookfield, Wisconsin and the other in Pewaukee, Wisconsin. Lincoln State Bank owns
all of its facilities except the Downtown Milwaukee Water Street branch, the New Berlin branch and
Brookfield branch which it leases from the buildings owners. In addition, Lincoln State Bank operates limited hour facilities at Villa St. Francis located
at South 20th and Ohio Streets in Milwaukee, at Clement Manor located at South 92nd Street and West
Howard Avenue in Milwaukee, at Friendship Village located at North 73rd and West Dean Road in
Milwaukee, at Stoney Creek Adult Community in Muskego, at the Milwaukee Protestant Home located on
North Downer Avenue in Milwaukee, at Forest Ridge located in Hales Corners, Wisconsin, at the
Landmark located in West Allis, Wisconsin at Deer Creek located in New Berlin, Wisconsin and at
Lexington Village located in the City of Greenfield, Wisconsin. Lincoln State Bank leases
facilities at all of the limited hour locations. Grafton State Banks main office is located at 101 Falls Road, Grafton, Wisconsin in a
seven-story building. Portions of the building that are not used by Grafton State Bank are leased
to various tenants. Grafton State Bank owns the facility. Grafton State Bank also operates two
branch facilities. One branch of Grafton State Bank is located at 112 North Port Washington Road
in Grafton, while the other is located at 524 East Green Bay Avenue in Saukville, Wisconsin.
Grafton State Bank owns the Saukville location while it leases the other branch facility. Franklin State Banks main office is located in a three-story building at 7000 South 76th
Street in Franklin, Wisconsin. The bank leases 5,700 square feet from the buildings owner. The
building was sold in 1999 to a group of investors and subsequently sub-leased back to Merchants and
Manufacturers. Portions of the building that are not used by Franklin State Bank are leased to
various tenants. In 1998 Franklin State Bank opened a branch facility at 9719 South Franklin Drive
in the Franklin Business Park, Franklin, Wisconsin. Franklin State Bank owns the facility. In
addition, Franklin State Bank operates a limited hour facility at Brenwood Park, also located in
Franklin. Franklin State Bank leases its limited hour facility. Community Bank Financials main office is located in a one-story building at 500 Cherry
Avenue, Oconto Falls, Wisconsin. Community Bank Financial operates branch facilities at 202 East
Main Street, Gillett, Wisconsin, 1288 East Frontage Road, in the town of Little Suamico, Wisconsin
and at 200 Golf View Road, in the village of Cecil, Wisconsin. Community Bank Financial owns all
of its facilities except the Cecil facility which it leases from the buildings owner. Fortress Bank of Westbys main office is located in a two-story building at 100 North Main
Street, Westby, Wisconsin. Fortress Bank of Westby also operates branch offices in the Wisconsin
communities of Coon Valley, Chaseburg and West Salem. Fortress Bank of Westby owns all of its
properties. Fortress Bank of Crescos main office is located in a one-story building at 130 North Park
Place, Cresco, Iowa. Fortress Bank of Cresco owns its facility. Fortress Bank Minnesotas main office is located in a two-story building at 225 Lafayette,
Houston, Minnesota. Fortress Bank Minnesota also operates a branch office in the Minnesota
community of Winona. Fortress Bank Minnesota owns both facilities. The Reedsburg Banks main office is located in a two-story building at 201 Main Street,
Reedsburg, Wisconsin. The Reedsburg Bank also operates branch offices in the Wisconsin communities
of North Freedom and Lime Ridge. The Reedsburg Bank owns all of its properties. Wisconsin State Banks main office is located in a one-story building at 201 Allen Street,
Random Lake, Wisconsin. Wisconsin State Bank also operates branch offices in the Wisconsin
communities of Belgium and Prairie du Chien. Wisconsin State Bank owns all of its properties. 9




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##### Table of Contents



Item 3. Legal Proceedings From time to time, we and our subsidiaries are party to legal proceedings arising out of
our general lending activities and other operations. However, as of the date of this report, there
are no pending legal proceedings to which we or our subsidiaries are a party, or to which their
property is subject, which, if determined adversely to us, would individually or in the aggregate
have a material adverse effect on our consolidated financial position. 
 Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of
2004. 
 PART II 
 Item 5. Market for Registrants Common Equity, Related Stockholders Matters and Issuer
Purchases of Equity Securities Our stock is not listed on any stock exchange or quoted on the National Association of
Securities Dealers Quotation Automated Quotation System. Our stock has been quoted on Pink
Sheets, an inter-broker quotation medium, since April 1993, and in the Over The Counter Bulletin
Board, an electronic quotation service. Robert W. Baird & Co., Incorporated, a regional securities
and investment banking firm headquartered in Milwaukee, Wisconsin, and Howe Barnes Investments,
Incorporated, headquartered in Chicago, Illinois, act as the market makers for the Corporations
stock. Our stock is quoted in the Other Stocks section of the Milwaukee Journal/Sentinel. Our
common stock trading symbol is MMBI. The following table sets forth the quarterly high and low bid prices for the period
indicated. The quotations below reflect inter-dealer prices, without retail mark-ups, mark-downs
or commissions and do not necessarily represent actual transactions. Quotation or PriceQuarter Ended
    
    Low Bid
    
    
    High BidMarch 31, 2003
    
    $
    26.55
    
    
    $
    28.64June 30, 2003
    
    
    27.59
    
    
    
    31.80September 30, 2003
    
    
    31.27
    
    
    
    33.18December 31, 2003
    
    
    32.86
    
    
    
    46.35March 31, 2004
    
    $
    43.65
    
    
    $
    46.50June 30, 2004
    
    
    33.05
    
    
    
    43.55September 30, 2004
    
    
    29.75
    
    
    
    34.50December 31, 2004
    
    
    31.00
    
    
    
    38.20
 The approximate number of holders of record of our common stock is 1,150 as of December 31,
2004. Holders of the our stock are entitled to receive such dividends as may be declared from time
to time by the Board of Directors from funds legally available for such payments. Our ability to
pay cash dividends is dependent primarily on the ability of each subsidiary to pay dividends to us.
The ability of each subsidiary to pay dividends depends on its earnings and financial condition
and on compliance with banking statutes and regulations. Quarterly dividends for the years ended December 31, 2004 and 2003 are shown in Item 6
Selected Financial Data. 10




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##### Table of Contents



Item 6. Selected Financial Data The following table summarizes our certain historical financial data. This information
is derived in part from, and should be read in conjunction with, our Consolidated Financial
Statements presented elsewhere herein (dollars in thousands, except per share data): At or for the Year Ended December 31,2004(1)
    
    
    2003(2)
    
    
    2002(3)
    
    
    2001(4)
    
    
    2000(dollars in thousands, except per share data)Income Statement Data:Interest income (taxable equivalent) (5)
    
    $
    63,058
    
    
    $
    51,871
    
    
    $
    40,421
    
    
    $
    43,782
    
    
    $
    43,256Interest expense
    
    
    19,633
    
    
    
    15,871
    
    
    
    13,106
    
    
    
    19,798
    
    
    
    21,718Net interest income
    
    
    43,425
    
    
    
    36,000
    
    
    
    27,315
    
    
    
    23,984
    
    
    
    21,538Provision for loan losses
    
    
    1,793
    
    
    
    1,311
    
    
    
    1,156
    
    
    
    1,125
    
    
    
    1,239Net interest income after provision for loan losses
    
    
    41,632
    
    
    
    34,689
    
    
    
    26,159
    
    
    
    22,859
    
    
    
    20,299Noninterest income
    
    
    11,537
    
    
    
    11,163
    
    
    
    6,127
    
    
    
    4,682
    
    
    
    4,395Merger related expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    296Noninterest expense
    
    
    45,839
    
    
    
    32,736
    
    
    
    22,139
    
    
    
    18,554
    
    
    
    16,757Income before provision for income taxes
    
    
    7,330
    
    
    
    13,116
    
    
    
    10,147
    
    
    
    8,987
    
    
    
    7,641Provision for income taxes
    
    
    2,258
    
    
    
    4,067
    
    
    
    3,244
    
    
    
    2,733
    
    
    
    2,267Less taxable equivalent adjustment
    
    
    1,070
    
    
    
    821
    
    
    
    518
    
    
    
    546
    
    
    
    606Net income
    
    $
    4,002
    
    
    $
    8,228
    
    
    $
    6,385
    
    
    $
    5,708
    
    
    $
    4,768Dividends:Common stock
    
    $
    2,523
    
    
    $
    2,213
    
    
    $
    1,790
    
    
    $
    1,802
    
    
    $
    1,599Dividend payout ratio
    
    
    63.04
    %
    
    
    26.90
    %
    
    
    28.03
    %
    
    
    31.57
    %
    
    
    33.54
    %Per Share Data:(6)Net income-Basic
    
    $
    1.16
    
    
    $
    2.58
    
    
    $
    2.30
    
    
    $
    2.05
    
    
    $
    1.70Net income-Diluted
    
    
    1.15
    
    
    
    2.56
    
    
    
    2.29
    
    
    
    2.04
    
    
    
    1.69Book value
    
    
    24.97
    
    
    
    24.04
    
    
    
    21.92
    
    
    
    19.07
    
    
    
    17.50Balance Sheet Data:Investment securities
    
    $
    172,564
    
    
    $
    156,597
    
    
    $
    130,125
    
    
    $
    66,143
    
    
    $
    78,847Loans, net
    
    
    1,028,059
    
    
    
    847,938
    
    
    
    657,775
    
    
    
    477,332
    
    
    
    473,161Total assets
    
    
    1,357,065
    
    
    
    1,145,607
    
    
    
    909,405
    
    
    
    608,020
    
    
    
    600,460Total deposits
    
    
    1,033,046
    
    
    
    911,948
    
    
    
    729,456
    
    
    
    477,785
    
    
    
    458,051Short-term borrowings
    
    
    61,322
    
    
    
    34,007
    
    
    
    18,088
    
    
    
    17,046
    
    
    
    43,928Long-term borrowings
    
    
    111,054
    
    
    
    59,528
    
    
    
    72,322
    
    
    
    55,800
    
    
    
    44,700Junior subordinated debt owed to unconsolidated trusts
    
    
    46,394
    
    
    
    36,084
    
    
    
    10,310
    
    
    
    
    
    
    
    Total stockholders equity
    
    
    91,739
    
    
    
    79,974
    
    
    
    69,329
    
    
    
    52,929
    
    
    
    48,515Earnings Ratios:Return on average total assets
    
    
    0.33
    %
    
    
    0.86
    %
    
    
    0.99
    %
    
    
    0.95
    %
    
    
    0.84
    %Return on average total stockholders equity
    
    
    4.69
    
    
    
    11.29
    
    
    
    11.55
    
    
    
    11.15
    
    
    
    10.18Net interest margin (7)
    
    
    3.86
    
    
    
    4.03
    
    
    
    4.48
    
    
    
    4.21
    
    
    
    4.05Efficiency ratio (8)
    
    
    85.06
    
    
    
    70.64
    
    
    
    67.24
    
    
    
    65.98
    
    
    
    67.33Asset Quality Ratios:Allowance for loan losses to loans
    
    
    1.02
    
    
    
    1.07
    
    
    
    1.15
    
    
    
    1.15
    
    
    
    1.05Nonaccrual loans to loans
    
    
    0.85
    
    
    
    0.62
    
    
    
    0.48
    
    
    
    0.92
    
    
    
    0.38Allowance for loan losses to nonperforming loans (9)
    
    
    119.74
    
    
    
    172.96
    
    
    
    239.24
    
    
    
    125.60
    
    
    
    276.03Nonperforming assets to total assets (10)
    
    
    0.75
    
    
    
    0.63
    
    
    
    0.61
    
    
    
    0.75
    
    
    
    0.32Net loan charge-offs to average loans
    
    
    0.14
    
    
    
    0.14
    
    
    
    0.21
    
    
    
    0.12
    
    
    
    0.06Capital Ratios:Total stockholders equity to total assets
    
    
    6.76
    
    
    
    6.99
    
    
    
    7.63
    
    
    
    8.71
    
    
    
    8.08Total capital to risk-weighted assets ratio
    
    
    10.14
    
    
    
    10.23
    
    
    
    10.71
    
    
    
    11.53
    
    
    
    11.19Tier 1 capital to risk-weighted assets ratio
    
    
    7.83
    
    
    
    8.27
    
    
    
    9.63
    
    
    
    10.43
    
    
    
    10.14Tier 1 capital to average assets ratio
    
    
    6.62
    
    
    
    7.19
    
    
    
    9.41
    
    
    
    8.72
    
    
    
    8.25
   1)
    
    Year-end data for 2004 includes Random Lake Bancorp Limited and subsidiaries acquired by
Merchants on August 12, 2004.2)
    
    Year-end data for 2003 includes Reedsburg Bancorporation, Inc. and subsidiaries acquired by
Merchants on November 1, 2003.3)
    
    Year-end data for 2002 includes Fortress Bancshares, Inc. and subsidiaries acquired by
Merchants on November 30, 2002.4)
    
    Restated to reflect the January 16, 2001 acquisition of CBOC, Inc. which was accounted for as
pooling-of-interests.5)
    
    Taxable-equivalent adjustments to interest income involve the conversion of tax-exempt
sources of interest income to the equivalent amounts of interest income that would be
necessary to derive the same net return if the investments had been subject to income taxes.
A 34% incremental income tax rate, consistent with our historical experience, is used in the
conversion of tax-exempt interest income to a tax-equivalent basis.6)
    
    All per share information presented in this report has been retroactively restated to give
effect to the 10% stock dividend declared in November 2003, as if it occurred as of January 1,
2000.7)
    
    Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis)
to average interest-earning assets.8)
    
    Efficiency ratio is the ratio of noninterest expense to the sum of net interest income and
noninterest income.9)
    
    Nonperforming loans consist of nonaccrual loans and certain loans with restructured terms.10)
    
    Nonperforming assets consist of nonperforming loans and other real estate. 11




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Effective January 1, 2002, Merchants adopted Statement of Financial Accounting Standards
(SFAS) No. 142 Goodwill and Other Intangible Assets. SFAS No. 142 changed the accounting for
goodwill from a model that required amortization of goodwill, supplemented by impairment tests, to
an accounting model that is based solely upon impairment tests. A reconciliation of Merchants Consolidated Statements of Earnings for each the years ending
December 31, 2001 and 2000 from amounts reported to amounts exclusive of goodwill amortization is
shown below. 2001(1)
    
    
    2000(dollars in thousands,except per share data)Net income as reported
    
    $
    5,708
    
    
    $
    4,768Add: goodwill amortization, net of tax
    
    
    46
    
    
    
    46Adjusted net income
    
    $
    5,754
    
    
    $
    4,814Basic earnings per share as reported
    
    $
    2.25
    
    
    $
    1.87Add: goodwill amortization, net of tax
    
    
    0.02
    
    
    
    0.02Adjusted basic earnings per share
    
    $
    2.27
    
    
    $
    1.89Diluted earnings per share as reported
    
    $
    2.24
    
    
    $
    1.86Add: goodwill amortization, net of tax
    
    
    0.02
    
    
    
    0.02Adjusted diluted earnings per share
    
    $
    2.26
    
    
    $
    1.88
   (1)
    
    Restated to reflect the January 16, 2001 acquisition of CBOC, Inc which was accounted for
as pooling-of-interests. Quarterly Financial Data The following table sets forth our selected quarterly financial data. The third and
fourth quarter 2004 data includes Random Lake Bancorp Limited. and subsidiaries acquired by
Merchants on August 12, 2004. Three Months Ended 2004
    
    
    Three Months Ended 2003December
    
    
    September
    
    
    June
    
    
    March
    
    
    December
    
    
    September
    
    
    June
    
    
    March(dollars in thousands except per share data)Interest income (taxable-equivalent)
(1)
    
    $
    17,466
    
    
    $
    16,132
    
    
    $
    14,805
    
    
    $
    14,859
    
    
    $
    13,840
    
    
    $
    12,657
    
    
    $
    12,469
    
    
    $
    12,905Interest expense
    
    
    5,586
    
    
    
    5,003
    
    
    
    4,503
    
    
    
    4,542
    
    
    
    4,202
    
    
    
    3,770
    
    
    
    3,905
    
    
    
    3,994Net interest income
    
    
    11,880
    
    
    
    11,129
    
    
    
    10,302
    
    
    
    10,047
    
    
    
    9,638
    
    
    
    8,887
    
    
    
    8,564
    
    
    
    8,911Provision for loan losses
    
    
    461
    
    
    
    431
    
    
    
    451
    
    
    
    450
    
    
    
    297
    
    
    
    372
    
    
    
    340
    
    
    
    302Noninterest income
    
    
    2,979
    
    
    
    3,209
    
    
    
    2,654
    
    
    
    2,695
    
    
    
    2,787
    
    
    
    3,043
    
    
    
    3,111
    
    
    
    2,222Noninterest expense
    
    
    14,574
    
    
    
    11,042
    
    
    
    10,141
    
    
    
    10,082
    
    
    
    8,954
    
    
    
    8,178
    
    
    
    8,005
    
    
    
    7,599Income before taxes
    
    
    (176
    )
    
    
    2,865
    
    
    
    2,364
    
    
    
    2,210
    
    
    
    3,174
    
    
    
    3,380
    
    
    
    3,330
    
    
    
    2,232Provision for income taxes
    
    
    337
    
    
    
    676
    
    
    
    663
    
    
    
    582
    
    
    
    867
    
    
    
    1,083
    
    
    
    1,088
    
    
    
    1,029Less taxable-equivalent adjustment
    
    
    298
    
    
    
    255
    
    
    
    229
    
    
    
    221
    
    
    
    229
    
    
    
    194
    
    
    
    191
    
    
    
    207Net income
    
    
    ($811
    )
    
    $
    1,934
    
    
    $
    1,472
    
    
    $
    1,407
    
    
    $
    2,078
    
    
    $
    2,103
    
    
    $
    2,051
    
    
    $
    1,996Basic earnings per share
    
    
    ($0.22
    )
    
    $
    0.55
    
    
    $
    0.44
    
    
    $
    0.42
    
    
    $
    0.64
    
    
    $
    0.66
    
    
    $
    0.65
    
    
    $
    0.63Diluted earnings per share
    
    
    ($0.22
    )
    
    $
    0.55
    
    
    $
    0.44
    
    
    $
    0.42
    
    
    $
    0.63
    
    
    $
    0.65
    
    
    $
    0.65
    
    
    $
    0.63Dividends per share
    
    $
    0.18
    
    
    $
    0.18
    
    
    $
    0.18
    
    
    $
    0.18
    
    
    $
    0.17
    
    
    $
    0.17
    
    
    $
    0.17
    
    
    $
    0.17
   (1)
    
    Taxable-equivalent adjustments to interest income involve the conversion of tax-exempt
sources of interest income to the equivalent amounts of interest income that would be
necessary to derive the same net return if the investments had been subject to income
taxes. A 34% incremental income tax rate, consistent with our historical experience, is
used in the conversion of tax-exempt interest income to a tax-equivalent basis. Fourth Quarter Results For the fourth quarter of 2004, Merchants reported a loss of $(811,000), or $(0.22) per
fully diluted common share, compared to income of $2.1 million, or $0.63 per fully diluted common
share, for the fourth quarter 2003. Earnings for the fourth quarter ended December 31, 2004 included the following non-recurring items:  
    A pre-tax charge of $1.2 million related to centralization and data processing conversions
    A pre-tax charge of $450,000 related to Sarbanes-Oxley compliance activities, and
    A pre-tax charge of $730,000 related to establishing a tax reserve for potential
payments due to the Wisconsin Department of Revenue. Earnings for the fourth quarter ended December 31, 2003 included the following item:  
    A pre-tax gain on sale of investment securities of $359,000. 12




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##### Table of Contents



The net effect of these items was a decrease of $0.54 per fully diluted share. Net interest income was $11.6 million for the fourth quarter of 2004 compared to $9.4 million
for the fourth quarter of 2003. The increase is due to the revenue resulting from the acquisitions
of Reedsburg and WSB, as well as to the increase in loan volume funded by the growth in deposits
and borrowings. Net interest margin was 3.77% for the fourth quarter 2004 compared to 3.78% for
the same period in 2003. The pressure on the net interest margin in 2003 began to stabilize in
2004 producing an increasing net interest margin since the fourth quarter of 2003. Recent
increases in market interest rates may improve the net interest margin as our balance sheet is
positioned to take advantage of increasing rates. Merchants provision for loan losses was $461,000 for the fourth quarter of 2004 compared to
$297,000 for the same quarter of 2003. Merchants ratio of allowance for loan losses to total
loans was 1.02% and 1.07% at December 31, 2004 and 2003, respectively. The ratio of allowance for
loan losses to non-performing loans was 119.7% at December 31, 2004 compared to 172.9% at December
31, 2003. The ratio of non-performing assets to total assets equaled 0.75% at December 31, 2004
compared to 0.63% at December 31, 2003. Non-interest income for the fourth quarter of 2004 was $3.0 million compared to $2.8 million
for the fourth quarter of 2003. Service charges on deposit accounts increased $301,000 for the
quarter ended December 31, 2004. The growth in non-interest income can be partially attributed to
our acquisitions. The Reedsburg Bank generated $339,000 of non-interest income during the fourth
quarter of 2004. In addition, fourth quarter net gains on the sale of securities amounted to
$1,000 for 2004 compared to $359,000 during fourth quarter of 2003. The gains on sales of mortgage
loans increased $15,000 when comparing the fourth quarter 2004 with the same period in 2003. In
addition, the income associated with the change in the valuation of our mortgage servicing rights
has decreased $71,000 when comparing the fourth quarter 2004 with the same period in 2003. Non-interest expense was $14.6 million for the 2004 fourth quarter compared to $9.0 million
for the fourth quarter of 2003, an increase of 62.8%. When comparing the fourth quarter 2004 with
the fourth quarter 2003, salaries and employee benefits increased $2.0 million, occupancy expense
increased $569,000 and other non-interest expense increased $3.1 million. The growth in
non-interest expense was caused in part by the acquisitions of Reedsburg, KCW and WSB. The
Reedsburg and WSB operations added $2.5 million of expenses in the fourth quarter of 2004. The
increase in non-interest expense can also be attributed to expenses incurred by implementing our
Vision Unlimited project as well as the cost of complying with Sarbanes-Oxley. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations General The following presents managements discussion and analysis of our financial condition
and results of operations as of the dates and for the periods indicated. You should read this
discussion in conjunction with our Selected Consolidated Financial Data, our consolidated
financial statements and the accompanying notes, and the other financial data contained elsewhere
in this report. 13




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##### Table of Contents



On August 12, 2004, we acquired Random Lake Bancorp Limited (Random Lake) and its
wholly-owned subsidiary, Wisconsin State Bank (WSB). The purchase price for Random Lake was
$11.5 million including $1.3 million in cash and 334,200 shares of Merchants common stock valued at
$10.2 million based on a $30.50 price. The transaction was recorded as a purchase. Application of
purchase accounting requires the inclusion of Random Lake and WSBs operating results in the
consolidated financial statements from the date of the acquisition. Accordingly Random Lake and
WSBs operating results are included in the consolidated results of operations since August 12,
2004. On November 1, 2003, we acquired Reedsburg Bancorporation, Inc. (Reedsburg) and its
wholly-owned subsidiary, The Reedsburg Bank. The purchase price for Reedsburg was $36.0 million
including $17.8 million in cash, $12.8 million in promissory notes and 146,800 shares of common
stock valued at $5.4 million based on the average price over the contractual pricing period. The
transaction was recorded as a purchase. Application of purchase accounting requires the inclusion
of Reedsburg and The Reedsburg Banks operating results in the consolidated financial statements
from the date of the acquisition. Accordingly Reedsburg and The Reedsburg Banks operating results
are included in the consolidated results of operations since November 1, 2003. On November 30, 2002, we acquired Fortress Bancshares, Inc. (Fortress) and its wholly-owned
subsidiaries, Fortress Bank of Westby, Wisconsin, Fortress Bank of Cresco, Iowa and Fortress Bank
Minnesota (f/k/a Fortress Bank, N.A.) headquartered in Houston, Minnesota (Fortress Banks). The
purchase price for Fortress was $21.5 million including $9.5 million in cash and 390,000 shares of
common stock valued at $11.7 million based on the average price over the contractual pricing
period. The transaction was recorded as a purchase. Application of purchase accounting requires
the inclusion of Fortress and the Fortress Banks operating results in the consolidated financial
statements from the date of the acquisition. Accordingly Fortress and the Fortress Banks
operating results are included in the consolidated results of operations since November 30, 2002. This discussion contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ significantly from those anticipated in these forward-looking
statements as a result of various factors. Important factors that could cause actual results to
differ materially from the results anticipated or projected include, but are not limited to, the
following: (1) expected cost savings and synergies from our recently completed merger of Random
Lake Bancorp Limited, might not be realized within the expected time frame; (2) the credit risks of
lending activities, including changes in the level and direction of loan delinquencies and
write-offs; (3) changes in managements estimate of the adequacy of the allowance for loan losses;
(4) competitive pressures among depository institutions; (5) interest rate movements and their
impact on customer behavior and our net interest margin; (6) the impact of repricing and
competitors pricing initiatives on loan and deposit products; (7) our ability to adapt
successfully to technological changes to meet customers needs and developments in the market
place; (8) our ability to access cost-effective funding; (9) changes in financial markets and
general economic conditions; (10) new legislation or regulatory changes; (11) changes in accounting
principles, policies or guidelines; (12) the result of the Corporations discussions with the
Wisconsin Department of Revenue regarding tax treatment of its Nevada investment subsidiaries and
(13) the effectiveness of the internal controls of Wisconsin State Bank (which are not covered by
managements evaluation of the Companys internal control over financial reporting as of December
31, 2004 in Item 9A of this report in reliance on guidance from the Securities and Exchange
Commission). Certain statements contained in or incorporated by reference into this report constitute
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. We intend such forward-looking statements to
be covered by the safe harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and are including this statement for purposes of invoking
these safe harbor provisions. You can identify these statements from our use of the words may,
will, should, expect, plan, intend, anticipate, could, believe, estimate,
predict, objective, potential, projection, forecast, goal, project, anticipate,
target and similar expressions. These forward-looking statements may include, among other
things:  statements relating to projected growth, anticipated improvements in earnings,
earnings per share and other financial performance measures, and managements long term performance
goals;  statements relating to the anticipated effects on results of operations or financial
condition from expected developments or events;  statements relating to our business and growth strategies, including potential acquisitions; and  any other statements which are not historical facts. Such forward-looking statements involve known and unknown risks, uncertainties and other
important factors that could cause our actual results, performance or achievements, or industry
results, to differ materially from our expectations of future results, performance or achievements
expressed or implied by such forward-looking statements. Although we believe that the expectations
reflected in any forward-looking statements are reasonable, we cannot guarantee future events or
results. Except as may be required under federal law, we undertake no obligation to update
publicly any forward-looking statements for any reason, even if new information becomes available
or other events occur. In addition, our past results of operations do not necessarily indicate our
future results. 14




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##### Table of Contents



Results of Operations For the year ended December 31, 2004, our net income was $4.0 million, or $1.15 per fully
diluted common share, compared to $8.2 million, or $2.56 per fully diluted common share for the
year ended December 31, 2003 and $6.4 million or $2.29 per fully diluted common share for the year
ended December 31, 2002. The decrease in 2004 earnings reflects the implementation of our Vision
Unlimited project, complying with the Sarbanes-Oxley Act of 2002 and establishing a reserve for
potential Wisconsin Department of Revenue settlements. Earnings for the year ended December 31, 2004 included the following non-recurring items:  
    A pre-tax charge of $1.7 million related to centralization and data processing conversions
    A pre-tax charge of $783,000 related to Sarbanes-Oxley compliance activities, and
    A pre-tax charge of $730,000 related to establishing a tax reserve for potential
payments due to the Wisconsin Department of Revenue. Earnings for the year ended December 31, 2003 included the following item:  
    Pre-tax mortgage related fee income of $4.4 million in 2003 compared to $2.6 million in
2004 The net effect of these items was a decrease of $1.02 per fully diluted share. In addition to these non-recurring items in 2004, numerous staff additions (primarily
information technology, marketing and credit administration), equipment purchases and technology
improvements were needed to implement our Vision Unlimited program. We believe these upgrades
will benefit the organization in future periods as we leverage our infrastructure over a larger
asset base. 2004 has been a year of transition for our organization. Through a company-wide project
called Vision Unlimited, we have standardized policies and procedures across the organization and
have centralized many operational functions. In addition, we have successfully converted all of
the banks to a single data processing platform. These changes will allow us to better manage risk,
operate more efficiently and serve customers better. Each of our community banks will continue to
keep its name, charter, board of directors and management teams but will transition its human
resources from the banks operational activities to customer related activities. Bank employees
will have the tools and resources they need to effectively focus on customer service, customer
retention and customer prospecting. While we expect these changes to enhance shareholder value in
the long run, a transition of this magnitude has involved short-term costs, which amounted to
approximately $1.7 million before tax in 2004. The Corporation also faced two other significant challenges in 2004. Like all public
companies, we are required to comply with the Sarbanes-Oxley Act of 2002. While we have used an
outside third party at a significant cost, compliance with Sarbanes-Oxley was accomplished
internally through our Vision Unlimited project. We originally expected our Sarbanes-Oxley
compliance costs would range from $400,000 to $500,000 in 2004. However, due to the higher than
anticipated volume of policies and procedures testing performed by our independent auditors, the
cost of complying with the Sarbanes-Oxley Act of 2002 amounted to $783,000 in 2004. Like hundreds of other Wisconsin banking organizations, we are in discussion with the
Wisconsin Department of Revenue (WDR) regarding the tax treatment of our Nevada investment
subsidiaries. Nevada does not have an income tax and historically the earnings of these Nevada
investment subsidiaries have not been subject to taxation in Wisconsin. We believe that we have
complied with private letter rulings the WDR previously issued in connection with the formation and
operation of our Nevada investment subsidiaries. However, the effect and intent of these rulings
is in question and the WDR may take the position that some or all of the income of our Nevada
investment subsidiaries is allocable to their Wisconsin corporate parents and taxable in Wisconsin.
The WDR may also take the position that such a reallocation should apply to prior open tax years.
The result of these discussions with the WDR could materially increase our future income tax
expense and has resulted in a significant current year tax charge. As of December 31, 2004 we have
not come to an agreement with the WDR and continue to dispute the WDRs claims, but have
established a $730,000 reserve in the event it should be necessary to make any future payments to
the WDR. Net Interest Income Net interest income equals the difference between interest earned on assets and the
interest paid on liabilities and is a measure of how effectively management has balanced and
allocated our interest rate sensitive assets and liabilities. Net interest income is the most
significant component of earnings. Taxable-equivalent adjustments to interest income involve the
conversion of tax-exempt sources of interest income to the equivalent amounts of interest income
that would be necessary to derive the same net return if the investments had been subject to income
taxes on a fully tax equivalent basis. A 34% incremental income tax rate, consistent with our
historical experience, is used in the conversion of tax-exempt interest income to a
taxable-equivalent basis. 15




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##### Table of Contents



Net interest income on a fully tax equivalent basis increased to $43.4 million in 2004,
compared with $36.0 million in 2003 and $27.3 million in 2002. In 2004, net interest income
increased $7.4 million due to internal growth in earning assets, the additional growth from the
Random Lake acquisition and the full year growth impact from the Reedsburg acquisition partially
offset by a lower net interest margin versus the prior year. In 2003, net interest income
increased due to internal growth in earning assets as well as the additional growth from the
Reedsburg and Fortress acquisitions. The net interest margin, on a fully tax-equivalent basis, was
3.86% for 2004, compared with 4.03% in 2003 and 4.48% in 2002. The relative low interest rate
environment, along with the incremental effect of the acquisitions resulted in lower margins in
2004 and 2003. The following table sets forth, for the periods indicated, information regarding the average
balances of assets and liabilities and the total dollar amount of interest income from average
interest-earning assets and interest expense on average interest-bearing liabilities, resulting
yields, interest rate spread, ratio of interest-earning assets to interest-bearing liabilities, and
net interest margin. Average balances have been calculated using average daily balances during
such periods (dollars in thousands): At or for the Year Ended December 31,2004
    
    
    2003
    
    
    2002Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    

    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(dollars in thousands)AssetsLoans,net (1)(2)
    
    $
    929,412
    
    
    $
    54,908
    
    
    
    5.91
    %
    
    $
    724,469
    
    
    $
    45,184
    
    
    
    6.24
    %
    
    $
    507,142
    
    
    $
    35,637
    
    
    
    7.03
    %Loans exempt from federal income
taxes (3)
    
    
    4,082
    
    
    
    306
    
    
    
    7.50
    %
    
    
    3,481
    
    
    
    279
    
    
    
    8.01

    %
    
    
    1,573
    
    
    
    120
    
    
    
    7.63
    %Taxable investment securities (4)
    
    
    40,032
    
    
    
    1,671
    
    
    
    4.17
    %
    
    
    42,486
    
    
    
    2,080
    
    
    
    4.90
    %
    
    
    20,240
    
    
    
    893
    
    
    
    4.41
    %Mortgage-related securities (4)
    
    
    91,239
    
    
    
    3,176
    
    
    
    3.48
    %
    
    
    69,283
    
    
    
    1,988
    
    
    
    2.87
    %
    
    
    39,226
    
    
    
    2,050
    
    
    
    5.23
    %Investment securities exempt
from federal income taxes (3)(4)
    
    
    48,614
    
    
    
    2,842
    
    
    
    5.85
    %
    
    
    36,909
    
    
    
    2,136
    
    
    
    5.79
    %
    
    
    21,201
    
    
    
    1,403
    
    
    
    6.62
    %Other securities
    
    
    12,181
    
    
    
    155
    
    
    

    1.27
    %
    
    
    16,647
    
    
    
    204
    
    
    
    1.23
    %
    
    
    19,816
    
    
    
    318
    
    
    
    1.60
    %Interest earning assets
    
    
    1,125,560
    
    
    
    63,058
    
    
    
    5.60
    %
    
    
    893,275
    
    
    
    51,871
    
    
    
    5.81
    %
    
    
    609,198
    
    
    
    40,421
    
    
    
    6.64
    %Non interest earning assets
    
    
    99,916
    
    
    
    
    
    
    
    
    
    
    
    67,559
    
    
    
    
    
    
    
    
    
    
    
    38,600Average assets
    
    $
    1,225,476
    
    
    
    
    
    
    
    
    
    
    $
    960,834
    
    
    
    
    
    
    
    
    
    
    $
    647,798Liabilities and Stockholders
EquityNOW deposits
    
    $
    88,067
    
    
    
    420
    
    
    
    0.48
    %
    
    $
    64,578
    
    
    
    400
    
    
    
    0.62
    %
    
    $
    37,849
    
    
    
    334
    
    
    
    0.88
    %Money market deposits
    
    
    260,275
    
    
    
    2,889
    
    
    
    1.11
    %
    
    
    230,298
    
    
    
    3,320
    
    
    
    1.44
    %
    
    
    108,247
    
    
    
    1,857
    
    
    
    1.72
    %Savings deposits
    
    
    128,954
    
    
    
    1,094
    
    
    
    0.85
    %
    
    
    90,723
    
    
    
    623
    
    
    
    0.69
    %
    
    
    78,357
    
    
    
    843
    
    
    
    1.08
    %Time deposits
    
    
    354,332
    
    
    
    8,450
    
    
    
    2.38
    %
    
    
    283,156
    
    
    
    7,316
    
    
    
    2.58
    %
    
    
    213,791
    
    
    
    7,261
    
    
    
    3.40
    %Short-term borrowings
    
    
    40,420
    
    
    
    838
    
    
    
    2.07
    %
    
    
    25,493
    
    
    
    594
    
    
    
    2.33
    %
    
    
    20,802
    
    
    
    502
    
    
    
    2.41
    %Long-term borrowings
    
    
    96,617
    
    
    
    3,546
    
    
    
    3.67
    %
    
    
    67,235
    
    
    
    2,463
    
    
    
    3.66
    %
    
    
    55,692
    
    
    
    2,244
    
    
    
    4.03
    %Junior subordinated debt owed to
unconsolidated trusts
    
    
    38,690
    
    
    
    2,396
    
    
    
    6.19
    %
    
    
    19,073
    
    
    
    1,155
    
    
    
    6.06
    %
    
    
    1,361
    
    
    
    65
    
    
    
    4.78
    %Interest bearing liabilities
    
    
    1,007,355
    
    
    
    19,633
    
    
    
    1.95
    %
    
    
    780,556
    
    
    
    15,871
    
    
    
    2.03
    %
    
    
    516,099
    
    
    
    13,106
    
    
    
    2.54
    %Demand deposits and other non
interest bearing liabilities
    
    
    132,720
    
    
    
    
    
    
    
    
    

    
    
    107,404
    
    
    
    
    
    
    
    
    
    
    
    76,400Stockholders equity
    
    
    85,401
    
    
    
    
    
    
    
    
    
    
    
    72,874
    
    
    
    
    
    
    
    
    
    
    
    55,299Average liabilities and
stockholders equity
    
    $
    1,225,476
    
    
    
    
    
    
    
    
    
    
    $
    960,834
    
    
    
    
    
    
    
    
    
    
    $
    647,798Net interest spread (5)
    
    
    
    
    
    $
    43,425
    
    
    
    3.65
    %
    
    
    
    
    
    $
    36,000
    
    
    
    3.78
    %
    
    
    
    
    
    $
    27,315
    
    
    
    4.10
    %Net interest earning assets
    
    $
    118,205
    
    
    
    
    
    
    
    
    
    
    $
    112,719
    

    
    
    
    
    
    
    
    
    
    $
    93,099Net interest margin on a fully
tax equivalent basis (6)
    
    
    
    
    
    
    
    
    
    
    3.86
    %
    
    
    
    
    
    
    
    
    
    
    4.03
    %
    
    
    
    
    
    
    
    
    
    
    4.48
    %Net interest margin (6)
    
    
    
    
    
    
    
    
    
    
    3.76
    %
    
    
    
    
    
    
    
    
    
    
    3.94
    %
    
    
    
    
    
    
    
    
    
    
    4.40
    %Ratio of average
interest-earning assets to
average interest-bearing
liabilities
    
    
    
    
    
    
    
    
    
    
    1.12
    
    
    
    
    
    
    
    
    
    
    
    1.14
    
    
    
    
    
    
    
    
    
    
    
    1.18
   (1)
    
    For the purpose of these computations, nonaccrual loans are included in the daily average
loan amounts outstanding.(2)
    
    Interest earned on loans includes loan fees (which are not material in amount) and interest
income which has been received from borrowers whose loans were removed from nonaccrual status
during the period indicated.(3)
    
    Taxable-equivalent adjustments were made using a 34% corporate tax rate for all years
presented in calculating interest income and yields.(4)
    
    Average balances of securities available-for-sale are based on amortized cost.(5)
    
    Interest rate spread represents the difference between the average yield on interest earning
assets and the average cost of interest bearing liabilities and is represented on a fully tax
equivalent basis.(6)
    
    Net interest margin represents net interest income as a percentage of average interest
earning assets. 16




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##### Table of Contents



The following table sets forth the effects of changing interest rates and volumes of
interest earning assets and interest bearing liabilities on our net interest income. Information
is provided with respect to (i) effect on net interest income attributable to changes in volume
(changes in volume multiplied by prior rate), (ii) effects on net interest income attributable to
changes in rate (changes in rate multiplied by prior volume) and (iii) net change. The net change
attributable to the combined impact of volume and rate has been allocated proportionately to the
change due to volume and the change due to rate (dollars in thousands): For the Year Ended December 31,2004 vs. 2003
    
    
    2003 vs. 2002Change Due
    
    
    Change Due
    
    
    
    
    
    
    Change Due
    
    
    Change Dueto Volume
    
    
    to Rate
    
    
    Total Change
    
    
    to Volume
    
    
    to Rate
    
    
    Total ChangeInterest-Earning Assets:Loans, net (1)
    
    $
    11,953
    
    
    ($
    2,229
    )
    
    $
    9,724
    
    
    $
    12,943
    
    
    ($
    3,396
    )
    
    $
    9,547Loans exempt from federal
income taxes (2)
    
    
    43
    
    
    
    (16
    )
    
    
    27
    
    
    
    153
    
    
    
    6
    
    
    
    159Taxable investment securities
    
    
    (115
    )
    
    
    (294
    )
    
    
    (409
    )
    
    
    1,079
    
    
    
    108
    
    
    
    1,187Mortgage-related securities
    
    
    710
    
    
    
    478
    
    
    
    1,188
    
    
    
    (151
    )
    
    
    89
    
    
    
    (62
    )Investment securities exempt
from federal income taxes (2)
    
    
    684
    
    
    
    22
    
    
    
    706
    
    
    
    882
    
    
    
    (149
    )
    
    
    733Other securities
    
    
    (57
    )
    
    
    8
    
    
    
    (49
    )
    
    
    (46
    )
    
    
    (68
    )
    
    
    (114
    )Total interest-earning assets
    
    $
    13,218
    
    
    ($
    2,031
    )
    
    $
    11,187
    
    
    $
    14,860
    
    
    ($
    3,410
    )
    
    $
    11,450Interest-Bearing Liabilities:NOW deposits
    
    $
    54
    
    
    ($
    34
    )
    
    $
    20
    
    
    $
    114
    
    
    ($
    48
    )
    
    $
    66Money market deposits
    
    
    562
    
    
    
    (993
    )
    
    
    (431
    )
    
    
    1,704
    
    
    
    (241
    )
    
    
    1,463Savings deposits
    
    
    302
    
    
    
    169
    
    
    
    471
    
    
    
    170
    
    
    
    (390
    )
    
    
    (220
    )Time deposits
    
    
    1,635
    
    
    
    (501
    )
    
    
    1,134
    
    
    
    209
    
    
    
    (154
    )
    
    
    55Short-term borrowings
    
    
    301
    
    
    
    (57
    )
    
    
    244
    
    
    
    109
    
    
    
    (17
    )
    
    
    92Long-term borrowings
    
    
    107
    
    
    
    (174
    )
    
    
    (67
    )
    
    
    2,410
    
    
    
    (12
    )
    
    
    2,398Junior subordinated debt owed
to unconsolidated trusts
    
    
    2,648
    
    
    
    (257
    )
    
    
    2,391
    
    
    
    (4,631
    )
    
    
    3,542
    
    
    
    (1,089
    )Total interest-bearing
liabilities
    
    $
    5,609
    
    
    ($
    1,847
    )
    
    $
    3,762
    
    
    $
    85
    
    
    $
    2,680
    
    
    $
    2,765Net change in net interest income
    
    
    
    
    
    
    
    
    
    $
    7,425
    
    
    
    
    
    
    
    
    
    
    $
    8,685
   (1)
    
    Interest earned on loans includes loan fees (which are not material in amount) and interest
income which has been received from borrowers whose loans were removed from non-accrual during
the period indicated.(2)
    
    Taxable-equivalent adjustments were made using a 34% corporate tax rate for all years presented
in calculating interest income and yields. Provision For Loan Losses During 2004, we made a provision of $1.8 million to the allowance for loan losses, as
compared to a provision of $1.3 million in 2003 and $1.2 million in 2002. The increased 2004
provision reflects the growth in the overall loan portfolio especially in higher risk categories of
commercial and commercial real estate loans and managements assessment of general economic
conditions. Net loan charge-offs for 2004 were $1.3 million, an increase of $265,000 from the $1.1
million of net charge-offs in 2003. This compares to net charge-offs of $1.1 million in 2002.
Although we consider the allowance for loan losses to be adequate to provide for potential losses
in the loan portfolio, there can be no assurance that losses will not exceed estimated amounts or
that the subsidiary banks will not be required to make further and possibly larger additions to
their allowance in the future. 17




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##### Table of Contents



Non-Interest Income Non-interest income increased $374,000 in 2004 and $5.0 million in 2003. The 2004 growth
in non-interest income can be attributed to higher fees collected on deposit accounts and the
growth in tax, brokerage and insurance commissions generated by CFG Financial Services. The 2004
growth in non-interest income was also positively impacted by the completed acquisition of
Wisconsin State Bank and the full-year inclusion of Reedsburgs operations. The 2003 increase was
primarily from growth in mortgage banking revenues and service charges collected on loans to which
were the result of higher origination volumes and loan refinances. Additionally, non-interest
income increased during 2003 from growth in tax, brokerage and insurance commissions due to growth
in sales and the acquisitions of KCW and IFS during 2003 and was also positively impacted by the
completed acquisitions of Fortress and Reedsburg. The composition of non-interest income is shown
in the following table (dollars in thousands). For the Year Ended December 31,2004
    
    
    2003
    
    
    2002Service charges on deposit accounts
    
    $
    3,566
    
    
    $
    2,649
    
    
    $
    1,625Service charges on loans
    
    
    2,154
    
    
    
    2,565
    
    
    
    1,260Tax fees, brokerage and insurance
commissions
    
    
    1,547
    
    
    
    1,165
    
    
    
    215Securities gains, net
    
    
    191
    
    
    
    360
    
    
    
    111Gain on sale of loans, net
    
    
    494
    
    
    
    1,859
    
    
    
    695Net gain on sale of premises
    
    
    158
    
    
    
    2
    
    
    
    360Other
    
    
    3,427
    
    
    
    2,563
    
    
    
    1,861Total non-interest income
    
    $
    11,537
    
    
    $
    11,163
    
    
    $
    6,127
 Service charge income on deposit accounts increased $917,000 in 2004 and $1.0 million in 2003.
The increases in both years continue to reflect the benefits from growth in deposit accounts, both
internal and through acquisitions and fee structure modifications company wide. Service charges on loans decreased $411,000 from $2.6 million in 2003 to $2.2 million in 2004.
The decrease is due directly to the higher level of mortgage and commercial loans refinanced and
originated in 2003. The increase in loan fees from 2002 to 2003 can be attributed to the high
volume of new loans generated and refinanced in 2003. Fees from tax services and brokerage and insurance services increased $382,000 from $1.2
million in 2003 to $1.5 million in 2004. The increase can be attributed to the growth in sales
that occurred during 2003 and the full-year recognition of the KCW commissions. The increase in
fees and commissions from 2002 to 2003 can be attributed to the acquisitions of KCW and IFS that
occurred during 2003. We recorded a net gain of $191,000 on the sale of $14.1 million of securities in 2004, a gain
of $360,000 on the sale of $15.1 million of securities in 2003 and a gain of $111,000 on the sale
of $7.7 million of securities in 2002. The proceeds from the sale of the investments were used to
fund loan demand or to reduce debt. We recorded $494,000 in gains on the sale of loans in 2004, compared to $1.9 million in 2003
and $695,000 in 2002. All-time low market interest rates led to higher secondary market sales of
15 and 30 year residential mortgage loans in 2003 and 2002. Higher interest rates in 2004 resulted
in reduced opportunities to sell loans. Other non-interest income was $3.4 million in 2004, compared to $2.6 million in 2003 and $1.9
million in 2002. Other non-interest income includes credit and debit card income, safe deposit box
fees, ATM fees and income associated the increased cash surrender value of life insurance policies.
The increase for 2004 was due in part to the Wisconsin State Bank acquisition and the full-year
recognition of the 2003 Reedsburg acquisition. The increase for 2003 was due in part to the
Reedsburg acquisition and the full-year recognition of the 2002 Fortress acquisition. 18




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##### Table of Contents



Non-Interest Expense Non-interest expense increased $13.1 million (40.0%) for the year ended December 31,
2004, and increased $10.6 million (47.9%) for the year ended December 31, 2003. In 2004, the
acquisition of Wisconsin State Bank and the full-year recognition of the 2003 Reedsburg and KCW
acquisitions contributed partially to the rise in expenses. Also affecting 2004 were nonrecurring
expenses associated with our data processing conversions and complying with Sarbanes-Oxley. In
2003, the acquisitions of Reedsburg and KCW and the full-year impact of the 2002 acquisition of
Fortress contributed to the rise in expenses. The major components of non-interest expense are
shown in the following table (dollars in thousands). For the Year Ended December 31,2004
    
    
    2003
    
    
    2002Salaries and employee benefits
    
    $
    24,646
    
    
    $
    18,655
    
    
    $
    12,439Premises and equipment
    
    
    6,387
    
    
    
    4,079
    
    
    
    3,419Marketing and business development
    
    
    2,321
    
    
    
    1,509
    
    
    
    894Data processing fees
    
    
    2,296
    
    
    
    1,193
    
    
    
    1,261Data processing conversions
    
    
    573
    
    
    
    
    
    
    
    System installations
    
    
    830
    
    
    
    
    
    
    
    Sarbanes-Oxley implementation
    
    
    783
    
    
    
    
    
    
    
    Other
    
    
    8,003
    
    
    
    7,300
    
    
    
    4,126Total noninterest expense
    
    $
    45,839
    
    
    $
    32,736
    
    
    $
    22,139
 Salaries and employee benefits increased $6.0 million in 2004 due in part to acquisition of
Wisconsin State Bank, the full-year recognition of the 2003 Reedsburg and KCW acquisitions and
staff additions made to implement our Vision Unlimited centralization project. Also impacting
salaries and employee benefits in 2004 were higher benefit costs and normal pay increases.
Salaries and employee benefits increased $6.2 million in 2003. The increase was primarily due to
the full-year recognition of the Fortress acquisition that was completed on November 30, 2002.
Also impacting salaries and employee benefits in 2003 were additional staff hires particularly in
the business development and acquisition support staff areas, higher benefit costs, changes in
personnel and normal pay increases. Premises and equipment expense increased $2.3 million in 2004 primarily due to the acquisition
of Wisconsin State Bank and the full-year recognition of the 2003 Reedsburg acquisition. Also
impacting premises and equipment expense were increases in depreciation associated with new
equipment and facilities as well as the regular maintenance of our existing facilities. Premises
and equipment expense increased $660,000 in 2003. The increase was primarily due to the full-year
recognition of the 2002 Fortress acquisition. Marketing and business development costs increased $812,000 in 2004, and increased $615,000 in
2003. The increase in 2004 can be attributed in part to the acquisition of Wisconsin State Bank
and the full-year recognition of the 2003 Reedsburg acquisition as well as the development of a
centralized marketing program and branding campaign that delivered a consistent message throughout
our entire organization. The 2003 increase can be attributed to a campaign associated with
developing our non-insured investment products, advertising of deposit products and effects of the
Reedsburg acquisition and the full-year recognition of the 2002 Fortress acquisition. During 2004 we successfully converted all of our banks to a single data processing platform.
We believe this upgrade in service has allowed us to better manage risk, operate more efficiently
and serve our clients better. An upgrade of this magnitude can not be accomplished without the
related costs. Data processing fees increased $1.1 million in 2004 and decreased $68,000 in 2003.
The 2004 increase was due in part to the acquisition of Wisconsin State Bank and the full-year
recognition of the 2003 Reedsburg acquisition. Also impacting data processing expense in 2004 were
increased telecommunication expense, software licensing costs, and the further development of our
internet banking service. The 2003 decrease was due to the efficiencies gained from a larger
organization. In addition to the on-going data processing expense, we absorbed $573,000 in non-recurring
data processing conversion and de-conversion costs paid to our current service bureau and to our
banks prior service bureau providers to convert their data to the new system. In addition to the
conversion cost, we incurred $830,000 of nonrecurring system installation expense. In 2004 we
installed various product delivery systems to better manage risk, operate more efficiently and
serve our clients better. The two largest system installations were an updated and centralized
loan documentation system that allows all loan documents to be created at a centralized location
and remotely printed at each one of our locations. In addition, in 2004 we also implemented a
document imaging system that allows us to more efficiently view and store documents, provide our
internet banking customers with on-line access to their processed checks and provides our clients
with copies of items rather than storing original documents. The elimination of original documents
greatly reduces the amount of storage space needed as well as gives our employees more timely
access to information. Like all public companies, we are required to comply with the Sarbanes-Oxley Act of 2002. We
utilized a combination of an independent third party and internal resources to complete the
internal control evaluation and testing needed to comply with the new certification requirements.
In addition to the third party, our external auditors were required to review and test our policies
and procedures. In 2004 the cost of the independent third party review and the testing by our
external auditors amounted to $783,000. 19




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##### Table of Contents



Although the majority of this expense was due to the formation and testing of new policies and
procedures, future expense will be incurred in the form of increased external auditor fees. Other expenses increased $703,000 in 2004 and $3.2 million in 2003. The increase in 2004 can
be attributed primarily to the acquisitions of Wisconsin State Bank and the full-year recognition
of the 2003 Reedsburg and KCW acquisitions. The increases in 2003 are the result of implementing
our strategic plan, training our employees on sales techniques, maintaining our internet banking
program, various consulting fees and legal fees. The Reedsburg and KCW acquisitions and the
full-year recognition of the 2002 Fortress acquisition also impacted other expenses. Income Taxes Our consolidated income tax rate varies from statutory rates principally due to interest
income from tax-exempt securities and loans and interest income on assets held in the portfolios of
our Nevada investment subsidiaries for which state taxes have historically not been imposed. Our
recorded provisions for income taxes totaled $2.3 million in 2004, $4.1 million in 2003 and $3.2
million in 2002. The corresponding effective tax rate for the same years were 36.1%, 33.1% and
33.7%. In 2004 our effective tax rate increased due to the findings of Wisconsin Department of
Revenue audits conducted at our Nevada investment subsidiaries which resulted in state taxes being
imposed on a portion of the assets held in those subsidiaries. In addition, in 2004 we have
established a $730,000 tax reserve in the event it should be necessary to make any future payments
to the Wisconsin Department of Revenue with respect to our Nevada investment subsidiaries. Loans Receivable Loans receivable (net of allowance) increased $180.1 million, or 21.2%, from $847.9
million at December 31, 2003, to $1.0 billion at December 31, 2004. The 2004 loan growth can be
attributed to both internal growth as well as acquisition growth associated with the Wisconsin
State Bank acquisition. At the time of the acquisition, Wisconsin State Bank had $72.9 million of
loans. In 2004, the Corporation performed an evaluation of the purpose and collateral of each
loan. This evaluation resulted in a reallocation of loan dollars between primarily commercial real
estate and commercial loans. Loans receivable consist mainly of commercial business loans secured
by business assets, real estate and guarantees as well as mortgages secured by residential
properties located in our primary market area. The following table shows the composition of our
loan portfolio on the dates indicated: At December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(dollars in thousands)First mortgage:Conventional single-family residential
    
    $
    142,926
    
    
    $
    113,479
    
    
    $
    98,075
    
    
    $
    78,377
    
    
    $
    98,730Commercial and multifamily residential
    
    
    436,612
    
    
    
    283,433
    
    
    
    198,250
    
    
    
    180,102
    
    
    
    173,107Construction
    
    
    76,267
    
    
    
    47,894
    
    
    
    32,995
    
    
    
    34,744
    
    
    
    47,767Farmland
    
    
    55,710
    
    
    
    43,676
    
    
    
    20,847
    
    
    
    7,312
    
    
    
    7,027711,515
    
    
    
    488,482
    
    
    
    350,167
    
    
    
    300,535
    
    
    
    326,631Commercial business loans
    
    
    240,575
    
    
    
    294,645
    
    
    
    246,787
    
    
    
    140,671
    
    
    
    110,291Consumer and installment loans
    
    
    49,136
    
    
    
    51,886
    
    
    
    51,883
    
    
    
    32,401
    
    
    
    33,327Home equity loans
    
    
    26,592
    
    
    
    14,664
    
    
    
    9,492
    
    
    
    6,140
    
    
    
    4,545Other
    
    
    10,863
    
    
    
    7,397
    
    
    
    7,109
    
    
    
    3,148
    
    
    
    3,377327,166
    
    
    
    368,592
    
    
    
    315,271
    
    
    
    182,360
    
    
    
    151,540Less:Allowance for loan losses
    
    
    10,622
    
    
    
    9,136
    
    
    
    7,663
    
    
    
    5,563
    
    
    
    5,010$
    1,028,059
    
    
    $
    847,938
    
    
    $
    657,775
    
    
    $
    477,332
    
    
    $
    473,161
 20




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##### Table of Contents



The following table presents information as of December 31, 2004 regarding first mortgage and
commercial business loan maturities and contractual principal repayments of loans during the
periods indicated. Loans with adjustable interest rates are shown maturing in the year of their
contractual maturity. Also provided are the amounts due after one year classified according to the
sensitivity to changes in interest rates. After one butWithin fiveWithin one year
    
    
    years
    
    
    After five years
    
    
    Total(dollars in thousands)Commercial business loans
    
    $
    169,022
    
    
    $
    68,234
    
    
    $
    3,319
    
    
    $
    240,575First mortgage loans
    
    
    373,029
    
    
    
    322,492
    
    
    
    15,994
    
    
    
    711,515$
    542,051
    
    
    $
    390,726
    
    
    $
    19,313
    
    
    $
    952,090Loans maturing after one
year with:Fixed interest rates
    
    
    
    
    
    $
    371,186
    
    
    $
    19,300Variable interest rates
    
    
    
    
    
    
    19,540
    
    
    
    13$
    390,726
    
    
    $
    19,313
 Allowance For Loan Losses Management believes the allowance for loan losses accounting policy is critical to the
portrayal and understanding of our financial condition and results of operations. As such,
selection and application of this critical accounting policy involves judgments, estimates, and
uncertainties that are susceptible to change. In the event that different assumptions or
conditions were to prevail, and depending upon the severity of such changes, the possibility of
materially different financial condition or results of operations is a reasonable likelihood. The allowance for loan losses is maintained at an amount that we believe will be adequate to
absorb probable losses on existing loans, based on an evaluation of the collectibility of loans and
prior loss experience. This evaluation also takes into consideration such factors as changes in the
nature and volume of the loan portfolio, the value of underlying collateral, overall portfolio
quality, review of specific problem loans, and current economic conditions that may affect the
borrowers ability to pay. While management uses the best information available to make its
evaluation, future adjustments to the allowance may be necessary if there are significant changes
in economic conditions. In addition, as an integral part of their examination process regulatory
agencies periodically review our allowance for loan losses and may require us to make additions to
the allowance based on their evaluation of information available at the time of their examinations.
The allowance for loan losses increased from $9.1 million at December 31, 2003, to $10.6 million
at December 31, 2004. The 2004 allowance for loan losses growth can be attributed to provisions
made during 2004 offset by net charge-offs as well as the Wisconsin State Bank allowance at the
time of the acquisition. At the time of the acquisition, the Wisconsin State Bank had a $1.0
million allowance for loan losses. The remaining increase was due to the growth in the loan
portfolio, the general uncertainty regarding economic conditions and the increase in non-performing
loans and charge-offs recorded in 2004 and 2003. The ratio of the allowance for loan losses to
total loans was 1.02% at December 31, 2004 and 1.07% at December 31, 2003. Based on the present
economic environment and our analysis of the financial condition of the borrowers, we consider the
present allowance to be appropriate and adequate to cover probable losses inherent in the loan
portfolio, however, changes in future economic conditions and in the financial condition of
borrowers cannot be predicted at this time. Deterioration in such conditions could result in
increases in charge-offs or adversely classified loans and accordingly, in additional provisions
for loan losses. 21




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##### Table of Contents



The balance of the allowance for loan losses and actual loss experience for the last five
years is summarized in the following table: At or for the Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(dollars in thousands)Balance at beginning of year
    
    $
    9,136
    
    
    $
    7,663
    
    
    $
    5,563
    
    
    $
    5,010
    
    
    $
    4,047Charge-offs:Conventional single-family mortgage residential
    
    
    49
    
    
    
    84
    
    
    
    1
    
    
    
    6
    
    
    
    91Commercial and multifamily residential
    
    
    326
    
    
    
    69
    
    
    
    647
    
    
    
    
    
    
    
    Agricultural loans
    
    
    104
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial business loans
    
    
    383
    
    
    
    532
    
    
    
    99
    
    
    
    210
    
    
    
    107Consumer and installment loans
    
    
    863
    
    
    
    746
    
    
    
    429
    
    
    
    379
    
    
    
    92Total charge-offs
    
    
    1,725
    
    
    
    1,431
    
    
    
    1,176
    
    
    
    595
    
    
    
    290Recoveries
    
    
    (419
    )
    
    
    (390
    )
    
    
    (112
    )
    
    
    (23
    )
    
    
    (14
    )Net charge-offs
    
    
    1,306
    
    
    
    1,041
    
    
    
    1,064
    
    
    
    572
    
    
    
    276Increase due to acquisition
    
    
    999
    
    
    
    1,203
    
    
    
    2,008
    
    
    
    
    
    
    
    Provisions charged to operations
    
    
    1,793
    
    
    
    1,311
    
    
    
    1,156
    
    
    
    1,125
    
    
    
    1,239Balance at end of year
    
    $
    10,622
    
    
    $
    9,136
    
    
    $
    7,663
    
    
    $
    5,563
    
    
    $
    5,010Ratios:Net charge-offs to average loans outstanding
    
    
    0.14
    %
    
    
    0.14
    %
    
    
    0.21
    %
    
    
    0.11
    %
    
    
    0.06
    %Net charge-offs to total allowance
    
    
    12.30
    %
    
    
    11.39
    %
    
    
    13.88
    %
    
    
    10.28
    %
    
    
    5.51
    %Allowance to year end gross loans outstanding
    
    
    1.02
    %
    
    
    1.07
    %
    
    
    1.15
    %
    
    
    1.15
    %
    
    
    1.05
    %
 Non-performing and Delinquent Loans When in the opinion of management, serious doubt exists as to the collectability of a
loan, the loan is placed on non-accrual status and interest previously accrued but unpaid is
deducted from interest income. We do not recognize income on any loans past due 90 days or more.
In 2004, $538,000 of additional income on nonaccrual loans would have been reported if the loans
had been current in accordance with their original terms and had been outstanding throughout the
year. Additionally, in 2003 we would have reported an additional $613,000 of interest income on
non-accrual loans had the loans been in accordance with their original terms. Nonperforming assets increased by $2.9 million from $7.2 million at December 31, 2003 to $10.2
million at December 31, 2004. The increase in non-performing assets can be attributed to the
increase in nonaccrual loans, primarily commercial business loans and commercial real estate loans

which was partially offset by the sale of property previously held in other real estate owned.
Other real estate owned is principally comprised of commercial properties acquired in partial or
total satisfaction of problem loans. Management believes that losses on non-performing assets will
be minimal due to the collateral position in each situation. 22




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##### Table of Contents



The following table summarizes non-performing assets on the dates indicated (dollars in
thousands): At December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(dollars in thousands)Nonaccrual loans
    
    $
    8,871
    
    
    $
    5,282
    
    
    $
    3,203
    
    
    $
    4,429
    
    
    $
    1,815Other real estate owned
    
    
    1,296
    
    
    
    1,945
    
    
    
    2,382
    
    
    
    139
    
    
    
    117Total non-performing assets
    
    $
    10,167
    
    
    $
    7,227
    
    
    $
    5,585
    
    
    $
    4,568
    
    
    $
    1,932Ratios:Non-accrual loans to total loans
    
    
    0.85
    %
    
    
    0.62
    %
    
    
    0.48
    %
    
    
    0.92
    %
    
    
    0.38
    %Allowance to non-accrual loans
    
    
    119.74
    %
    
    
    172.96
    %
    
    
    239.24
    %
    
    
    125.60
    %
    
    
    276.03
    %Non-performing assets to total assets
    
    
    0.75
    %
    
    
    0.63
    %
    
    
    0.61
    %
    
    
    0.75
    %
    
    
    0.32
    %
 Potential Problem Loans We utilize an internal asset classification system as a means of reporting problem and potential problem assets.
At least quarterly, a list is presented to each subsidiary banks Board of Directors showing all loans listed as
Special Mention, Substandard, Doubtful and Loss. A Special Mention loan has potential weaknesses that
deserve managements close attention. If left uncorrected, these potential weaknesses may result in deterioration
of the repayment prospects for the loan at some future date. An asset is classified Substandard if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.
Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the
deficiencies are not corrected. Assets classified as Doubtful have all the weaknesses inherent in those classified
Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on
the basis of currently existing facts, conditions and values, highly questionable and improbable.
Assets classified as Loss are those considered uncollectible and viewed as non-bankable assets, worthy of
charge-off. Assets that do not currently expose us to sufficient risk to warrant classification in one of
the aforementioned categories, but possess weaknesses that may or may not be within the control of the customer
are deemed to be Management Attention (or equivalent designation at the various subsidiary banks).
As of December 31, 2004, loans classified as Special Mention, Substandard, Doubtful and Loss loans totaled
$40.9 million compared to $20.5 million as of December 31, 2003, an increase of $20.4 million or 99.5%.
The majority of the increase can be directly related to inclusion of three commercial business loans
into these categories. Management believes that no losses will be realized from these loans.
Also contributing to the growth in potential problem loans was the inclusion of loans acquired
during our recent acquisition and a more aggressive approach in the evaluation of potential
problem loans from the prior period. Our
determination as to the classification of our assets and the amount
of our valuation allowances is subject to review by the Banks'
primary regulators, which can order the establishment of additional
general or specific loss allowances. The FDIC, in conjunction with
the other federal banking agencies, has adopted an interagency policy
statement on the allowance for loan losses. The policy statement
provides guidance for financial institutions on both the
responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use
in determining the adequacy of general valuation guidelines.
Generally, the policy statement recommends that (i) institutions have
effective systems and controls to identify, monitor and address asset
quality problems; (ii) management has analyzed all significant
factors that affect the collectibility of the portfolio in a
reasonable manner; and (iii) management has established acceptable
allowance evaluation processes that meet the objectives set forth in
the policy statement. We have established an adequate allowance for
probable loan losses. We analyze the process regularly, with
modifications made if needed, and report those results four times per
year to each subsidiary bank's Board of Directors. However, there can
be no assurance that regulators, in reviewing our loan portfolio,
will not request us to materially increase our allowance for loan
loses at the time. Although management believes that adequate
specific and general loan loss allowances have been established,
actual losses are dependent upon future events and, as such, further
additions to the level of specific and general loan loss allowance
may become necessary. Investment Securities The investment portfolio is intended to provide us with adequate liquidity, flexibility
in asset/liability management and lastly earnings potential. Investment securities at December 31,
2004 were $172.6 million compared to $156.6 million at December 31, 2003. The 2004 investment
security growth can be attributed to both internal growth as well as acquisition growth associated
with the Wisconsin State Bank acquisition. At the time of the acquisition, the Wisconsin State
Bank had $11.5 million of investment securities. The 2003 growth in investment securities was
primarily due to The Reedsburg Bank acquisition. Management determines the appropriate classification of securities (including mortgage-related
securities) at the time of purchase. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses, net of tax, reported as a separate component of stockholders
equity. See Notes 1 and 4 to Consolidated Financial Statements for further details. 23




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##### Table of Contents



The amortized cost of debt securities is adjusted for amortization of premiums and accretion
of discounts to maturity, or in the case of mortgage-related securities, over the estimated life of
the security. Such amortization is included in interest income from the related security.
Interest and dividends are included in interest income from the related securities. Realized gains
and losses, and declines in value judged to be other-than-temporary are included in securities
gains (losses). The cost of securities sold is based on the specific identification method. The following table sets forth our estimated fair value of investment securities
available-for-sale at the dates indicated: At December 31,2004
    
    
    2003
    
    
    2002(dollars in thousands)U.S. Treasury and other U.S.
government securities
    
    $
    10,174
    
    
    $
    32,402
    
    
    $
    24,064State and political subdivision securities
    
    
    68,297
    
    
    
    48,859
    
    
    
    39,901Corporate bonds
    
    
    75
    
    
    
    75
    
    
    
    75Mutual funds
    
    
    
    
    
    
    
    
    
    
    3,069Collateralized mortgage obligations
    
    
    51,294
    
    
    
    34,249
    
    
    
    28,611Mortgage-backed securities
    
    
    42,724
    
    
    
    41,012
    
    
    
    34,405$
    172,564
    
    
    $
    156,597
    
    
    $
    130,125
 The maturity distribution (based upon the average life) and weighted average yield of our
securities portfolio as of December 31, 2004 are summarized in the following table: Within One Year
    
    
    One to Five Years
    
    
    Five to Ten Years
    
    
    Over Ten YearsWeighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageAmount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    YieldU.S. Treasury and other
government agency securities
    
    $
    2,979
    
    
    
    2.36
    %
    
    $
    5,619
    
    
    
    3.23
    %
    
    $
    1,610
    
    
    
    4.27
    %
    
    $
    
    
    
    
    
    %State and political subdivision
securities
    
    
    2,727
    
    
    
    3.99
    
    
    
    14,708
    
    
    
    4.87
    
    
    
    36,278
    
    
    
    5.70
    
    
    
    13,574
    
    
    
    5.83Corporate bonds
    
    
    25
    
    
    
    7.45
    
    
    
    50
    
    
    
    4.23
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Collateralized mortgage obligations
    
    
    4,445
    
    
    
    2.90
    
    
    
    41,818
    
    
    
    4.00
    
    
    
    5,315
    
    
    
    4.20
    
    
    
    
    
    
    
    Mortgage-backed securities
    
    
    747
    
    
    
    3.93
    
    
    
    35,630
    
    
    
    3.87
    
    
    
    5,657
    
    
    
    4.86
    
    
    
    428
    
    
    
    3.57$
    10,923
    
    
    
    3.10
    %
    
    $
    97,825
    
    
    
    4.04
    %
    
    $
    48,860
    
    
    
    5.39
    %
    
    $
    14,182
    
    
    
    5.76
    %
 Weighted average yield is calculated by dividing income within each maturity range by the
outstanding amount of the related investment based on carrying value. Total Deposits We continue to stress core deposit accumulation and retention as a basis for sound growth
and profitability. Core deposits consist of all deposits other than public funds and certificates
of deposit in excess of $100,000. 24




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##### Table of Contents



Total deposits increased $121.1 million to $1.0 billion on December 31, 2004, from $911.9
million on December 31, 2003. The 2004 deposit growth can be attributed to both internal growth as
well as acquisition growth associated with the Wisconsin State Bank acquisition. At the time of
the acquisition, the Wisconsin State had $80.0 million of deposits. The 2003 deposit growth can be
attributed to both internal growth as well as acquisition growth associated with the Reedsburg
acquisition. At the time of the acquisition, The Reedsburg Bank had $120.6 million of deposits.
The average increase in time deposits occurred via increases in retail certificates of deposits and
retail jumbo certificates of deposits, while the increase in NOW and money market deposits can be
attributed to depositors desiring to stay liquid as market interest rates remained low in 2004.
The following table sets forth the average amount of and the average rate paid by the banks on
deposits by deposit category: For the Year Ended December 31,2004
    
    
    2003
    
    
    2002Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageBalance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate(dollars in thousands)Non-interest-bearing
demand deposits
    
    $
    119,839
    
    
    
    0.00
    %
    
    $
    95,351
    
    
    
    0.00
    %
    
    $
    72,662
    
    
    
    0.00
    %NOW and money
market deposits
    
    
    348,342
    
    
    
    0.95
    
    
    
    294,876
    
    
    
    1.26
    
    
    
    146,096
    
    
    
    1.50Savings deposits
    
    
    128,954
    
    
    
    0.85
    
    
    
    90,723
    
    
    
    0.69
    
    
    
    78,357
    
    
    
    1.08Time deposits
    
    
    354,332
    
    
    
    2.38
    
    
    
    283,156
    
    
    
    2.58
    
    
    
    213,791
    
    
    
    3.40Total
    
    $
    951,467
    
    
    
    1.35
    %
    
    $
    764,106
    
    
    
    1.52
    %
    
    $
    510,906
    
    
    
    2.02
    %
 Maturities of time deposits and certificate accounts with balances of $100,000 or more,
outstanding at December 31, 2004, are summarized as follows (dollars in thousands): 3 months or less
    
    $
    27,575Over 3 through 6 months
    
    
    37,938Over 6 through 12 months
    
    
    28,431Over 12 months
    
    
    29,674Total
    
    $
    123,618
 Borrowings Although deposits are our primary source of funds, it has been our policy to utilize
borrowings as an alternative source of funds. We utilize both short-term and long-term borrowings,
as well as repurchase agreements as a part of our asset/liability management strategy. Borrowings
are secured when we believe we can profitably re-invest those funds for our benefit. A significant
component of our borrowings are federal funds purchased and advances from the Federal Home Loan
Bank (FHLB). The FHLB advances are collateralized by the capital stock of the FHLB that we hold,
certain mortgage loans in our loan portfolio and certain investment securities. Such advances are
made pursuant to several different credit programs, each of which has its own interest rate and
range of maturities. The following table shows outstanding amounts of borrowings together with the weighted average
interest rates, at the dates indicated (dollars in thousands). At December 31,2004
    
    
    2003
    
    
    2002Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    RateFederal Funds purchased
    
    $
    51,142
    
    
    
    2.59
    %
    
    $
    24,500
    
    
    
    1.29
    %
    
    $
    
    
    
    
    
    %Securities sold under
agreements to repurchase
    
    
    19
    
    
    
    0.85
    
    
    
    1,588
    
    
    
    1.27
    
    
    
    3,101
    
    
    
    1.53Other short-term borrowings
    
    
    10,161
    
    
    
    3.92
    
    
    
    7,919
    
    
    
    2.54
    
    
    
    14,987
    
    
    
    3.34Long-term borrowings
    
    
    111,054
    
    
    
    3.55
    
    
    
    72,346
    
    
    
    4.00
    
    
    
    72,322
    
    
    
    3.96Junior subordinated
debt owed to
unconsolidated trusts
    
    
    46,394
    
    
    
    6.16
    
    
    
    36,084
    
    
    
    6.30
    
    
    
    10,310
    
    
    
    4.75$
    218,770
    
    
    
    3.90
    %
    
    $
    142,437
    
    
    
    4.00
    %
    
    $
    100,720
    
    
    
    3.87
    %
 25




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##### Table of Contents



The following table shows the maximum amounts outstanding of borrowings for each of the past
three years (dollars in thousands). For the year ended December 31,2004
    
    
    2003
    
    
    2002Federal Funds purchased
    
    $
    51,142
    
    
    $
    24,500
    
    
    $
    19,313Securities sold under
agreements to repurchase
    
    
    2,424
    
    
    
    8,425
    
    
    
    9,894Other short-term borrowings
    
    
    13,770
    
    
    
    16,222
    
    
    
    14,987Long-term borrowings
    
    
    112,467
    
    
    
    83,879
    
    
    
    72,322Junior subordinated
debt owed to
unconsolidated trusts
    
    
    46,394
    
    
    
    36,084
    
    
    
    10,310$
    226,197
    
    
    $
    169,110
    
    
    $
    126,826
 The following table shows for the periods indicated the daily average amount outstanding for
the categories of borrowings, the interest paid and the weighted average rates (dollars in
thousands). For the year ended December 31,2004
    
    
    2003
    
    
    2002Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    RateFederal Funds purchased
    
    $
    29,757
    
    
    
    1.72
    %
    
    $
    7,245
    
    
    
    1.57
    %
    
    $
    8,474
    
    
    
    2.07
    %Securities sold under
agreements to repurchase
    
    
    804
    
    
    
    1.25
    
    
    
    5,059
    
    
    
    1.28
    
    
    
    7,273
    
    
    
    1.88Other short-term borrowings
    
    
    9,859
    
    
    
    3.23
    
    
    
    11,124
    
    
    
    2.70
    
    
    
    6,189
    
    
    
    3.44Long-term borrowings
    
    
    96,617
    
    
    
    3.67
    
    
    
    69,300
    
    
    
    3.71
    
    
    
    55,692
    
    
    
    4.03Junior subordinated
debt owed to
unconsolidated trusts
    
    
    38,690
    
    
    
    6.19
    
    
    
    19,073
    
    
    
    6.06
    
    
    
    1,361
    
    
    
    4.75$
    175,727
    
    
    
    3.86
    %
    
    $
    111,801
    
    
    
    3.77
    %
    
    $
    78,989
    
    
    
    3.59
    %
 Capital Resources and Adequacy Stockholders equity increased from $80.0 million at December 31, 2003 to $91.7 million
at December 31, 2004. Approximately $10.2 million of capital growth was due to the Random Lake
acquisition. The $4.0 million increase from earnings retention were partially offset by the
payment of $2.5 million in cash dividends to shareholders and the $158,000 decrease in the
investment portfolio market value. Pursuant to regulations promulgated by the Federal Reserve Board, bank holding companies are
required to maintain minimum levels of core capital as a percent of total assets and total capital
as a percent of risk-based assets. The minimum core capital requirement ranges from 3% to 5% of
total assets, depending upon the Federal Reserve Boards determination of the financial
institutions strength. Similar capital guidelines are also established for our individual banking
subsidiaries. Most financial institutions are required to meet a minimum core capital requirement
of 4% or more of total assets. The regulations assign risk weightings to assets and off-balance
sheet items and require minimum risk-based capital ratios. Bank holding companies generally are
required to have total capital equal to not less than 8% of risk weighted assets. Core capital
consists principally of shareholders equity less intangibles, while qualifying total capital
consists of core capital, portions of trust preferred securities and a portion of the reserve for
loan losses. As of December 31, 2004, we had a total capital to risk weighted assets ratio of
10.14%, and Lincoln State Bank, Franklin State Bank, Grafton State Bank, Community Bank Financial,
Fortress Bank of Westby, Fortress Bank of Cresco, Fortress Bank Minnesota, The Reedsburg Bank and
Wisconsin State Bank had total capital to risk weighted assets ratios of 10.02%, 11.42%, 11.55%,
10.51%, 11.18%, 12.72%, 12.45%, 11.11% and 12.27% respectively. These ratios are above the 2004
minimum requirements established by regulatory agencies to be well-capitalized. 26




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##### Table of Contents



In accordance with Federal Reserve Board regulations in effect at December 31, 2004, the
Corporation is allowed, for regulatory purposes, to included $30,412,000 of the capital securities
issued by the Trusts in Tier 1 capital, with the remaining $14,588,000 included in Tier II capital.
In March 2005, the Federal Reserve Board issued final regulations, which become effective March
31, 2009. If those regulations had been in effect at December 31, 2004, the Corporation would have
been allowed to include approximately $18,440,000 of the securities in Tier 1 capital and the
remainder in Tier II capital. The Corporation would exceed all regulatory minimum capital ratios
if the regulations that are to take effect were in place as of December 31, 2004. For a summary of the banks regulatory capital ratios at December 31, 2004, please see Note 17
to Consolidated Financial Statements. Management strives to maintain a strong capital position to take advantage of opportunities
for profitable geographic and product expansion and to maintain depositor and investor confidence.
Conversely, management believes that capital must be maintained at levels that provide adequate
returns on the capital employed. Management actively reviews capital strategies for us and for
each of our subsidiaries to ensure that capital levels are appropriate based on perceived business
risks, growth and regulatory standards. Liquidity and Capital Resources Liquidity management involves the ability to meet the cash flow requirements of customers
who may be either depositors wanting to withdraw funds or borrowers needing assurance that
sufficient funds will be available to meet their credit needs. We had liquid assets of $44.3
million and $47.7 million on December 31, 2004 and December 31, 2003, respectively. Management
believes liquidity and capital levels are adequate at December 31, 2004. Our liquidity, represented by cash and cash equivalents, is a product of our operating
activities, investing activities and financing activities. These activities are summarized below: For the Year Ended December 31,2004
    
    
    2003
    
    
    2002(dollars in thousands)Cash and cash equivalents at beginning of
period
    
    $
    47,655
    
    
    $
    61,755
    
    
    $
    37,468Operating activities:Net income
    
    
    4,002
    
    
    
    8,228
    
    
    
    6,385Adjustments to reconcile net income to
net cash provided by operating activities
    
    
    4,892
    
    
    
    1,935
    
    
    
    4,033Net cash provided by operating activities
    
    
    8,894
    
    
    
    10,163
    
    
    
    10,418Net cash used in investing activities
    
    
    (118,676
    )
    
    
    (109,462
    )
    
    
    (57,473
    )Net cash provided by financing activities
    
    
    106,397
    
    
    
    85,199
    
    
    
    71,342Increase (decrease) in cash and cash
equivalents
    
    $
    (3,385
    )
    
    $
    (14,100
    )
    
    $
    24,287Cash and cash equivalents at end of period
    
    $
    44,270
    
    
    $
    47,655
    
    
    $
    61,755
 Net cash was provided by operating activities during the years ended December 31, 2004, 2003
and 2002 primarily as a result of normal ongoing business operations. The non-cash items, such as
the provisions for loan losses and depreciation and the net amortization of premiums, also
contributed to net cash provided by operating activities during these periods. Liquidity is also necessary at the parent company level. The parent companys primary source
of funds are dividends from subsidiaries, borrowings and proceeds from issuance of equity. The
parent company manages its liquidity position to provide the funds necessary to pay dividends to
shareholders, service debt, invest in subsidiaries and satisfy other operating requirements.
Dividends received from subsidiaries totaled $8.3 million, $7.3 million and $3.5 million for the
years ended December 31, 2004, 2003 and 2002, respectively, and will continue to be the parent
companys main source of long-term liquidity. The dividends from our banks were sufficient to pay
cash dividends to our shareholders of $2.5 million, $2.2 million and $1.8 million for the years
ended December 31, 2004, 2003 and 2002 respectively. At December 31, 2004, the parent company had
$20.0 million in lines of credit with unaffiliated banks available, with a $7.0 million balance
outstanding. 27




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##### Table of Contents



The following table summarizes our significant contractual obligations and other potential
funding needs at December 31, 2004 (dollars in thousands). Time deposits
    
    
    Long-term debt (1)
    
    
    Operating leases
    
    
    Total2005
    
    $
    270,945
    
    
    $
    30,219
    
    
    $
    1,088
    
    
    $
    302,2522006
    
    
    73,495
    
    
    
    18,564
    
    
    
    1,016
    
    
    
    93,0752007
    
    
    27,526
    
    
    
    24,814
    
    
    
    755
    
    
    
    53,0952008
    
    
    12,306
    
    
    
    22,812
    
    
    
    754
    
    
    
    35,8722009
    
    
    11,204
    
    
    
    9,000
    
    
    
    754
    
    
    
    20,958Thereafter
    
    
    
    
    
    
    52,039
    
    
    
    
    
    
    
    52,039Total
    
    $
    395,476
    
    
    $
    157,448
    
    
    $
    4,367
    
    
    $
    557,291Commitments
to
originate
mortgage
loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    20,104Unused
lines of
credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    185,447Standby
letters
of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    12,574
   (1)
    
    Long-term debt includes junior subordinated debt owed to
unconsolidated trusts Asset/Liability Management Financial institutions are subject to interest rate risk to the extent their
interest-bearing liabilities (primarily deposits) mature or reprice at different times and on a
different basis than their interest-earning assets (consisting primarily of loans and securities).
Interest rate sensitivity management seeks to match maturities on assets and liabilities and avoid
fluctuating net interest margins while enhancing net interest income during periods of changing
interest rates. 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 the same time period is referred to as an interest rate gap. A gap is considered positive
when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. During periods of rising interest rates, a
negative gap tends to adversely affect net interest income while a positive gap tends to result in
an increase in net interest income. During a period of falling interest rates, a negative gap
tends to result in an increase in net interest income while a positive gap tends to adversely
affect net interest income. 28




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##### Table of Contents



The following table shows the interest rate sensitivity gap for four different time intervals
as of December 31, 2004. Certain assumptions regarding prepayment and withdrawal rates are based
upon our historical experience, and management believes such assumptions are reasonable. Amounts Maturing or Repricing as of December 31, 2004Within
    
    
    Six to Twelve
    
    
    One to Five
    
    
    OverSix Months
    
    
    Months
    
    
    Years
    
    
    Five Years
    
    
    Total(Dollars in Thousands)Interest-earning assets:Fixed-rate mortgage loans
    
    $
    104,320
    
    
    $
    63,714
    
    
    $
    303,232
    
    
    $
    15,981
    
    
    $
    487,247Adjustable-rate mortgage loans
    
    
    193,041
    
    
    
    11,954
    
    
    
    19,260
    
    
    
    13
    
    
    
    224,268Total mortgage loans
    
    
    297,361
    
    
    
    75,668
    
    
    
    322,492
    
    
    
    15,994
    
    
    
    711,515Commercial business loans
    
    
    147,654
    
    
    
    21,369
    
    
    
    68,233
    
    
    
    3,319
    
    
    
    240,575Consumer loans
    
    
    17,849
    
    
    
    6,537
    
    
    
    23,703
    
    
    
    1,047
    
    
    
    49,136Home equity loans
    
    
    25,820
    
    
    
    2
    
    
    
    770
    
    
    
    0
    
    
    
    26,592Other loans
    
    
    7,760
    
    
    
    504
    
    
    
    1,699
    
    
    
    900
    
    
    
    10,863Mortgage-related securities
    
    
    36,707
    
    
    
    14,793
    
    
    
    28,192
    
    
    
    14,326
    
    
    
    94,018Fixed rate investment securities and other
    
    
    1,984
    
    
    
    3,730
    
    
    
    20,448
    
    
    
    52,383
    
    
    
    78,545Variable rate investment securities and other
    
    
    31,108
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    31,108Total interest-earning assets
    
    $
    566,243
    
    
    $
    122,603
    
    
    $
    465,537
    
    
    $
    87,969
    
    
    $
    1,242,352Interest-bearing liabilities:DepositsTime deposits
    
    $
    177,036
    
    
    $
    93,909
    
    
    $
    124,531
    
    
    $
    0
    
    
    $
    395,476NOW accounts
    
    
    5,923
    
    
    
    5,923
    
    
    
    59,234
    
    
    
    27,643
    
    
    
    98,723Savings accounts
    
    
    7,891
    
    
    
    7,891
    
    
    
    78,907
    
    
    
    36,824
    
    
    
    131,513Money market accounts
    
    
    31,258
    
    
    
    14,624
    
    
    
    146,241
    
    
    
    66,729
    
    
    
    258,852Short-term borrowings
    
    
    59,312
    
    
    
    2,010
    
    
    
    0
    
    
    
    0
    
    
    
    61,322Long-term borrowings
    
    
    11,044
    
    
    
    16,611
    
    
    
    77,755
    
    
    
    5,644
    
    
    
    111,054Junior subordinated debt owed to
unconsolidated trusts
    
    
    28,352
    
    
    
    0
    
    
    
    0
    
    
    
    18,042
    
    
    
    46,394Total interest-bearing liabilities
    
    $
    320,816
    
    
    $
    140,968
    
    
    $
    486,668
    
    
    $
    154,882
    
    
    $
    1,103,334Interest-earning assets less
interest-bearing liabilities
    
    $
    245,427
    
    
    
    ($18,365
    )
    
    
    ($21,131
    )
    
    
    ($66,913
    )
    
    $
    139,018Cumulative interest rate sensitivity gap
    
    $
    245,427
    
    
    $
    227,062
    
    
    $
    205,931
    
    
    $
    139,018Cumulative interest rate sensitivity gap as a
percentage of total assets
    
    
    18.09
    %
    
    
    16.73
    %
    
    
    15.17
    %
    
    
    10.24
    %
 At December 31, 2004, our cumulative interest-rate sensitive gap as a percentage of total
assets was a positive 18.09% for six months and a positive 16.73% for one-year maturities.
Therefore, we are positively gapped and may benefit from rising interest rates. Certain shortcomings are inherent in the method of analysis presented in the above schedule.
For example, although certain assets and liabilities have similar maturities or periods of
repricing, they may react in different degrees to changes in market interest rates. Also, the
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.
Additionally, certain assets, such as adjustable rate mortgage loans, have features that restrict
changes in interest rates on a short-term basis over the life of the asset. Further, in the event
of a change in interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the schedule. Finally, the ability of many
borrowers to service their debt may decrease in the event of an interest rate increase. 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk Our financial performance is impacted by, among other factors, interest rate risk and
credit risk. We utilize no derivatives to mitigate our interest rate risk. To control credit risk
we rely instead on loan review and an adequate loan loss reserve. Interest rate risk is the risk of loss of net interest income due to changes in interest
rates. This risk is addressed by our Asset Liability Management Committee, which includes senior
management representatives. The Asset Liability Management Committee monitors and considers
methods of managing interest rate risk by monitoring changes in net interest income under
various interest rate scenarios. The Asset Liability Management Committee attempts to manage
various components of our balance sheet to minimize the impact of sudden and sustained changes in
interest rate on net interest income. 29




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##### Table of Contents



Our exposure to interest rate risk is reviewed on at least a quarterly basis by the Asset
Liability Management Committee. Interest rate risk exposure is measured using interest rate
sensitivity analysis to determine our change in net interest income in the event of hypothetical
changes in interest rates and interest liabilities. If potential changes to net interest income
resulting from hypothetical interest rate swings are not within the limits established by the Asset
Liability Management Committee, the asset and liability mix may be adjusted to bring interest rate
risk within approved limits. In order to reduce the exposure to interest rate fluctuations, we have developed strategies to
manage our liquidity, shorten the effective maturities of certain interest-earning assets, and
increase the effective maturities of certain interest-bearing liabilities. One strategy used is
focusing our residential lending on adjustable rate mortgages, which generally reprice within one
to three years. Another strategy used is concentrating our non-residential lending on adjustable
or floating rate and/or short-term loans. We have also focused our investment activities on short
and medium-term securities, while attempting to maintain and increase our savings account and
transaction deposit accounts, which are considered to be relatively resistant to changes in
interest rates. Along with the analysis of the interest rate sensitivity gap, determining the sensitivity of
future earnings to a hypothetical plus 200 basis point rate change or minus 100 basis point change
can be accomplished through the use of simulation modeling. In addition to the assumptions used to
measure the interest rate sensitivity gap, simulation of earnings includes the modeling of the
balance sheet as an ongoing entity. Future business assumptions involving administered rate
products, prepayments for future rate sensitive balances, and the reinvestment of maturing assets
and liabilities are included. These items are then modeled to project income based on a
hypothetical change in interest rates. The resulting pretax income for the next 12-month period is
compared to the pretax income calculated using flat rates. This difference represents our earning
sensitivity to a plus 200 basis point rate change or minus 200 basis point change. The table below
illustrates these amounts as of December 31, 2004. Percent Change in Net Interest IncomeChange in Interest Rates
    
    2004
    
    
    2003+ 200 basis points
    
    
    8.17
    %
    
    
    8.16
    %+ 150 basis points
    
    
    6.12
    %
    
    
    5.46
    %+ 100 basis points
    
    
    3.45
    %
    
    
    2.76
    %+ 50 basis points
    
    

    0.69
    %
    
    
    1.07
    %Base Scenario
    
    
    0.00
    %
    
    
    0.00
    %- 50 basis points
    
    
    (4.92
    )%
    
    
    (5.76
    )%- 100 basis points
    
    
    (6.88
    )%
    
    
    (7.55
    )%- 150 basis points
    
    
    (10.90
    )%
    
    
    (11.69
    )%- 200 basis points
    
    
    (13.72
    )%
    
    
    (14.34
    )%
 These results are based solely on immediate and sustained parallel changes in market rates and
do not reflect the earnings sensitivity that may arise from other factors such as changes in the
shape of the yield curve, the change in spread between key market rates, or accounting recognition
for impairment of certain intangibles. The above results also do not include any management action
to mitigate potential income variances within the simulation process. This action would include,
but would not be limited to, adjustments to the repricing characteristics of any on or off balance
sheet item with regard to short-term rate projections and current market value assessments. We determine another component of interest rate risk, fair value at risk, through the
technique of simulating the fair value of equity in changing rate environment. This technique
involves determining the present value of all contractual asset liability cash flows (adjusted for
prepayments) based on a predetermined discount rate. The net result of all these balance sheet
items determine the fair value of equity. The fair value of equity resulting from the current flat
rate scenario is compared to the fair value of equity calculated using discount rates plus 200
basis point rate change or minus 100 basis point change to determine the fair value of equity at
risk. Currently, fair value of equity at risk is less than 1.0% of our market value as of December
31, 2004. 
 Item 8. Financial Statements and Supplementary Data The consolidated balance sheets of the Corporation and its subsidiaries as of December
31, 2004 and 2003 and the related consolidated statements of income, stockholders equity and cash
flows for each of the years in the three year period ended December 31, 2004 are attached.
Selected quarterly financial data is included in Item 6. 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 30




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Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, the Corporation carried out an evaluation
under the supervision and with the participation of the Corporations management, including the
Corporations Chairman of the Board and Principal Executive Officer and the Corporations Chief
Financial Officer, of the Corporations disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on this
evaluation, the Corporations Chairman of the Board and Principal Executive Officer and the
Corporations Chief Financial Officer concluded that the Corporations disclosure controls and
procedures were effective in timely alerting them to material information relating to the
Corporation required to be included in the Corporations periodic filings with the Securities and
Exchange Commission. It should be noted that in designing and evaluating the disclosure controls
and procedures, management recognized that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired control objectives,
and management necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. The Corporation has designed its disclosure
controls and procedures to reach a level of reasonable assurance of achieving the desired control
objectives and based on the evaluation described above, the Corporations Chairman of the Board and
Principal Executive Officer and the Corporations Chief Financial Officer concluded that the
Corporations disclosure controls and procedures were effective at reaching that level of
reasonable assurance. Changes in Internal Control Over Financial Reporting There was no change in the Corporations internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the
Corporations most recently completed fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Corporations internal control over financial reporting. Managements Report on Internal Control Over Financial Reporting The management of Merchants and Manufacturers Bancorporation, Inc. (Merchants) is responsible
for establishing and maintaining adequate internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 as amended). Merchants
internal control over financial reporting is designed to provide reasonable assurance to Merchants
management and board of directors regarding the preparation and fair presentation of published
financial statements. Merchants internal control over financial reporting includes those policies
and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of Merchants; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of Merchants are being made only in accordance with
authorizations of management and directors of Merchants; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of Merchants assets that could have a material effect on the
financial statements. In August 2004, Merchants acquired Random Lake Bancorp Limited (Random Lake) and its
subsidiary bank Wisconsin State Bank through the merger of Random Lake into a wholly owned
subsidiary of Merchants. As permitted by the Securities and Exchange Commission, management
excluded Wisconsin State Bank from its assessment of the effectiveness of Merchants internal
control over financial reporting as of December 31, 2004. Wisconsin State Bank had total assets of
$100.4 million, or 7.4% of Merchants total consolidated assets, as of December 31, 2004. Since
its acquisition by Merchants, Wisconsin State Bank recorded gross revenue of $2.3 million, or 3.07%
of Merchants total consolidated gross revenue for the year ended December 31, 2004. Net income
recorded by Wisconsin State Bank after the acquisition was $314,000, or 7.8% of Merchants total
consolidated net income for the year ended December 31, 2004. Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate. Merchants management assessed the effectiveness of Merchants internal control over financial
reporting as of December 31, 2004. In making this assessment, it used the criteria set for the by
the Committee of Sponsoring Organization of the Treadway Commission (COSO) in Internal Control 
Integrated Framework.Based on our assessment, which excluded Wisconsin State Bank as described
above, management believes that, as of December 31, 2004, Merchants internal control over
financial reporting was effective based on those criteria. McGladrey & Pullen, the independent registered public accounting firm that audited Merchants
financial statements included in this Annual Report, issued an audit report on managements
assessment of Merchants internal control over financial reporting. McGladrey & Pullens audit
report appears on page one of that report. 31




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##### Table of Contents



Item 9B. Other Information None. 
 PART III 
 Item 10. Directors and Executive Officers of the Registrant The information in response to this item is incorporated herein by reference to the
Corporations proxy statement, which shall be filed with the Securities and Exchange Commission no
later than 120 days after the Corporations fiscal year end covered by this report. 
 Item 11. Executive Compensation The information in response to this item is incorporated herein by reference to the
Corporations proxy statement, which shall be filed with the Securities and Exchange Commission no
later than 120 days after the Corporations fiscal year end covered by this report. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters The information in response to this item is incorporated herein by reference to the
Corporations proxy statement, which shall be filed with the Securities and Exchange Commission no
later than 120 days after the Corporations fiscal year end covered by this report. Equity Compensation Plan Information The following table summarizes share information, as of December 31, 2004, for the
Corporations equity compensation plan, the 1996 Incentive Stock Option Plan. This plan has been
approved by the Corporations shareholders. Number of
    
    
    
    
    
    
    Number ofcommon shares to be
    
    
    
    
    
    
    common sharesissued upon exercise
    
    
    Weighted-average
    
    
    available for futureof outstanding
    
    
    exercise price of
    
    
    issuance underoptions,
    
    
    outstanding options,
    
    
    equityPlan Category
    
    warrants, and rights
    
    
    warrants, and rights
    
    
    compensation plansEquity compensation
plans approved by
stockholders
    
    
    98,921
    
    
    $
    33.39
    
    
    
    111,079Equity compensation
plans not approved
by stockholders
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    98,921
    
    
    $
    33.39
    
    
    
    111,079
 
 Item 13. Certain Relationships and Related Transactions The information in response to this item is incorporated herein by reference to the
Corporations proxy statement, which shall be filed with the Securities and Exchange Commission no
later than 120 days after the Corporations fiscal year end covered by this report. 
 Item 14. Principal Accountant Fees and Services The information in response to this item is incorporated herein by reference to the
Corporations proxy statement, which shall be filed with the Securities and Exchange Commission no
later than 120 days after the Corporations fiscal year end covered by this report. 32




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##### Table of Contents



PART IV 
 Item 15. Exhibits and Financial Statement Schedules Documents Filed:1 and 2.
    
    Financial Statements and Financial Statement Schedules. The following
financial statements of Merchants and Manufacturers Bancorporation, Inc. and
subsidiaries are filed as a part of this report under Item 8. Financial Statements and
Supplementary Data:Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 31, 2004 and 2003Consolidated Statements of Income for the years ended December 31, 2004, 2003, and
2002Consolidated Statements of Changes in Stockholders Equity for the years ended
December 31, 2004, 2003, and 2002Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003
and 2002Notes to Consolidated Financial StatementsAll financial statement schedules have been omitted as they are not applicable or
because the information is included in the financial statements or notes thereto.3.Exhibits.
    
    All required exhibits have been furnished in connection with and are
incorporated by reference to previous filing, except for the exhibits set forth on the
Exhibit List appearing elsewhere in this filing.
 33




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized. MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.By:
    
    /s/ Michael J. Murry.Michael J. MurryChairman of the Board of Directors & Principal Executive OfficerDate: March 16, 2005
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the capacities and on the dates
indicated. PRINCIPAL EXECUTIVE OFFICERS/s/ Michael J. Murry
    
    Chairman of the Board of Directors
    
    March 16, 2005Michael J. Murry
    
    & Principal Executive Officer/s/ James C. Mroczkowski
    
    Executive Vice President & Chief
    
    March 16, 2005James C. Mroczkowski
    
    Financial OfficerDIRECTORS/s/ Michael J. Murry
    
    Chairman of the Board of Directors
    
    March 16, 2005Michael J. Murry/s/ Nicholas S. Logarakis
    
    Director
    
    March 16, 2005Nicholas S. Logarakis/s/ Rodney T. Goodell
    
    Director
    
    March 16, 2005Rodney Goodell/s/ Donald A. Zellmer
    
    Director
    
    March 16, 2005Donald Zellmer/s/ James A. Sass
    
    Director
    
    March 16, 2005James A. Sass/s/ Thomas J. Sheehan
    
    Director
    
    March 16, 2005Thomas J. Sheehan/s/ J. Michael Bartels
    
    Director
    
    March 16, 2005J. Michael Bartels/s/ William L. Adamany
    
    Director
    
    March 16, 2005William L. Adamany/s/ Steven R. Blakeslee
    
    Director
    
    March 16, 2005Steven R. Blakeslee/s/ Sr. Joel Read
    
    Director
    
    March 16, 2005Sr. Joel Read/s/ Harold J. Mueller
    
    Director
    
    March 16, 2005Harold J. Mueller
 34




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(MCGLADREY & PULLEN LOGO) Merchants and Manufacturers   Bancorporation,
Inc. and Subsidiaries Consolidated Financial Report
12.31.2004 McGladrey & Pullen, LLP is a member firm of RSM International,
an affiliation of separate and independent legal entities.




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Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Contents  
 Report of Independent Registered Public Accounting Firm
    
    
    1-2Report of Independent Registered Public Accounting Firm
on Consolidated Financial Statements
    
    
    3Consolidated Financial StatementsConsolidated Balance Sheets
    
    
    4Consolidated Statements of Income
    
    
    5Consolidated Statements of Changes in Stockholders Equity
    
    
    6Consolidated Statements of Cash Flows
    
    
    7-8Notes to Consolidated Financial Statements
    
    
    9-42




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##### Table of Contents



(MCGLADREY & PULLEN LOGO) Report of Independent Registered Public Accounting Firm
     on Internal Control over Financial Reporting To the Audit Committee of the Board of Directors
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
New Berlin, Wisconsin We have audited managements assessment, included in the accompanying Managements Report on Internal Control Over Financial Reporting, that Merchants and Manufacturers Bancorporation, Inc. and subsidiaries (the Corporation) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Corporations management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the companys internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements. McGladrey & Pullen, LLP is an independent member firm of RSM International,
an affiliation of separate and independent legal entities. 1




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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that the Corporation maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Merchants and Manufacturers Bancorporation, Inc. and subsidiaries acquired Random Lake Bancorp, Ltd. (Random Lake) during 2004, and management excluded from its assessment of the effectiveness of the Companys internal control over financial reporting as of December 31, 2004, Random Lakes internal control over financial reporting associated with total assets of $100.4 million, total revenue of $2.3 million, and net income of $314,000 included in the consolidated financial statements of Merchants and Manufacturers Bancorporation, Inc. and subsidiaries as of and for the year ended December 31, 2004. Our audit of internal control over financial reporting of Merchants and Manufacturers Bancorporation, Inc. and subsidiaries also excluded an evaluation of the internal control over financial reporting of Random Lake Bancorp, Ltd. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Corporation and subsidiaries and our report dated March 4, 2005 expressed an unqualified opinion. (MCGLADREY & PULLEN, LLP) Madison, Wisconsin
March 4, 2005 2




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(MCGLADREY & PULLEN LOGO) 
 Report of Independent Registered Public Accounting Firm
     on Consolidated Financial Statements To the Board of Directors
Merchants and Manufacturers
     Bancorporation, Inc. and Subsidiaries
New Berlin, Wisconsin We have audited the accompanying consolidated balance sheets of Merchants and Manufacturers
Bancorporation, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of income, changes in stockholders equity, and cash flows for each of the
three years in the period ended December 31, 2004. These consolidated financial statements are the
responsibility of the Corporations management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Merchants and Manufacturers Bancorporation, Inc. and
subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2004 in conformity with
accounting principles generally accepted in the United States of America. We have also audited, in accordance with the Standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Merchants and Manufacturers Bancorporation, Inc. and
subsidiaries internal control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control  Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 4, 2005 expressed an
unqualified opinion. (MCGLADREY & PULLEN, LLP) Madison, Wisconsin
March 4, 2005 McGladrey & Pullen, LLP is an independent member firm of RSM International,
an affiliation of separate and independent legal entities. 3




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##### Table of Contents



Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries 
 Consolidated Balance Sheets
December 31, 2004 and 2003 2004
    
    
    2003(Amounts In Thousands, ExceptShare and Per Share Amounts)AssetsCash and Due From Banks (Note 3)
    
    $
    33,839
    
    
    $
    29,376Interest Bearing Deposits in Banks
    
    
    1,178
    
    
    
    2,647Federal Funds Sold
    
    
    9,253
    
    
    
    15,632Cash and cash equivalents
    
    
    44,270
    
    
    
    47,655Available-for-Sale Securities (Note 4)
    
    
    172,564
    
    
    
    156,597Loans, less allowance for loan losses of $10,622 and $9,136
at December 31, 2004 and 2003, respectively (Note 5 and Note 9)
    
    
    1,028,059
    
    
    
    847,938FHLB Stock
    
    
    19,649
    
    
    
    16,245Premises and Equipment (Note 6)
    
    
    30,355
    
    
    
    20,591Goodwill (Note 7)
    
    
    31,885
    
    
    
    26,943Intangible Assets (Note 7)
    
    
    3,829
    
    
    
    3,559Other Assets
    
    
    21,035
    
    
    
    21,658Accrued Interest Receivable
    
    
    5,419
    
    
    
    4,421Total assets
    
    $
    1,357,065
    
    
    $
    1,145,607Liabilities and Stockholders EquityLiabilitiesDeposits:Non-interest bearing
    
    $
    148,482
    
    
    $
    109,755Interest bearing
    
    
    884,564
    
    
    
    802,193Total deposits (Note 8)
    
    
    1,033,046
    
    
    
    911,948Short-term borrowings (Note 9)
    
    
    61,322
    
    
    
    34,007Long-term borrowings (Note 9)
    
    
    111,054
    
    
    
    72,346Junior subordinated debt owed to unconsolidated trusts (Note 10)
    
    
    46,394
    
    
    
    36,084Accrued interest payable
    
    
    1,944
    
    
    
    1,417Other liabilities
    
    
    11,566
    
    
    
    9,831Total liabilities
    
    
    1,265,326
    
    
    
    1,065,633Commitments and Contingent Liabilities (Note 15)Stockholders Equity (Note 17)Preferred stock, $1.00 par value; 250,000 shares authorized, shares
issued and shares outstanding  none
    
    
    
    
    
    
    Common stock $1.00 par value; 6,000,000 shares
authorized; shares issued: 3,770,251 - 2004; 3,436,051 - 2003;
shares outstanding: 3,674,054 - 2004; 3,326,104 - 2003
    
    
    3,770
    
    
    
    3,436Additional paid-in capital
    
    
    53,421
    
    
    
    43,691Retained earnings
    
    
    36,486
    
    
    
    35,007Accumulated other comprehensive income
    
    
    505
    
    
    
    663Treasury stock, at cost (96,197 shares - 2004; 109,947 shares - 2003)
    
    
    (2,443
    )
    
    
    (2,823
    )Total stockholders equity
    
    
    91,739
    
    
    
    79,974Total liabilities and stockholders equity
    
    $
    1,357,065
    
    
    $
    1,145,607
 See Notes to Consolidated Financial Statements. 4




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##### Table of Contents



Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries 
 Consolidated Statements of IncomeYears Ended December 31, 2004, 2003, and 2002 2004
    
    
    2003
    
    
    2002(Amounts In Thousands, Except Per Share Amounts)Interest and dividend income:Interest and fees on loans
    
    $
    55,110
    
    
    $
    45,368
    
    
    $
    35,716Interest and dividends on securities:Taxable
    
    
    1,671
    
    
    
    2,080
    
    
    
    893Tax-exempt
    
    
    1,876
    
    
    
    1,410
    
    
    
    926Interest on mortgage-backed securities
    
    
    3,176
    
    
    
    1,988
    
    
    
    2,050Interest on interest bearing deposits in banks and
federal funds sold
    
    
    155
    
    
    
    204
    
    
    
    318Total interest and dividend income
    
    
    61,988
    
    
    
    51,050
    
    
    
    39,903Interest expense:Interest on deposits
    
    
    12,853
    
    
    
    11,659
    
    
    
    10,295Interest on short-term borrowings
    
    
    838
    
    
    
    479
    
    
    
    502Interest on long-term borrowings
    
    
    3,546
    
    
    
    2,578
    
    
    
    2,244Interest on junior subordinated debt owed to unconsolidated trusts
    
    
    2,396
    
    
    
    1,155
    
    
    
    65Total interest expense
    
    
    19,633
    
    
    
    15,871
    
    
    
    13,106Net interest income
    
    
    42,355
    
    
    
    35,179
    
    
    
    26,797Provision for loan losses (Note 5)
    
    
    1,793
    
    
    
    1,311
    
    
    
    1,156Net interest income after provision for loan losses
    
    
    40,562
    
    
    
    33,868
    
    
    
    25,641Noninterest income:Service charges on deposit accounts
    
    
    3,566
    
    
    
    2,649
    
    
    
    1,625Service charges on loans
    
    
    2,154
    
    
    
    2,565
    
    
    
    1,260Securities gains, net
    
    
    191
    
    
    
    360
    
    
    
    111Gain on sale of loans, net
    
    
    494
    
    
    
    1,859
    
    
    
    695Net gain on sale of premises and equipment
    
    
    158
    
    
    
    2
    
    
    
    360Tax, brokerage and insurance commissions
    
    
    1,547
    
    
    
    1,165
    
    
    
    215Other
    
    
    3,427
    
    
    
    2,563
    
    
    
    1,861Total noninterest income
    
    
    11,537
    
    
    
    11,163
    
    
    
    6,127Noninterest expenses:Salaries and employee benefits
    
    
    24,646
    
    
    
    18,655
    
    
    
    12,439Premises and equipment
    
    
    6,387
    
    
    
    4,079
    
    
    
    3,419Data processing fees
    
    
    2,296
    
    
    
    1,193
    
    
    
    1,261Data processing conversions
    
    
    573
    
    
    
    
    
    
    
    Marketing and business development
    
    
    2,321
    
    
    
    1,509
    
    
    
    894System installations
    
    
    830
    
    
    
    
    
    
    
    Sarbanes-Oxley implementation
    
    
    783
    
    
    
    
    
    
    
    Other
    
    
    8,003
    
    
    
    7,300
    
    
    
    4,126Total noninterest expenses
    
    
    45,839
    
    
    
    32,736
    
    
    
    22,139Income before income taxes
    
    
    6,260
    
    
    
    12,295
    
    
    
    9,629Income taxes (Note 14)
    
    
    2,258
    
    
    
    4,067
    
    
    
    3,244Net income
    
    $
    4,002
    
    
    $
    8,228
    
    
    $
    6,385Basic earnings per share
    
    $
    1.16
    
    
    $
    2.58
    
    
    $
    2.30Diluted earnings per share
    
    $
    1.15
    
    
    $
    2.56
    
    
    $
    2.29
 See Notes to Consolidated Financial Statements. 5




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Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries 
 Consolidated Statements of Changes in Stockholders EquityYears Ended December 31, 2004, 2003, and 2002 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    TreasuryStock
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Stock
    
    
    Total(Amounts In Thousands, Except Share and Per Share Amounts)Balance at December 31, 2001
    
    $
    2,588
    
    
    $
    14,955
    
    
    $
    36,894
    
    
    $
    330
    
    
    $
    (1,838
    )
    
    $
    52,929Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    6,385
    
    
    
    
    
    
    
    
    
    
    
    6,385Change in net unrealized gains on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,799
    
    
    
    
    
    
    
    1,799Reclassification adjustment for gains
included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (111
    )
    
    
    
    
    
    
    (111
    )Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (570
    )
    
    
    
    
    
    
    (570
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,503Issuance of 389,722 shares of stock
for acquisition
    
    
    389
    
    
    
    11,356
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,745Sale of 525 shares of treasury stock
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    18
    
    
    
    15Purchase of 38,937 shares of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,073
    )
    
    
    (1,073
    )Cash dividends paid  $0.65 per share
    
    
    
    
    
    
    
    
    
    
    (1,790
    )
    
    
    
    
    
    
    
    
    
    
    (1,790
    )Balance at December 31, 2002
    
    
    2,977
    
    
    
    26,308
    
    
    
    41,489
    
    
    
    1,448
    
    
    
    (2,893
    )
    
    
    69,329Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    8,228
    
    
    
    
    
    
    
    
    
    
    
    8,228Change in net unrealized gains on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (789
    )
    
    
    
    
    
    
    (789
    )Reclassification adjustment for gains
included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (360
    )
    
    
    
    
    
    
    (360
    )Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    364
    
    
    
    
    
    
    
    364Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,443Issuance of 146,792 shares of stock
for acquisition
    
    
    147
    
    
    
    5,249
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,396Sale of 159 shares of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    5Purchase of 25 shares of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Stock dividend
    
    
    312
    
    
    
    12,169
    
    
    
    (12,497
    )
    
    
    
    
    
    
    
    
    
    
    (16
    )Cash dividends paid  $0.69 per share
    
    
    
    
    
    
    
    
    
    
    (2,213
    )
    
    
    
    
    
    
    
    
    
    
    (2,213
    )Exercise of stock options
    
    
    
    
    
    
    (35
    )
    
    
    
    
    
    
    
    
    
    
    66
    
    
    
    31Balance at December 31, 2003
    
    
    3,436
    
    
    
    43,691
    
    
    
    35,007
    
    
    
    663
    
    
    
    (2,823
    )
    
    
    79,974Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    4,002
    
    
    
    
    
    
    
    
    
    
    
    4,002Change in net unrealized gains on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80
    )
    
    
    
    

    
    
    (80
    )Reclassification adjustment for gains
included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (191
    )
    
    
    
    
    
    
    (191
    )Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    113
    
    
    
    
    
    
    
    113Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,844Issuance of 334,200 shares of stock
for acquisition
    
    
    334
    
    
    
    9,854
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,188Cash dividends paid  $0.72 per share
    
    
    
    
    
    
    
    
    
    
    (2,523
    )
    
    
    
    
    
    
    
    
    
    
    (2,523
    )Exercise of stock options
    
    
    
    
    
    
    (124
    )
    
    
    
    
    
    
    
    
    
    
    380
    
    
    
    256Balance at December 31, 2004
    
    $
    3,770
    
    
    $
    53,421
    
    
    $
    36,486
    
    
    $
    505
    
    
    $
    (2,443
    )
    
    $
    91,739
 See Notes to Consolidated Financial Statements. 6




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##### Table of Contents



Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries 
 Consolidated Statements of Cash FlowsYears Ended December 31, 2004, 2003, and 2002 2004
    
    
    2003
    
    
    2002(Amounts In Thousands)Cash Flows From Operating ActivitiesNet income
    
    $
    4,002
    
    
    $
    8,228
    
    
    $
    6,385Adjustments to reconcile net income to cash provided by operating activities:Provision for loan losses
    
    
    1,793
    
    
    
    1,311
    
    
    
    1,156Depreciation
    
    
    2,246
    
    
    
    1,681
    
    
    
    1,073Amortization and accretion of premiums and discounts, net
    
    
    998
    
    
    
    817
    
    
    
    232Amortization of intangibles
    
    
    588
    
    
    
    417
    
    
    
    99Deferred income taxes
    
    
    648
    
    
    
    (46
    )
    
    
    (361
    )Securities gains, net
    
    
    (191
    )
    
    
    (360
    )
    
    
    (111
    )Gain on sale of loans, net
    
    
    (494
    )
    
    
    (1,859
    )
    
    
    (695
    )Net gain on sale of premises and equipment
    
    
    (158
    )
    
    
    (2
    )
    
    
    (360
    )Increase in cash surrender value
    
    
    960
    
    
    
    144
    
    
    
    240Decrease (increase) in accrued interest receivable
    
    
    (570
    )
    
    
    414
    
    
    
    743(Decrease) increase in accrued interest payable
    
    
    255
    
    
    
    (256
    )
    
    
    (209
    )Other, net
    
    
    629
    
    
    
    (2,499
    )
    
    
    1,888Net cash provided by operations before loan originations and sales
    
    
    10,706
    
    
    
    7,990
    
    
    
    10,080Loans originated for sale
    
    
    (63,742
    )
    
    
    (181,297
    )
    
    
    (108,441
    )Proceeds from sales of loans
    
    
    61,930
    
    
    
    183,470
    
    
    
    108,779Net cash provided by operating activities
    
    
    8,894
    
    
    
    10,163
    
    
    
    10,418Cash Flows From Investing ActivitiesPurchase of available-for-sale securities
    
    
    (102,371
    )
    
    
    (78,454
    )
    
    
    (40,190
    )Proceeds from sales of available-for-sale securities
    
    
    14,085
    
    
    
    15,093
    
    
    
    7,666Proceeds from redemptions and maturities of available-for-sale securities
    
    
    82,745
    
    
    
    59,701
    
    
    
    23,057Net increase in loans
    
    
    (109,343
    )
    
    
    (95,901
    )
    
    
    (37,135
    )Purchases of premises and equipment, net
    
    
    (9,751
    )
    
    
    (3,195
    )
    
    
    (1,852
    )Proceeds from sales of other real estate
    
    
    2,261
    
    
    
    817
    
    
    
    Cash received (paid) in acquisition
    
    
    4,837
    
    
    
    (6,405
    )
    
    
    663Purchases of FHLB stock
    
    
    (1,139
    )
    
    
    (1,118
    )
    
    
    (9,682
    )Net cash (used in) investing activities
    
    
    (118,676
    )
    
    
    (109,462
    )
    
    
    (57,473
    )Cash Flows From Financing ActivitiesNet increase in deposits
    
    
    41,066
    
    
    
    61,268
    
    
    
    75,851Net increase in short-term borrowings
    
    
    27,315
    
    
    
    15,919
    
    
    
    1,042Dividends paid
    
    
    (2,523
    )
    
    
    (2,213
    )
    
    
    (1,790
    )Proceeds from long-term borrowings
    
    
    55,354
    
    
    
    15,000
    
    
    
    6,500Repayment of long-term borrowings
    
    
    (25,381
    )
    
    
    (29,794
    )
    
    
    (19,203
    )Issuance of junior subordinated debt owed to unconsolidated trusts
    
    
    10,310
    
    
    
    25,000
    
    
    
    10,000Stock dividend
    
    
    
    
    
    
    (16
    )
    
    
    Common stock transactions, net
    
    
    256
    
    
    
    35
    
    
    
    (1,058
    )Net cash provided by financing activities
    
    
    106,397
    
    
    
    85,199
    
    
    
    71,342Increase (decrease) in cash and cash equivalents
    
    
    (3,385
    )
    
    
    (14,100
    )
    
    
    24,287Cash and cash equivalents at beginning of year
    
    
    47,655
    
    
    
    61,755
    
    
    
    37,468Cash and cash equivalents at end of year
    
    $
    44,270
    
    
    $
    47,655
    
    
    $
    61,755
 (Continued) 7




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##### Table of Contents



Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Continued)Years Ended December 31, 2004, 2003, and 2002 2004
    
    
    2003
    
    
    2002(Amounts In Thousands)Supplemental Cash Flow Information and Noncash Transactions:Interest paid
    
    $
    19,106
    
    
    $
    16,127
    
    
    $
    13,315Income taxes paid
    
    
    3,581
    
    
    
    4,277
    
    
    
    3,209Loans transferred to other real estate owned
    
    
    1,612
    
    
    
    380
    
    
    
    2,234Supplemental Schedules of Noncash Investing Activities:Change in accumulated other comprehensive income, unrealized
gains (losses) on available-for-sale securities, net
    
    $
    (158
    )
    
    $
    (785
    )
    
    $
    1,118Acquisitions (Note 2)Assets acquired:Cash and cash equivalents
    
    $
    6,137
    
    
    $
    13,956
    
    
    $
    10,449Available-for-sale securities
    
    
    11,507
    
    
    
    24,715
    
    
    
    53,634Accrued interest receivable
    
    
    428
    
    
    
    587
    
    
    
    2,041Loans, net
    
    
    71,878
    
    
    
    96,267
    
    
    
    146,338FHLB stock
    
    
    2,265
    
    
    
    487
    
    
    
    1,679Premises and equipment, net
    
    
    2,101
    
    
    
    3,693
    
    
    
    4,349Other
    
    
    1,628
    
    
    
    4,281
    
    
    
    4,334Core deposit and other intangibles
    
    
    858
    
    

    
    1,291
    
    
    
    Excess of cost over fair value of net assets acquired
    
    
    5,203
    
    
    
    19,384
    
    
    
    7,232102,005
    
    
    
    164,661
    
    
    
    230,056Liabilities assumed:Deposits
    
    
    80,032
    
    
    
    121,224
    
    
    
    175,820Accrued interest payable
    
    
    272
    
    
    
    270
    
    
    
    584Short-term borrowings
    
    
    6,725
    
    
    
    
    
    
    
    22,825Long-term borrowings
    
    
    2,010
    
    
    
    2,000
    
    
    
    6,400Other liabilities
    
    
    1,478
    
    
    
    2,312
    
    
    
    2,89690,517
    
    
    
    125,806
    
    
    
    208,525Net assets acquired
    
    $
    11,488
    
    
    $
    38,855
    
    
    $
    21,531Cash paid
    
    $
    1,300
    
    
    $
    20,361
    
    
    $
    9,786Note issued
    
    
    
    
    
    
    13,098
    
    
    
    Stock issued
    
    
    10,188
    
    
    
    5,396
    
    
    
    11,745Total price paid
    
    $
    11,488
    
    
    $
    38,855
    
    
    $
    21,531
 See Notes to Consolidated Financial Statements. 8




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##### Table of Contents



Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries 
 Notes to Consolidated Financial Statements  Note 1. Summary of Significant Accounting Policies Nature of Banking Activities: The consolidated income of Merchants and Manufacturers
Bancorporation, Inc.
(the Corporation) is principally from the income of its wholly owned subsidiaries. The Banks, as
defined in the following paragraph, provide a full range of personal and commercial financial
services to customers. The Corporation and the Banks are subject to competition from other
financial institutions. Merchants and Manufacturers Statutory Trust I, II, III, IV and V (the
Trusts), also wholly-owned subsidiaries, were capitalized November 2002, May 2003, October 2003,
October 2003 and September 2004, respectively, for the purpose of issuing Trust Preferred
securities. The Corporation and the Banks are also subject to the regulations of certain federal
and state agencies and undergo periodic examinations by those regulatory agencies. Consolidation: The consolidated financial statements of the Corporation include the
accounts of its wholly owned subsidiaries: Lincoln State Bank (Lincoln), Franklin State Bank
(Franklin), Grafton State Bank (Grafton), Community Bank Financial (CBF), Fortress Bank of Cresco
(Cresco), Fortress Bank of Westby (Westby), Fortress
Bank Minnesota (Houston), The Reedsburg Bank (Reedsburg), and Wisconsin State Bank (WSB) 
collectively referred to as the Banks, Lincoln Neighborhood Redevelopment Corporation, which
provides redevelopment and rehabilitation to certain areas located primarily on the near south side
of Milwaukee, Merchants Merger Corporation and Merchants New Merger Corporation, which are used to
facilitate acquisitions, CFG Financial Services, Inc., which provides non-insured investment and
insurance products to customers of the Banks and Lincolns wholly owned subsidiary, M&M Lincoln
Investment Corporation, Graftons wholly owned subsidiary, GSB Investments, Inc., CBFs wholly
owned subsidiary, CBOC Investments, Inc., Westbys wholly owned subsidiary, Westby Investment
Company, Inc., and WSBs wholly owned subsidiary, Random Lake Investments, Inc., which manage the
investment portfolio for the Banks and CFG Mortgage, Inc., which acts as the Corporations mortgage
broker. CFG Financial Services, Inc. also includes the accounts of its wholly-owned subsidiaries
Link Community Financial Services and Keith C. Winters and Associates. The Trusts are not included
as they do not meet the criteria for consolidation. The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States of
America and conform to general practices within the banking industry. All significant intercompany
accounts and transactions for consolidated subsidiaries have been eliminated in the consolidated
financial statements. Use of Estimates: In preparing the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the determination of the
allowance for loan losses, and the valuation of foreclosed real estate and deferred tax assets.
The fair value disclosure of financial instruments is an estimate that can be computed within a
range. Presentation of Cash Flows: For purposes of reporting cash flows, cash and due from banks
includes cash on hand and amounts due from banks, interest bearing deposits in banks, and federal
funds sold. Cash flows from loans, deposits, and short-term borrowings are treated as net
increases or decreases. Cash and Due From Banks: The Banks maintain amounts due from banks which, at times, may
exceed federally insured limits. Management monitors these correspondent relationships. The Banks
have not experienced any losses in such accounts. 9




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##### Table of Contents



Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 1. Summary of Significant Accounting Policies (Continued) Available-for-Sale Securities: Securities classified as available-for-sale are those debt
securities that the Banks intend to hold for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as available-for-sale would be based on
various factors, including significant movements in interest rates, changes in the maturity mix of
the Banks assets and liabilities, liquidity needs, regulatory capital consideration, and other
similar factors. Securities classified as available-for-sale are carried at fair value.
Unrealized gains or losses are reported as increases or decreases in accumulated other
comprehensive income, net of the related deferred tax effect. Realized gains or losses, determined
on the basis of the cost of specific securities sold, are included in earnings. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost
that are deemed to be other than temporary are reflected in earnings as realized losses. In
estimating other-than-temporary impairment losses, management considers (1) the length of time and
the extent to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the Corporation to retain its
investment in the issuer for a period of time sufficient to allow for any anticipated recovery in
fair value. Loans: Loans are stated at the amount of unpaid principal, reduced by an allowance for
loan losses. Interest income is accrued on the unpaid principal balance. The accrual of interest
income on loans is discontinued at the time the loan is 90 days delinquent unless the credit is
well-secured and in the process of collection. When interest accrual is discontinued, all unpaid
accrued interest is reversed against interest income. Accrual of interest is generally resumed
when the customer is current on all principal and interest payments and has been paying on a timely
basis for a period of time. Mortgage Loans Held for Sale: Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value in the aggregate. All
sales are made without recourse. The balance of mortgage loans held for sale are included in the
loan balance in the financial statements. Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the
Corporation. The carrying value of mortgage loans sold is reduced by the cost allocated to the
associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized
based on the difference between the selling price and the carrying value of the related mortgage
loans sold. Allowance for Loan Losses: The allowance for loan losses is established through a
provision for loan losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that the collectibility of the principal is unlikely. Subsequent
recoveries, if any, are credited to the allowance. The allowance is based on past events and
current economic conditions, and does not include the effects of expected losses on specific loans
or groups of loans that are related to future events or expected changes in economic conditions.
While management uses the best information available to make its evaluation, future adjustments to
the allowance may be necessary if there are significant changes in economic conditions. Impaired loans are measured based on the present value of expected future cash flows discounted at
the loans effective interest rate or, as a practical expedient, at the loans observable market
price or the fair value of the collateral if the loan is collateral dependent. A loan is impaired
when it is probable the creditor will be unable to collect all contractual principal and interest
payments due in accordance with the terms of the loan agreement. Cash collections on impaired
loans are credited to the loan receivable balance and no interest income is recognized on those
loans until the principal balance is current. 10




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##### Table of Contents



Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 1. Summary of Significant Accounting Policies (Continued) In addition, various regulatory agencies periodically review the allowance for loan losses. These
agencies may require the Banks to make additions to the allowance for loan losses based on their
judgments of collectibility based on information available to them at the time of their
examination. Credit Related Financial Instruments: In the ordinary course of business the Banks have
entered into off-balance-sheet financial instruments consisting of commitments to extend credit and
standby letters of credit. Such financial instruments are recorded in the financial statements
when they are funded. Transfers of Financial Assets: Transfers of financial assets are accounted for as sales
only when control over the assets has been surrendered. Control over transferred assets is deemed
to be surrendered when (1) the assets have been isolated from the Corporation, (2) the transferee
obtains the right (free of conditions that constrain it from taking advantage of the right) to
pledge or exchange the transferred assets, and (3) the Corporation does not maintain effective
control over the transferred assets through an agreement to repurchase them before their maturity
or the ability to unilaterally cause the holder to return specific assets. Premises and Equipment: Premises and equipment are stated at cost, less accumulated
depreciation. Provisions for depreciation are computed using the straight-line or
double-declining-balance methods, over the estimated useful lives of the assets ranging from three
years to 39 years. Goodwill: The Corporations goodwill includes the excess of cost over the fair value of
net assets acquired arising from the purchase of certain assets and the assumption of certain
liabilities from unrelated entities. Goodwill is evaluated on an annual basis to determine
impairment, if any. On January 1, 2002, the Corporation implemented SFAS No. 142, Goodwill and Other Intangible Assets.
Under the provisions of SFAS No. 142, goodwill is no longer subject to amortization over its
useful life, but instead will be subject to at least annual assessments for impairment by applying
a fair value based test. SFAS No. 142 also requires that an acquired intangible asset should be
separately recognized if the benefit of the intangible asset is obtained through contractual or
other legal rights, or if the asset can be sold, transferred, licensed, rented or exchanged,
regardless of the acquirers intent to do so. The Corporation determined that no transitional
impairment loss was required at January 1, 2002. In addition, no impairment loss was required for
the years ended December 31, 2004, 2003 and 2002. Intangible Assets: The Corporations intangible assets include the value of ongoing
customer relationships (core deposits and other intangibles) arising form the purchase of certain
assets and the assumption of certain liabilities from unrelated entities. Core deposits and other
intangibles are amortized over a 10 to 16 year period. Any impairment in the intangibles would be
recorded against income in the period of impairment. Other Real Estate Owned: Other real estate owned, acquired through partial or total
satisfaction of loans, is carried at the lower of cost or fair value, less cost to sell. At the
date of acquisition losses are charged to the allowance for loan losses. Revenue and expenses from
operations and changes in the valuation allowance are included in loss on foreclosed real estate.
The balance of other real estate owned is included in other assets in the financial statements. 11




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##### Table of Contents



Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 1. Summary of Significant Accounting Policies (Continued) Stock-Based Compensation Plan: At December 31, 2004, the Corporation had a stock-based key
officer and employee compensation plan, which is described more fully in Note 11. The Corporation
accounts for this plan under the recognitions and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee
compensation cost is reflected in the income, as all options granted under this plan had an
exercise price equal to the market value of the underlying common stock on the date of grant. The
table on the following page illustrates the effect on net income and earnings per share if the
Corporation had applied the fair value recognition provisions of the Financial Accounting Standards
Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation. Years Ended December 31,2004
    
    
    2003
    
    
    2002(Amounts In Thousands, Except Per Share Data)Net income, as reported
    
    $
    4,002
    
    
    $
    8,228
    
    
    $
    6,385Deduct total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects
    
    
    167
    
    
    
    876
    
    
    
    389Pro forma net income
    
    $
    3,835
    
    
    $
    7,352
    
    
    $
    5,996Earnings per share:Basic:As reported
    
    $
    1.16
    
    
    $
    2.58
    
    
    $
    2.30Pro forma
    
    
    1.11
    
    
    
    2.30
    
    
    
    2.16Diluted:As reported
    
    $
    1.15
    
    
    $
    2.56
    
    
    $
    2.29Pro forma
    
    
    1.11
    
    
    
    2.29
    
    
    
    2.15
 In determining compensation cost using the fair value method prescribed in Statement No. 123, the
value of each grant is estimated at the grant date with the following weighted-average assumptions
used for grants in 2004, 2003 and 2002, respectively: dividend yield of 2.07 percent, 1.50 percent,
and 2.44 percent; expected price volatility of 21.82 percent, 16.66 percent, and 14.78 percent;
blended risk-free interest rates of 4.15 percent, 2.34 percent, and 3.95 percent; and expected
lives of 10 years. Income Taxes: The Corporation files a consolidated federal income tax return and
individual subsidiary state income tax returns. Accordingly, amounts equal to tax benefits of
those companies having taxable federal losses or credits are reimbursed by the other companies that
incur federal tax liabilities. Amounts provided for income tax expense are based on income reported for financial statement
purposes, and do not necessarily represent amounts currently payable under tax laws. Deferred
income tax assets and liabilities are computed annually for differences between the financial
statement and tax bases of assets and liabilities that will result in taxable or deductible amounts
in the future based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation
allowances are established when necessary to reduce deferred tax assets to the amount expected to
be realized. 12




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Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 1. Summary of Significant Accounting Policies (Continued) Trust Assets: Property held for customers in fiduciary or agency capacities, other than
cash on deposit at the Banks, is not included in the accompanying balance sheets since such items
are not assets of the Corporation. Earnings Per Share: Earnings per share of common stock have been computed based on the
weighted-average number of common stock and common stock equivalents, if dilutive, outstanding
during each year. In the computation of diluted earnings per share, all dilutive stock options are
assumed to be exercised at the beginning
of each year and the proceeds are used to purchase shares of the Corporations common stock at the
average market price during the year. On November 21, 2003, the Corporation declared a 10 percent stock dividend payable December 15,
2003 to shareholders as of December 1, 2003. As a result, earnings per share for the years ended
December 31, 2003 and 2002, have been adjusted to give retroactive effect to the 10 percent stock
dividend issued on December 15, 2003 as if the stock dividend had occurred on January 1, 2002. Earnings per common share have been computed for the years ended December 31, 2004, 2003 and 2002
based on the following: 2004
    
    
    2003
    
    
    2002(Amounts In Thousands, Except Share Amounts)Net income
    
    $
    4,002
    
    
    $
    8,228
    
    
    $
    6,385Weighted average common shares
outstanding
    
    
    3,464,766
    
    
    
    3,190,207
    
    
    
    2,522,507Effect of dilutive options
    
    
    13,011
    
    
    
    18,376
    
    
    
    16,134Weighted average common shares
outstanding used to calculate diluted
earnings per common share
    
    
    3,477,777
    
    
    
    3,208,583
    
    
    
    2,538,641
 Comprehensive Income: Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as
a separate component of the equity section of the balance sheet, such items, along with net income,
are components of comprehensive income. Segment Reporting: The Corporation is managed as one unit and does not have separate
operating segments. The Corporations chief operating decision-maker uses consolidated results to
make operating and strategic decisions. Adoption of Financial Accounting Standards Board (FASB) Interpretation No. 46: In December
2003, the Corporation implemented Interpretation No. 46, Consolidation of Variable Interest
Entities,(FIN 46) which establishes guidance for determining when an entity should consolidate
another entity that meets the definition of variable interest entity. FIN 46 requires a variable
interest entity to be consolidated by a company if that company will absorb a majority of the
expected losses, will receive a majority of the expected residual returns, or both. FASB deferred
the effective date of FIN 46 to no later than the end of the first reporting period that ends after
March 15, 2004. The Corporation adopted FIN 46 as of January 1, 2004 which resulted in the
Corporation no longer consolidating its wholly-owned subsidiaries, the Trusts, and accounting for
them by the equity method. The interpretation and the revision had no material effect on the
Corporations consolidated financial statements. 13




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Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 1. Summary of Significant Accounting Policies (Continued) Current Accounting Developments: The Accounting Standards Executive Committee has issued
Statement of Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a
Transfer. This Statement applies to all loans acquired in a transfer, including those acquired in
the acquisition of a bank or a branch, and provides that such loans be accounted for at fair value
with no allowance for loan losses, or other valuation allowance, permitted at the time of
acquisition. The difference between cash flows expected at the acquisition date and the investment
in the loan should be recognized as interest income over the life of the loan. If contractually
required payments for principal and interest are less than expected cash flows, this amount should
not be recognized as a yield adjustment, a loss accrual, or a valuation allowance. For the
Corporation this Statement is effective for calendar year 2005, and early adoption, although
permitted, is not planned. No significant impact is expected on the consolidated financial
statements at the time of adoption. On September 30, 2004, the FASB issued FASB Staff Position (FSP) Emerging Issues Task Force
(EITF) Issue No. 03-1-1 delaying the effective date of paragraphs 10-20 of EITF 03-1, The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments, which provides
guidance for determining the meaning of other-than-temporarily impaired and its application to
certain debt and equity securities within the scope of SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, and investments accounted for under the cost method. The
guidance requires that investments which have declined in value due to credit concerns or solely
due to changes in interest rates must be recorded as other-than-temporarily impaired unless the
Company can assert and demonstrate its intention to hold the security for a period of time
sufficient to allow for a recovery of fair value up to or beyond the cost of the investment which
might mean maturity. The delay of the effective date of EITF 03-1 will be superceded concurrent with the final issuance of proposed FSP Issue 03-1-a.
Proposed FSP Issue 03-1-a is intended to provide implementation guidance with respect to all
securities analyzed for impairment under paragraphs 10-20 of EITF 03-1. Management continues to
closely monitor and evaluate how the provisions of EITF 03-1 and proposed FSP Issue 03-1-a will
affect the Corporation. In December 2004, the FASB published FASB Statement No. 123 (revised 2004), Share-Based Payment (FAS 123(R) or the Statement). FAS 123(R) requires that the compensation cost relating to
share-based payment transactions, including grants of employee stock options, be recognized in
financial statements. That cost will be measured based on the fair value of the equity or
liability instruments issued. FAS 123(R) covers a wide range of share-based compensation
arrangements including stock options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. FAS 123(R) is a replacement of FASB
Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and its related interpretive guidance. The effect of the Statement will be to require entities to measure the cost of employee services
received in exchange for stock options based on the grant-date fair value of the award, and to
recognize the cost over the period the employee is required to provide services for the award. FAS
123(R) permits entities to use any option-pricing model that meets the fair value objective in the
Statement. The Corporation will be required to apply FAS 123(R) as of the beginning of its first interim
period that begins after June 15, 2005, which will be the quarter ending September 30, 2005. 14




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Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 1. Summary of Significant Accounting Policies (Continued) FAS 123® allows two methods for determining the effects of the transition: the modified
prospective transition method and the modified retrospective method of transition. Under the
modified prospective transition method, an entity would use the fair value based accounting method
for all employee awards granted, modified, or settled after the effective date. As of the
effective date, compensation cost related to the nonvested portion of awards outstanding as of that
date would be based on the grant-date fair value of those awards as calculated under the original
provisions of Statement No. 123, that is, an entity would not remeasure the grant-date fair value
estimate of the unvested portion of awards granted prior to the effective date of FAS 123®. An
entity will have the further option to either apply the Statement to only the quarters in the
period of adoption and subsequent periods, or apply the Statement to all quarters in the fiscal
year of adoption. Under the modified retrospective method of transition, an entity would revise
its previously issued financial statements to recognize employee compensation cost for prior
periods presented in accordance with the original provisions of Statement No. 123. The Corporation has not yet completed its study of the transition methods or made any decisions
about how it will adopt FAS 123®. Reclassification: Certain amounts in the prior year financial statements have been
reclassified, with no effect on net income or stockholders equity, to conform with the 2004
presentation. Note 2. Business Combinations On August 12, 2004, the Corporation acquired Random Lake Bancorp, Ltd. (Random Lake) and its
wholly-owned subsidiary, Wisconsin State Bank (WSB). The purchase price for Random Lake was $11.5
million including $1.3 million in cash and 334,200 shares of Merchants common stock valued at $10.2
million based on a $30.50 per share price. At the date of the acquisition Random Lake had assets
of $102.3 million, loans of $72.9 million and deposits of $80 million. The acquisition was
accounted for using the purchase method of accounting, and accordingly, the results of operations
have been included in the Corporations results of operations since the date of acquisition. Under
this method of accounting, the purchase price is allocated to the respective assets acquired and
liabilities assumed based on their estimated fair values, net of applicable income tax effects.
The excess cost over fair value of net assets acquired of approximately $5.2 million has been
recorded as goodwill. On November 1, 2003, the Corporation acquired all of the outstanding stock of Reedsburg
Bancorporation, Inc. (Reedsburg), a holding company owning a community bank in Reedsburg,
Wisconsin. The acquisition was a combination of 85 percent cash and promissory notes and 15
percent common stock. Each shareholder of Reedsburg received $765 of cash or notes and 3.6726
shares of common stock for each share of Reedsburg common stock. The transaction was accounted for
under the purchase method of accounting. Accordingly, the results of operations have been included
in the Corporations results of operations since the date of acquisition. Under this method of
accounting, the purchase price is allocated to the respective assets acquired and liabilities
assumed based on their estimated fair values, net of applicable income tax effects. The excess
cost over fair value of net assets acquired of approximately $17.6 million has been recorded as
goodwill. 15




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##### Table of Contents



Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 2. Business Combinations (Continued) On November 30, 2002, the Corporation acquired Fortress Bancshares, Inc. (Fortress), a multi-bank
holding company that owns three separately chartered community banks in Wisconsin, Minnesota and
Iowa. The acquisition was a combination of 45 percent cash and 55 percent common stock. Each
shareholder of Fortress was paid $30 for each share of common stock held by such shareholders or
received 1.0153 shares of common stock for each one share of Fortress common stock. The
transaction was accounted for under the purchase method of accounting. Accordingly, the results of
operations have been included in the Corporations results of operations since the date of
acquisition. Under this method of accounting, the purchase price is allocated to the respective
assets acquired and liabilities assumed based on their estimated fair values, net of applicable
income tax effects. The excess cost over fair value of net assets acquired of approximately $7.2
million has been recorded as goodwill. The unaudited pro forma results of operations, which follow, assume that the Fortress and Reedsburg
acquisitions had occurred on January 1, 2002 and that the Reedsburg and WSB acquisitions had
occurred on January 1, 2003. In addition to combining the historical results of operations, the
pro forma calculations include purchase accounting adjustments related to the acquisition. The pro
forma calculations do not include any anticipated cost savings as a result of the acquisition. Unaudited pro forma consolidated results of operations for the years ended December 31, 2004, 2003
and 2002, as though Fortress and Reedsburg had been acquired January 1, 2002 and WSB and Reedsburg
had been acquired January 1, 2003 are as follows: 2004
    
    
    2003
    
    
    2002(Amounts In Thousands,Except Per Share Amounts)Net interest income
    
    $
    44,623
    
    
    $
    44,504
    
    
    $
    40,590Net income
    
    $
    4,582
    
    
    $
    10,543
    
    
    $
    10,100Basic earnings per common share
    
    $
    1.25
    
    
    $
    2.89
    
    
    $
    3.05Diluted earnings per common share
    
    $
    1.24
    
    
    $
    2.88
    
    
    $
    3.04
 The pro forma results of operations are not necessarily indicative of the actual results of
operations that would have occurred had the Fortress and Reedsburg acquisitions actually taken
place as of January 1, 2002, and the WSB and Reedsburg acquisitions actually taken place as of
January 1, 2003, or results that may occur in the future. Note 3. Cash and Due From Banks The Banks are required to maintain vault cash and reserve balances with the Federal Reserve Bank
based upon a percentage of deposits. These requirements approximated $1,511,000 and $3,503,000 at
December 31, 2004 and 2003, respectively. 16




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Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 4. Available-for-Sale Securities Amortized costs and fair values of available-for-sale securities as of December 31, 2004 and 2003
are summarized as follows: December 31, 2004Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    (Losses)
    
    
    Value(Amounts In Thousands)U.S. treasury and other U.S.
government agency securities
    
    $
    10,208
    
    
    $
    34
    
    
    $
    (68
    )
    
    $
    10,174State and political subdivisions
    
    
    67,467
    
    
    
    1,000
    
    
    
    (170
    )
    
    
    68,297Corporate bonds
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    75Collateralized mortgage obligations
    
    
    51,578
    
    
    
    129
    
    
    
    (413
    )
    
    
    51,294Mortgage-backed securities
    
    
    42,462
    
    
    
    339
    
    
    
    (77
    )
    
    
    42,724$
    171,790
    
    
    $
    1,502
    
    
    $
    (728
    )
    
    $
    172,564
 December 31, 2003Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    (Losses)
    
    
    Value(Amounts In Thousands)U.S. treasury and other U.S.
government agency securities
    
    $
    32,423
    
    
    $
    50
    
    
    $
    (71
    )
    
    $
    32,402State and political subdivisions
    
    
    47,794
    
    
    
    1,175
    
    
    
    (110
    )
    
    
    48,859Corporate bonds
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    75Collateralized mortgage obligations
    
    
    34,407
    
    
    
    140
    
    
    
    (298
    )
    
    
    34,249Mortgage-backed securities
    
    
    40,853
    
    
    
    301
    
    
    
    (142
    )
    
    
    41,012$
    155,552
    
    
    $
    1,666
    
    
    $
    (621
    )
    
    $
    156,597
 17




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##### Table of Contents



Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 4. Available-for-Sale Securities (Continued) Information pertaining to securities with gross unrealized losses and their fair values at December
31, 2004 and 2003, aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, are summarized as follows: Less than 12 months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    

    
    Losses
    
    
    Value
    
    
    Losses(Amounts In Thousands)December 31, 2004U.S. treasury and other U.S.
government agency securities
    
    $
    1,282
    
    
    $
    (18
    )
    
    $
    3,624
    
    
    $
    (50
    )
    
    $
    4,906
    
    
    $
    (68
    )State and political subdivisions
    
    
    13,065
    
    
    
    (158
    )
    
    
    1,225
    
    
    
    (12
    )
    
    
    14,290
    
    
    
    (170
    )Collateralized mortgage
obligations
    
    
    21,572
    
    
    
    (277
    )
    
    
    14,046
    
    
    
    (136
    )
    
    
    35,618
    
    
    
    (413
    )Mortgage-backed securities
    
    
    11,530
    
    
    
    (47
    )
    
    
    4,507
    
    
    
    (30
    )
    
    
    16,037
    
    
    
    (77
    )Total temporarily impaired
securities
    
    $
    47,449
    
    
    $
    (500
    )
    
    $
    23,402
    
    
    $
    (228
    )
    
    $
    70,851
    
    
    $
    (728
    )
 Less than 12 months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses(Amounts In Thousands)December 31, 2003U.S. treasury and other U.S.
government agency securities
    
    $
    5,126
    
    
    $
    (71
    )
    
    $
    
    
    
    $
    
    
    
    $
    5,126
    
    
    $
    (71
    )State and political subdivisions
    
    
    1,159
    
    
    
    (104
    )
    
    
    286
    
    
    
    (6
    )
    
    
    1,445
    
    
    
    (110
    )Collateralized mortgage
obligations
    
    
    21,155
    
    
    
    (292
    )
    
    
    855
    
    
    
    (6
    )
    
    
    22,010
    
    
    
    (298
    )Mortgage-backed securities
    
    
    9,993
    
    
    
    (141
    )
    
    
    51
    
    
    
    (1
    )
    
    
    10,044
    
    
    
    (142
    )Total temporarily impaired
securities
    
    $
    37,433
    
    
    $
    (608
    )
    
    $
    1,192
    
    
    $
    (13
    )
    
    $
    38,625
    
    
    $
    (621
    )
 Management evaluates securities for other-than-temporary impairment at least on a quarterly basis,
and more frequently when economic or market concerns warrant such evaluation. In estimating
other-than-temporary impairment losses, management considers (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Corporation to retain its investment
in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
At December 31, 2004 and 2003, unrealized losses on debt securities are generally due to changes in
interest rates and as such, are considered by the Corporation to be temporary. In analyzing an issuers financial condition, management considers whether the securities are
issued by the federal government or its agencies, whether downgrades by bond rating agencies have
occurred, and industry analysts reports. As management has the ability to hold debt securities
until maturity, no declines are deemed to be other than temporary. 18




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Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 4. Available-for-Sale Securities (Continued) The amortized cost and fair value of available-for-sale securities at December 31, 2004, by
contractual maturity, are shown below. Expected maturities will differ from contractual maturities
in mortgage-related securities, and collateralized mortgage obligations since the anticipated
maturities are not readily determinable. Therefore, these securities are not included in the
maturity categories in the following summary: Amortized
    
    
    FairCost
    
    
    Value(Amounts In Thousands)Due in one year or less
    
    $
    5,731
    
    
    $
    5,739Due after one year through five years
    
    
    20,377
    
    
    
    20,498Due after five years through ten years
    
    
    37,888
    
    
    
    38,777Due after ten years
    
    
    13,754
    
    
    
    13,53277,750
    
    
    
    78,546Collateralized mortgage obligations
    
    
    51,578
    
    
    
    51,294Mortgage-backed securities
    
    
    42,462
    
    
    
    42,724$
    171,790
    
    
    $
    172,564
 Proceeds from sales of available-for-sale securities during the years ended December 31, 2004,
2003 and 2002, were $14,085,000, $15,093,000, and $7,666,000, respectively. Gross gains of
approximately $204,000, $360,000, and $215,000, were recorded on those sales for the years ended
December 31, 2004, 2003, and 2002, respectively. Gross losses of approximately $13,000, $0, and
$104,000, were also recorded in the years ended December 31, 2004, 2003, and 2002, respectively. Securities with a fair value of approximately $58,879,000 and $58,125,000 at December 31, 2004 and
2003, respectively, were pledged as collateral on public deposits and for other purposes as
required or permitted by law. 19




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Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 5. Loans Major classifications of loans are as follows: December 31,2004
    
    
    2003(Amounts In Thousands)First mortgage:Conventional single-family residential
    
    $
    142,926
    
    
    $
    113,479Commercial and multi-family residential
    
    
    436,612
    
    
    
    283,433Construction
    
    
    76,267
    
    
    
    47,894Farm land
    
    
    55,710
    
    
    
    43,676711,515
    
    
    
    488,482Commercial business loans
    
    
    240,575
    
    
    
    294,645Consumer and installment loans
    
    
    49,136
    
    
    
    51,886Home equity loans
    
    
    26,592
    
    
    
    14,664Other
    
    
    10,863
    
    
    
    7,397327,166
    
    
    
    368,592Less allowance for loan losses
    
    
    10,622
    
    
    
    9,136$
    1,028,059
    
    
    $
    847,938
 Changes in the allowance for loan losses for the years ended December 31, 2004, 2003, and
2002 are presented as follows: December 31,2004
    
    
    2003
    
    
    2002(Amounts In Thousands)Balance at beginning of year
    
    $
    9,136
    
    
    $
    7,663
    
    
    $
    5,563Increase due to acquisition
    
    
    999
    
    
    
    1,203
    
    
    
    2,008Provisions charged to expense
    
    
    1,793
    
    
    
    1,311
    
    
    
    1,156Recoveries
    
    
    419
    
    
    
    390
    
    
    
    112Charge-offs
    
    
    (1,725
    )
    
    
    (1,431
    )
    
    
    (1,176
    )Balanc e at end of year
    
    $
    10,622
    
    
    $
    9,136
    
    
    $
    7,663
 20




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Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 5. Loans (Continued) The following is a summary of information pertaining to impaired loans: December 31,2004
    
    
    2003(Amounts In Thousands)Impaired loans for which an allowance
has been provided
    
    $
    3,068
    
    
    $
    3,288Impaired loans for which no allowance
has been provided
    
    
    2,562
    
    
    
    1,994Total loans determined to be impaired
    
    $
    5,630
    
    
    $
    5,282Allowance provided for impaired loans,
included in the allowance for loan losses
    
    $
    1,385
    
    
    $
    433
 Years Ended December 31,2004
    
    
    2003
    
    
    2002(Amounts In Thousands)Average investment in impaired loans
    
    $
    5,842
    
    
    $
    4,645
    
    
    $
    3,397
 Nonaccruing loans totaled approximately $8,871,000 and $5,282,000 as of December 31, 2004 and
2003, respectively. Interest income in the amount of approximately $538,000, $613,000, and
$311,000, would have been earned on the nonaccrual loans had they been performing in accordance
with their original terms during the years ended December 31, 2004, 2003, 2002, respectively. The
interest collected on nonaccrual loans and impaired loans included in income for the years ended
December 31, 2004, 2003, and 2002 was approximately $442,000, $368,000, and $350,000, respectively. Certain directors and executive officers of the Corporation, and their related interests, had loans
outstanding in the aggregate amounts of approximately $37,520,000 and $27,654,000 at December 2004
and 2003, respectively. During 2004, approximately $7,265,000 of new loans were made, repayments
totaled approximately 6,341,000 and there was an increase of approximately $8,942,000 due to
changes in related-party interests. These loans were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the same time for comparable
transactions with other persons, and did not involve more than normal risks of collectibility or
present other unfavorable features. The unpaid principal balance of mortgage loans serviced for others, which are not included on
the consolidated balance sheet, were approximately $343,552,000 and $279,107,000 at December 31,
2004 and 2003, respectively. Mortgage servicing rights, which are included with other assets, were
approximately $1,991,000 and $1,712,000, respectively, at December 31, 2004 and 2003. The fair
value of the servicing rights was determined using a discount rate of 10 percent, prepayment speeds
ranging from 1 percent to 8 percent, depending upon the stratification of the specific right, and a
weighted average default rate of zero percent. The carrying value of these mortgage servicing
rights approximates fair market values as of December 31, 2004 and 2003, respectively. 21




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Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 5. Loans (Continued) The following summarizes the activity pertaining to mortgage servicing rights: Years Ended December 31,2004
    
    
    2003
    
    
    2002(Amounts In Thousands)Balance at beginning of year
    
    $
    1,712
    
    
    $
    703
    
    
    $
    Mortgage servicing rights capitalized
    
    
    1,064
    
    
    
    1,542
    
    
    
    1,084Mortgage servicing rights amortized
    
    
    (785
    )
    
    
    (533
    )
    
    
    (381
    )Balance at end of year
    
    $
    1,991
    
    
    $
    1,712
    
    
    $
    703
 Note 6. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation, and are summarized as
follows: December 31,2004
    
    
    2003(Amounts In Thousands)Land
    
    $
    4,767
    
    
    $
    3,554Office buildings and improvements
    
    
    26,085
    
    
    
    20,240Furniture and equipment
    
    
    18,077
    
    
    
    17,95248,929
    
    
    
    41,746Less accumulated depreciation
    
    
    18,574
    
    
    
    21,155$
    30,355
    
    
    $
    20,591
 During the year ended December 31, 1999 and 2000, the Corporation sold certain land and
buildings and, subsequently, leased a portion of the buildings back from the new owners. The total
gain on the sales was $2,600,000, of which $1,352,000 was immediately recognized in income. The
remaining gain is being accreted into income over the remaining lease terms. The gains recognized
during the years ended December 31, 2004, 2003, and 2002, were $0, $0, and $356,000, respectively. 22




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Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 7. Goodwill and Intangible Assets The Corporations goodwill includes the excess of cost over fair value of net assets acquired
arising from the purchase of certain assets and the assumption of certain liabilities from
unrelated entities. The changes in the carrying amount of goodwill for the year ended December 31,
2004 and 2003, are as follows: 2004
    
    
    2003(Amounts In Thousands)Balance at beginning of year
    
    $
    26,682
    
    
    $
    7,298Goodwill acquired during year
    
    
    5,203
    
    
    
    19,384Balance at end of year
    
    $
    31,885
    
    
    $
    26,682
 In accordance with the provisions of SFAS No. 142, goodwill related to acquisitions is not
being amortized, but is evaluated annually for impairment. Any impairment in goodwill would be
recognized against income in the period of impairment. Intangible assets consisted of the following at December 31, 2004 and 2003: 2004
    
    
    2003(Amounts In Thousands)Core deposit intangibles
    
    $
    4,301
    
    
    $
    3,443Other intangibles
    
    
    563
    
    
    
    5634,864
    
    
    
    4,006Less accumulated amortization
    
    
    1,035
    
    
    
    447Intangible assets, net
    
    $
    3,829
    
    
    $
    3,559
 The Corporations intangible assets include the value of ongoing customer relationships (core
deposit and other intangibles) arising from the purchase of certain assets and the assumption of
certain liabilities from unrelated entities. For the years ended December 31, 2004 and 2003, the
Corporation acquired $858,000 and $1,291,000 of core deposit intangibles and $0 and $563,000 of
other intangibles, respectively. In accordance with the provisions of SFAS No. 142, core deposit intangibles of $4,301,000 are being
amortized over a 10 year period. Other intangibles of $563,000 are being amortized over a 16-year
period. Core deposit and other intangible assets are periodically reviewed for impairment. Any
impairment in the core deposit intangibles or other intangibles would be recognized against income
in the period of impairment. 23




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##### Table of Contents



Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 7. Goodwill and Intangible Assets (Continued) Amortization of core deposit intangibles was approximately $553,000, $394,000 and $99,000 during
the years ended December 31, 2004, 2003, and 2002, respectively. For the years ended December 31,
2004, 2003, and 2002, amortization of other intangibles was approximately $35,000, $23,000, and $0,
respectively. Estimated aggregate amortization expenses for the core deposit and other intangibles
for the next five years are as follows: Years Ending December 31,2005
    
    $
    563,0002006
    
    
    464,0002007
    
    
    407,0002008
    
    
    395,0002009
    
    
    395,000
 Note 8. Deposits Deposits consisted of the following as of December 31: 2004
    
    
    2003(Amounts In Thousands)Negotiable Order of Withdrawal (NOW) accounts:Non-interest bearing
    
    $
    148,482
    
    
    $
    109,755Interest-bearing
    
    
    98,723
    
    
    
    84,713Savings deposits
    
    
    131,513
    
    
    
    109,474Money market investment accounts
    
    
    258,852
    
    
    
    281,881Time deposits and certificate accounts
    
    
    395,476
    
    
    
    326,125$
    1,033,046
    
    
    $
    911,948
 The scheduled maturities of time deposits and certificate accounts at December 31, 2004 are as
follows (amounts in thousands): Years Ending December 31,2005
    
    $
    270,9452006
    
    
    73,4952007
    
    
    27,5262008
    
    
    12,3062009
    
    
    11,204$
    395,476
 At December 31, 2004 and 2003, time deposits and certificate accounts with balances greater
than $100,000 amounted to approximately $123,618,000 and $74,155,000, respectively. 24




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##### Table of Contents



Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 9. Borrowings Short-term borrowings consisted of the following at December 31: 2004
    
    
    2003(Amounts In Thousands)Short-term borrowings:Federal funds purchased, 2.59% and 1.29%, respectively
    
    $
    51,142
    
    
    $
    24,500Securities sold under agreements to repurchase
with rates ranging from 0.85% to 1.46%
    
    
    19
    
    
    
    1,588Lines of credit with unaffiliated banks with rates
ranging from 3.77% to 4.75%
    
    
    9,797
    
    
    
    7,736Treasury, tax, and loan accounts with the Federal
Home Loan Bank (FHLB) of Chicago
    
    
    364
    
    
    
    183Total short-term borrowings
    
    $
    61,322
    
    
    $
    34,007
 Securities sold under agreements to repurchase generally mature within 120 days. Information concerning federal funds purchased is summarized as follows: 2004
    
    
    2003(Amounts In Thousands)Average daily balance during the year
    
    $
    29,757
    
    
    $
    7,245Average daily interest rate during the year
    
    
    1.71
    %
    
    
    1.58
    %Maximum month-end balance during the year
    
    $
    51,142
    
    
    $
    24,500Weighted average rate as of December 31
    
    
    2.59
    %
    
    
    1.29
    %
 The Corporation has an unsecured line of credit of $20 million from a third-party lender which
expires May 26, 2005. As of December 31, 2004, $13 million is available. Interest is payable
quarterly at the adjusted interbank rate plus 135 basis points on the first $10 million and at the
adjusted interbank rate plus 150 basis points for the second
$10 million, as defined in the note agreement. As of December 31, 2004, the interest rate is 3.77
percent. 25




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##### Table of Contents



Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 9. Borrowings (Continued) Long-term borrowings consist of the following as of December 31: 2004
    
    
    2003(Amounts In Thousands)Long-term borrowings:Acquisition notes payable, 5.35%, equal
payments of $2,564 until 2008
    
    $
    10,254
    
    
    $
    12,818Notes payable to FHLB, maturing during fiscal year
2004 with rates ranging from 1.43% to 5.12%
    
    
    
    
    
    
    24,233Notes payable to FHLB, maturing during fiscal year
2005 with rates ranging from 1.39% to 6.53%
    
    
    27,655
    
    
    
    14,642Notes payable to FHLB, maturing during fiscal year
2006 with rates ranging from 2.62% to 3.47%
    
    
    16,000
    
    
    
    3,000Notes payable to FHLB, maturing during fiscal year
2007 with rates ranging from 2.63% to 3.86%
    
    
    22,250
    
    
    
    6,000Notes payable to FHLB, maturing during fiscal year
2008 with rates ranging from 3.13% to 5.34%
    
    
    20,250
    
    
    
    7,000Notes payable to FHLB, maturing thereafter
with rates ranging from 3.49% to 5.95%
    
    
    14,645
    
    
    
    4,653Total long-term borrowings
    
    $
    111,054
    
    
    $
    72,346
 At December 31, 2004, FHLB borrowings are collateralized by securities with a fair value of
approximately $40,793,000 and loans receivable with an outstanding balance of
approximately $135,402,000. At December 31, 2003, FHLB borrowings are collateralized by securities
with a fair value of approximately $32,839,000 and loans receivable with an outstanding balance of
approximately $106,606,000. Of the borrowings due in 2005, $1,000 is callable quarterly, all of the borrowings in 2008 are
callable quarterly, $5,000 of the borrowings due thereafter are callable quarterly and $500 of the
borrowings due thereafter are callable in 2006. 26




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##### Table of Contents



Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 10. Junior Subordinated Debt Owed to Unconsolidated Trusts In November 2002, May 2003, October 2003, and September 2004, the Corporation, the Trusts, and all
Connecticut statutory business trusts, issued $10 million, $10 million, $7.5 million, $7.5 million,
and $10 million, respectively, of three-month LIBOR plus 3.35 percent, 8.25 percent fixed,
three-month LIBOR plus 2.95 percent, 8.25 percent fixed, and three-month LIBOR plus 2.05 percent,
respectively, Company obligated mandatorily redeemable trust preferred securities (the trust
preferred securities). These securities represent preferred beneficial interests in the assets of
each Trust. The trust preferred securities will mature on November 11, 2032, May 30, 2033, October
15, 2033, October 15, 2033, and September 30, 2034, respectively, and are redeemable, in whole or
in part, at the option of the Corporation at any time after five years. The Trusts also issued
$310,000, $310,000, $232,000, $232,000, and $310,000, respectively, of common equity securities to
the Corporation. The Trusts used the proceeds of the offering of the trust preferred securities to
purchase $10.3 million, $10.3 million, $7.7 million, $7.7 million, and $10.3 million, respectively,
of junior subordinated deferrable interest debentures (the debentures) issued by the Corporation,
which have interest rates and terms substantially similar to the trust preferred securities. Debt
issuance cost totaling $44,000, $210,000, $9,000, $9,000, and $0, and underwriting fees of
$300,000, $300,000, $169,000, $169,000, and $0, respectively, were capitalized related to the
offerings and are being amortized over the estimated life of the trust preferred securities. At
December 31, 2004, there is $27.5 million of floating rate securities which carry interest rates as
follows: $10 million at 5.33 percent, $7.5 million at 4.93 percent, and $10 million at 4.25
percent. Holders of the capital securities have no voting rights, are unsecured, and rank junior
in priority of payment to all of the Corporations indebtedness and senior to the Corporations
capital stock. Payments of distributions on the trust preferred securities and payments on redemption of the trust
preferred securities are guaranteed by the Corporation on a limited basis. The Corporation also
entered into an agreement as to expenses and liabilities with the Trust pursuant to which it
agreed, on a subordinated basis, to pay any costs, expenses or liabilities of the Trust other than
those arising under the trust preferred securities. The obligations of the Corporation under the
junior subordinated debentures, the related indenture, the trust agreement establishing the Trusts,
the guarantee and the agreement as to expenses and liabilities, in the aggregate, constitute a full
and unconditional guarantee by the Corporation of the Trusts obligations under the trust preferred
securities. The Corporation owns all of the outstanding common stock of the Trusts. The Trusts are considered
variable interest entities (VIEs) under Financial Accounting Standards Board Interpretation (FIN)
No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research
Bulletin No. 51, as revised. Prior to FIN 46, VIEs were generally consolidated by an enterprise
when the enterprise had a controlling financial interest through ownership of a majority of voting
interest in the entity. Under FIN 46, a VIE should be consolidated by its primary beneficiary.
The Corporation adopted FIN 46 during the first quarter of 2004. Because the Corporation is not
the primary beneficiary of the Trusts, the financial statements of the Trusts will no longer be
included in the consolidated financial statements of the Corporation. The Corporations prior
financial statements have been restated to de-consolidate the Corporations investment in the
Trust. See Note 1Summary of Significant Accounting PoliciesCurrent Accounting Developments. 27




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##### Table of Contents



Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 10. Junior Subordinated Debt Owed to Unconsolidated Trusts (Continued) In accordance with Federal Reserve Board regulations in effect at December 31, 2004, the
Corporation is allowed, for regulatory purposes, to include $30,412,000 of the capital securities
issued by the Trusts in Tier 1 capital, with the remaining $14,588,000 included in Tier II capital.
In March 2005, the Federal Reserve Board issued final regulations, which become effective March
31, 2009. If those regulations had been in effect at December 31, 2004, the Corporation would have
been allowed to include approximately $18,440,000 of the securities in Tier 1 capital and the
remainder in Tier II capital. The Corporation would exceed all regulatory minimum capital ratios
if the regulations that are to take effect were in place as of December 31, 2004. Note 11. Stock Based Compensation The Corporation has an Incentive Stock Option Plan under which 210,000 shares of common stock are
reserved for the grant of options to officers and key employees at a price not less than the fair
market value of the stock on the date of the grant. The Incentive Stock Option Plan limits the
options that may be granted to each employee to $100,000 (based on aggregate fair market value at
the date of the grant) per calendar year, on a cumulative basis. Options must be exercised within
10 years of the date of grant and can be regranted if forfeited. Activity in the Incentive Stock Option Plan is summarized in the following table: Weighted-
    
    
    Weighted-Average
    
    
    AverageNumber
    
    
    Exercise Price
    
    
    Remainingof Shares
    
    
    Per Share
    
    
    Contractual Life
    
    
    ExercisableTotal outstanding at
December 31, 2001
    
    
    50,815
    
    
    $
    29.60
    
    
    
    7.15
    
    
    
    50,815Acquisition
    
    
    17,767
    
    
    
    16.62G ranted
    
    
    Exercised
    
    
    Forfeited
    
    
    Total outstanding at
December 31, 2002
    
    
    68,582
    
    
    
    26.24
    
    
    
    4.82
    
    
    
    68,582Stock dividend
    
    
    6,659G ranted
    
    
    Exercised
    
    
    (1,990
    )
    
    
    15.15Forfeited
    
    
    Total outstanding at
December 31, 2003
    
    
    73,251
    
    
    
    24.15
    
    
    
    5.20
    
    
    
    73,251Granted
    
    
    39,422
    
    
    
    45.11Exercised
    
    
    (13,752
    )
    
    
    17.77Forfeited
    
    
    Total outstanding at
December 31, 2004
    
    
    98,921
    
    
    
    33.39
    
    
    
    5.70
    
    
    
    98,921
 28




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##### Table of Contents



Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 11. Stock Based Compensation (Continued) The following table summarizes information about stock options outstanding and exercisable as of
December 31, 2004. Options Outstanding
    
    
    Options ExercisableWeighted-Average
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Remaining
    
    
    Average
    
    
    
    
    
    
    AverageRange of
    
    Number
    
    
    Contractual Life
    
    
    Exercise
    
    
    Number
    
    
    ExerciseExercise Price
    
    Outstanding
    
    
    (In Years)
    
    
    Price
    
    
    Exercisable
    
    
    Price$15.11
    
    
    10,606
    
    
    
    3.3
    
    
    $
    15.11
    
    
    
    10,606
    
    
    $
    15.11$25.45 to $28.31
    
    
    48,893
    
    
    
    3.6
    
    
    
    27.91
    
    
    
    48,893
    
    
    
    27.91$45.00 to $46.00
    
    
    39,422
    
    
    
    9.1
    
    
    
    45.11
    
    
    
    39,422
    
    
    
    45.1198,921
    
    
    
    
    
    
    
    
    
    
    
    98,921
 Note 12. Profit-Sharing and Pension Plan Profit-Sharing Plan:The Corporation has a 401(k) Profit Sharing Plan and Trust which covers
substantially all employees with at least six months of service who have attained age twenty and
one-half. Participating employees may annually contribute up to 12 percent of their pretax
compensation. The Corporations annual contribution consists of a discretionary matching
percentage, limited to 1 percent of employee compensation, and an additional discretionary amount
which is determined annually by the Board of Directors. The Corporations contributions for 2004,
2003, and 2002, were approximately $515,000, $437,000, and $319,000, respectively. Pension Plan:The Corporation has a non-contributory defined contribution pension plan covering
substantially all employees of the Cresco, Westby and Houston banks. Total pension expense was
approximately $258,000, $206,000, and $195,000 during 2004, 2003, and 2002, respectively. Note 13. Salary Continuation Agreement The Corporation has entered into salary continuation agreements with various executive officers.
The agreements provide for the payment of specified amounts upon the employees retirement or death
which is being accrued over the anticipated remaining period of employment. Expense recognized for
future benefits under these agreements totaled approximately $373,000, $183,000, and $153,000,
during 2004, 2003, and 2002, respectively. Although not part of the agreement, the Corporation purchased insurance on the lives of the
officers which could provide funding for the payment of benefits. Included in other assets is
approximately $2,999,000 and $2,693,000 of related cash surrender value of life insurance as of
December 31, 2004 and 2003, respectively. 29




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##### Table of Contents



Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 14. Income Taxes The provision for income taxes consisted of the following: December 31,2004
    
    
    2003
    
    
    2002(Amounts In Thousands)Current
    
    $
    1,610
    
    
    $
    4,113
    
    
    $
    3,605Deferred
    
    
    648
    
    
    
    (46
    )
    
    
    (361
    )$
    2,258
    
    
    $
    4,067
    
    
    $
    3,244
 The provision for income taxes differs from that computed at the federal statutory corporate
tax rate as follows: 2004
    
    
    2003
    
    
    2002% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofPretax
    
    
    
    
    
    
    Pretax
    
    
    
    
    
    
    PretaxAmount
    
    
    Income
    
    
    Amount
    
    
    Income
    
    
    Amount
    
    
    Income(Amounts In Thousands)Computed expected tax
expense
    
    $
    2,191
    
    
    
    35.0
    %
    
    $
    4,303
    
    
    
    35.0
    %
    
    $
    3,370
    
    
    
    35.0
    %Effect of graduated tax
rates
    
    
    (63
    )
    
    
    (1.0
    )
    
    
    (123
    )
    
    
    (1.0
    )
    
    
    (96
    )
    
    
    (1.0
    )T ax-exempt income, net
    
    
    (851
    )
    
    
    (13.6
    )
    
    
    (643
    )
    
    
    (5.2
    )
    
    
    (384
    )
    
    
    (4.0
    )State income taxes, net
of federal benefit
    
    
    1,050
    
    
    
    16.8
    
    
    
    552
    
    
    
    4.5
    
    
    
    323
    
    
    
    3.4Other, net
    
    
    (69
    )
    
    
    (1.1
    )
    
    
    (22
    )
    
    
    (0.2
    )
    
    
    31
    
    
    
    0.3$
    2,258
    
    
    
    36.1
    %
    
    $
    4,067
    
    
    
    33.1
    %
    
    $
    3,244
    
    
    
    33.7
    %
 30




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Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 14. Income Taxes (Continued) The net deferred tax assets included with other assets in the accompanying consolidated balance
sheets include the following amounts: December 31,2004
    
    
    2003(Amounts In Thousands)Deferred tax assets:Allowance for loan losses
    
    $
    3,870
    
    
    $
    3,183Net operating loss carryforwards
    
    
    2,073
    
    
    
    1,549Deferred compensation
    
    
    1,423
    
    
    
    1,089Other assets
    
    
    1,023
    
    
    
    1,220Total deferred tax assets
    
    
    8,389
    
    
    
    7,041Valuation allowance
    
    
    (2,073
    )
    
    
    (1,549
    )6,316
    
    
    
    5,492Deferred tax liabilities:Depreciation
    
    
    1,313
    
    
    
    515Purchase ac counting
    
    
    2,126
    
    
    
    2,169Unrealized gain on available-for-sale securities
    
    
    268
    
    
    
    382Other liabilities
    
    
    2,992
    
    
    
    2,275Total deferred tax liabilities
    
    
    6,699
    
    
    
    5,341Net deferred tax asset
    
    $
    (383
    )
    
    $
    151
 Note 15. Commitments and Contingent Liabilities In the normal course of business, the Corporation is involved in various legal proceedings. In the
opinion of management, any liability resulting from such proceedings would not have a material
adverse effect on the consolidated financial statements. The Corporation is currently under examination by the Wisconsin Department of Revenue for its open
tax years of 1999 through 2003. Several non-bank subsidiaries, including our Nevada investment
subsidiary, hold and manage Corporation assets in states with no income taxes. The Wisconsin
Department of Revenue is asserting that income derived from these subsidiaries should be allocable
to the State of Wisconsin and should be subject to its state taxes. We have assessed the
likelihood of such assessment as probable and accrued our estimate of the liability of $730,000 in
the fourth quarter of 2004. The Corporation is party to financial instruments with off-balance-sheet risk in the normal course
of business to meet the financing needs of its customers. These financial instruments include
commitments to extend credit, financial guarantees, and standby letters of credit. They involve,
to varying degrees, elements of credit risk in excess of amounts recognized on the consolidated
balance sheets. The Corporations exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit and standby letters of credit is represented
by the contractual notional amount of those instruments. The Corporation uses the same credit
policies in making commitments and issuing letters of credit as they do for on-balance-sheet
instruments. 31




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Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 15. Commitments and Contingent Liabilities (Continued) Off-balance-sheet financial instruments whose contracts represented credit and/or interest rate
risk at December 31, 2004 and 2003, are as follows: December 31,2004
    
    
    2003(Amounts In Thousands)Commitments to originate mortgage loans
    
    $
    20,104
    
    
    $
    29,248Unused lines of credit:Commercial business
    
    
    144,647
    
    
    
    108,163Home equity
    
    
    21,935
    
    
    
    13,957Credit cards
    
    
    18,865
    
    
    
    17,146Standby letters of credit
    
    
    12,574
    
    
    
    10,275
 Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Standby letters of credit are conditional
commitments issued to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements. The credit risk
involved in issuing letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Corporation evaluates each customers credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon
extension of credit, is based on managements credit evaluation of the counterparty. Collateral
held varies but may include accounts receivable, inventory, property and equipment, and
income-producing commercial properties. Credit card commitments are unsecured. Standby letters of credit are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements and, generally, have terms of one year or less. The
credit risk involved in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Bank holds collateral, which may include accounts
receivable, inventory, property, equipment, and income-producing properties, supporting those
commitments if deemed necessary. In the event the customer does not perform in accordance with the
terms of the agreement with the third party, the Bank would be required to fund the commitment.
The maximum potential amount of future payments the Bank could be required to make is represented
by the contractual amount shown in the summary above. If the commitment is funded the Bank would
be entitled to seek recovery from the customer. At December 31, 2004 and 2003, no amounts have
been recorded as liabilities for the Banks potential obligations under these guarantees. The Corporation has also executed contracts for the sale of mortgage loans in the secondary market
in the amount of $2,233,228 and $421,720 as of December 31, 2004 and 2003, respectively. These
amounts are included in total loans at the respective balance sheet dates. 32




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Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 15. Commitments and Contingent Liabilities (Continued) Except for the above-noted commitments to originate loans in the normal course of business, the
Corporation and the Banks have not undertaken the use of off-balance-sheet derivative financial
instruments for any purpose as of December 31, 2004 and 2003. Various subsidiary banks of the Corporation have entered into noncancelable leases for certain
branch facilities. The following is a schedule of future minimum rental payments required under
the noncancelable lease agreements: Years Ending December 31,(Dollars in Thousands)2005
    
    $
    1,0882006
    
    
    1,0162007
    
    
    7552008
    
    
    7542009
    
    
    754$
    4,367
 Note 16. Concentration of Credit Risk The Corporation and the Banks do not engage in the use of interest-rate swaps, futures, or option
contracts as of December 31, 2004. Practically all of the Banks loans, commitments, and standby letters of credit have been granted
to customers in the Banks market areas. Although the Banks have a diversified loan portfolio, the
ability of their debtors to honor their contracts is dependent on the economic conditions of the
counties surrounding the Banks. The concentration of credit by type of loan is set forth in Note
5. Investment securities issued by state and political subdivisions (see Note 4) also involve
governmental entities within the Banks market areas. Note 17. Regulatory Capital Requirements and Restrictions of Dividends The Corporation (on a consolidated basis) and Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory  and possibly additional discretionary  actions by
regulators that, if undertaken, could have a direct material effect on the Banks financial
statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Banks must meet specific capital guidelines that involve quantitative measures of the
Banks assets, liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other factors. Prompt
corrective action provisions are not applicable to bank holding companies. 33




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Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 17. Regulatory Capital Requirements and Restrictions of Dividends (Continued) Quantitative measures established by regulation to ensure capital adequacy require the
Corporation and Banks to maintain minimum amounts and ratios (set forth in the table on the
following page) of total and Tier I capital (as defined in the regulations), to risk-weighted
assets (as defined), and Tier 1 capital (as defined), to average assets (as defined). Management
believes, as of December 31, 2004 and 2003, that the Corporation and Banks meet all capital
adequacy requirements to which they are subject. As of December 31, 2004, the most recent notification from the Federal Deposit Insurance
Corporation categorized all the Banks as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Banks must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table on the
following page. There are no conditions or events since that notification that management believes
have changed the Corporations or Banks classification as of December 31, 2004. 34




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Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 17. Regulatory Capital Requirements and Restrictions of Dividends (Continued) The Corporations and Banks actual capital amounts and ratios as of December 31, 2004 and
2003 are presented in the following table. To Be Well CapitalizedFor Capital
    
    
    Under Prompt CorrectiveActual
    
    
    Adequacy Purposes
    
    
    Action ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(Amounts In Thousands)As of December 31, 2004Total capital (to risk-
weighted assets):Consolidated
    
    $
    110,946
    
    
    
    10.14
    %
    
    $
    87,560
    
    
    
    8.00
    %
    
    $
    109,450
    
    
    
    N/ALincoln State Bank
    
    
    38,766
    
    
    
    10.02
    
    
    
    30,942
    
    
    
    8.00
    
    
    
    38,678
    
    
    
    10.00
    %Franklin State Bank
    
    
    9,512
    
    
    
    11.42
    
    
    
    6,662
    
    
    
    8.00
    
    
    
    8,328
    
    
    
    10.00Grafton State Bank
    
    
    15,806
    
    
    
    11.55
    
    
    
    10,951
    
    
    
    8.00
    
    
    
    13,689
    
    
    
    10.00Community Bank Financial
    
    
    7,935
    
    
    
    10.51
    
    
    
    6,039
    
    
    
    8.00
    
    
    
    7,549
    
    
    
    10.00Fortress Bank of Westby
    
    
    11,948
    
    
    
    11.18
    
    
    
    8,550
    
    
    
    8.00
    
    
    
    10,687
    
    
    
    10.00Fortress Bank of Cresco
    
    
    6,417
    
    
    
    12.72
    
    
    
    4,037
    
    
    
    8.00
    
    
    
    5,046
    
    
    
    10.00Fortress Bank Minnesota
    
    
    5,281
    
    
    
    12.45
    
    
    
    3,394
    
    
    
    8.00
    
    
    
    4,242
    
    
    
    10.00The Reedsburg Bank
    
    
    14,119
    
    
    
    11.11
    
    
    
    10,168
    
    
    
    8.00
    
    
    
    12,710
    
    
    
    10.00Wisconsin State Bank
    
    
    8,768
    
    
    
    12.27
    
    
    
    5,716
    
    
    
    8.00
    
    
    
    7,146
    
    
    
    10.00Tier 1 capital (to risk-
weighted assets):Consolidated
    
    $
    85,735
    
    
    
    7.83
    %
    
    $
    43,780
    
    
    
    4.00
    %
    
    $
    65,670
    
    
    
    N/ALincoln State Bank
    
    
    35,445
    
    
    
    9.16
    
    
    
    15,471
    
    
    
    4.00
    
    
    
    23,207
    
    
    
    6.00
    %Franklin State Bank
    
    
    8,470
    
    
    
    10.17
    
    
    
    3,331
    
    
    
    4.00
    
    
    
    4,997
    
    
    
    6.00Grafton State Bank
    
    
    14,719
    
    
    
    10.75
    
    
    
    5,475
    
    
    
    4.00
    
    
    
    8,213
    
    
    
    6.00Community Bank Financial
    
    
    7,316
    
    
    
    9.69
    
    
    
    3,020
    
    
    
    4.00
    
    
    
    4,529
    
    
    
    6.00Fortress Bank of Westby
    
    
    10,802
    
    
    
    10.11
    
    
    
    4,275
    
    
    
    4.00
    
    
    
    6,412
    
    
    
    6.00Fortress Bank of Cresco
    
    
    5,846
    
    
    
    11.59
    
    
    
    2,018
    
    
    
    4.00
    
    
    
    3,028
    
    
    
    6.00Fortress Bank Minnesota
    
    
    4,751
    
    
    
    11.20
    
    
    
    1,697
    
    
    
    4.00
    
    
    
    2,545
    
    
    
    6.00The Reedsburg Bank
    
    
    12,919
    
    
    
    10.16
    
    
    
    5,084
    
    
    
    4.00
    
    
    
    7,626
    
    
    
    6.00Wisconsin State Bank
    
    
    7,872
    
    
    
    11.02
    
    
    
    2,858
    
    
    
    4.00
    
    
    
    4,287
    
    
    
    6.00Tier 1 capital (to average assets):Consolidated
    
    $
    85,735
    
    
    
    6.62
    %
    
    $
    51,835
    
    
    
    4.00
    %
    
    $
    64,793
    
    
    
    N/ALincoln State Bank
    
    
    35,445
    
    
    
    8.59
    
    
    
    16,506
    
    
    
    4.00
    
    
    
    20,633
    
    
    
    5.00
    %Franklin State Bank
    
    
    8,470
    
    
    
    9.29
    
    
    
    3,645
    
    
    
    4.00
    
    
    
    4,557
    
    
    
    5.00Grafton State Bank
    
    
    14,719
    
    
    
    8.54
    
    
    
    6,897
    
    
    
    4.00
    
    
    
    8,621
    
    
    
    5.00Community Bank Financial
    
    
    7,316
    
    
    
    8.25
    
    
    
    3,545
    
    
    
    4.00
    
    
    
    4,432
    
    
    
    5.00Fortress Bank of Westby
    
    
    10,802
    
    
    
    8.13
    
    
    
    5,314
    
    
    
    4.00
    
    
    
    6,642
    
    
    
    5.00Fortress Bank of Cresco
    
    
    5,846
    
    
    
    8.93
    
    
    
    2,619
    
    
    
    4.00
    
    
    
    3,274
    
    
    
    5.00Fortress Bank Minnesota
    
    
    4,751
    
    
    
    8.73
    
    
    
    2,178
    
    
    
    4.00
    
    
    
    2,723
    
    
    
    5.00The Reedsburg Bank
    
    
    12,919
    
    
    
    8.29
    
    
    
    6,233
    
    
    
    4.00
    
    
    
    7,792
    
    
    
    5.00Wisconsin State Bank
    
    
    7,872
    
    
    
    7.85
    
    
    
    4,012
    
    
    
    4.00
    
    
    
    5,015
    
    
    
    5.00
 35




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Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements  Note 17. Regulatory Capital Requirements and Restrictions of Dividends (Continued) To Be WellCapitalizedFor Capital
    
    
    Under Prompt CorrectiveActual
    
    
    Adequacy Purposes
    
    
    Action ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(Amounts In Thousands)As of December 31, 2003Total capital (to risk-
weighted assets):Consolidated
    
    $
    92,602
    
    
    
    10.23
    %
    
    $
    72,434
    
    
    
    8.00
    %
    
    $
    90,543
    
    
    
    N/ALincoln State Bank
    
    
    38,253
    
    
    
    10.80
    
    
    
    28,339
    
    
    
    8.00
    
    
    
    35,424
    
    
    
    10.00
    %Franklin State Bank
    
    
    9,213
    
    
    
    10.87
    
    
    
    6,782
    
    
    
    8.00
    
    
    
    8,478
    
    
    
    10.00Grafton State Bank
    
    
    14,661
    
    
    
    12.32
    
    
    
    9,519
    
    
    
    8.00
    
    
    
    11,898
    
    
    
    10.00Community Bank Financial
    
    
    7,860
    
    
    
    11.68
    
    
    
    5,383
    
    
    
    8.00
    
    
    
    6,729
    
    
    
    10.00Fortress Bank of Westby
    
    
    11,287
    
    
    
    11.96
    
    
    
    7,551
    
    
    
    8.00
    
    
    
    9,439
    
    
    
    10.00Fortress Bank of Cresco
    
    
    6,346
    
    
    
    15.38
    
    
    
    3,300
    
    
    
    8.00
    
    
    
    4,126
    
    
    
    10.00Fortress Bank Minnesota
    
    
    5,097
    
    
    
    14.17
    
    
    
    2,878
    
    
    
    8.00
    
    
    
    3,598
    
    
    
    10.00The Reedsburg Bank
    
    
    12,888
    
    
    
    12.74
    
    
    
    8,090
    
    
    
    8.00
    
    
    
    10,113
    
    
    
    10.00Tier 1 capital (to risk-
weighted assets):Consolidated
    
    $
    74,903
    
    
    
    8.27
    %
    
    $
    36,217
    
    
    
    4.00
    %
    
    $
    54,236
    
    
    
    N/ALincoln State Bank
    
    
    34,909
    
    
    
    9.85
    
    
    
    14,170
    
    
    
    4.00
    
    
    
    21,255
    
    
    
    6.00
    %Franklin State Bank
    
    
    8,322
    
    
    
    9.82
    
    
    
    3,391
    
    
    
    4.00
    
    
    
    5,087
    
    
    
    6.00Grafton State Bank
    
    
    13,598
    
    
    
    11.43
    
    
    
    4,759
    
    
    
    4.00
    
    
    
    7,139
    
    
    
    6.00Community Bank Financial
    
    
    7,317
    
    
    
    10.87
    
    
    
    2,692
    
    
    
    4.00
    
    
    
    4,038
    
    
    
    6.00Fortress Bank of Westby
    
    
    10,355
    
    
    
    10.97
    
    
    
    3,776
    
    
    
    4.00
    
    
    
    5,663
    
    
    
    6.00Fortress Bank of Cresco
    
    
    5,830
    
    
    
    14.13
    
    
    
    1,650
    
    
    
    4.00
    
    
    
    2,475
    
    
    
    6.00Fortress Bank Minnesota
    
    
    4,647
    
    
    
    12.92
    
    
    
    1,439
    
    
    
    4.00
    
    
    
    2,159
    
    
    
    6.00The Reedsburg Bank
    
    
    11,612
    
    
    
    11.48
    
    
    
    4,045
    
    
    
    4.00
    
    
    
    6,068
    
    
    
    6.00Tier 1 capital (to average assets):Consolidated
    
    $
    74,903
    
    
    
    7.19
    %
    
    $
    41,696
    
    
    
    4.00
    %
    
    $
    51,120
    
    
    
    N/ALincoln State Bank
    
    
    34,909
    
    
    
    9.06
    
    
    
    15,415
    
    
    
    4.00
    
    
    
    19,269
    
    
    
    5.00
    %Franklin State Bank
    
    
    8,322
    
    
    
    9.09
    
    
    
    3,662
    
    
    
    4.00
    
    
    
    4,578
    
    
    
    5.00Grafton State Bank
    
    
    13,598
    
    
    
    8.60
    
    
    
    6,324
    
    
    
    4.00
    
    
    
    7,904
    
    
    
    5.00Community Bank Financial
    
    
    7,317
    
    
    
    8.87
    
    
    
    3,300
    
    
    
    4.00
    
    
    
    4,125
    
    
    
    5.00Fortress Bank of Westby
    
    
    10,355
    
    
    
    8.92
    
    
    
    4,644
    
    
    
    4.00
    
    
    
    5,805
    
    
    
    5.00Fortress Bank of Cresco
    
    
    5,830
    
    
    
    9.72
    
    
    
    2,398
    
    
    
    4.00
    
    
    
    2,998
    
    
    
    5.00Fortress Bank Minnesota
    
    
    4,647
    
    
    
    8.79
    
    
    
    2,116
    
    
    
    4.00
    
    
    
    2,645
    
    
    
    5.00The Reedsburg Bank
    
    
    11,612
    
    
    
    8.23
    
    
    
    5,643
    
    
    
    4.00
    
    
    
    7,053
    
    
    
    5.00
 36




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Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 17. Regulatory Capital Requirements and Restrictions of Dividends (Continued) Dividends are paid by the Corporation from funds which are mainly provided by dividends from the
Banks. However, federal and state banking regulations place certain restrictions on dividends paid
and loans or advances made by the Banks to the Corporation. The total amount of dividends which
may be paid at any date is generally limited to the retained earnings of the Banks, and loans or
advances are limited to 10 percent of the Banks capital stock and surplus on a secured basis. As of December 31, 2004, the subsidiary banks collectively had equity of approximately $141,524,000
of which approximately $10,989,000 was available for distribution to the Corporation as dividends
without prior regulatory approval. In addition, dividends paid by the Banks to the Corporation would be prohibited if the effect
thereof would cause the Banks capital to be reduced below applicable minimum capital requirements. Note 18. Fair Values of Financial Instruments FASB Statement No. 107, Disclosures About Fair Value of Financial Instruments(SFAS No. 107),
requires disclosure of fair value information about financial instruments, whether recognized or
not recognized in the balance sheet, for which it is practicable to estimate that value. The fair
value of a financial instrument is the current amount that would be exchanged between willing

parties, other than a forced liquidation. Fair value is best-determined based upon quoted market
prices. However, in many instances, there are no quoted market prices for the Corporations
various financial instruments. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those techniques are
significantly affected by assumptions used, including the discount rate and estimates of future
cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement
of the instrument. SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts
presented may not necessarily represent the underlying fair value of the Corporation. The following methods and assumptions were used by the Corporation in estimating fair value
disclosures for financial instruments:  Cash and due from banks: The carrying amounts of cash and due from banks equal their fair
values.  Interest bearing deposits in banks: The carrying amounts of interest bearing deposits in banks
equal their fair values.  Federal funds sold: The carrying amounts of federal funds sold equal their fair values.  Available-for-sale securities: Fair values for securities are based on quoted market prices.  Loans: For variable-rate loans that reprice frequently and with no significant change in credit
risk, fair values are based on carrying values. Fair values for all other loans are estimated
by discounting contractual cash flows using estimated market discount rates which reflect the
credit and interest rate risk inherent in the loan. Fair values of mortgage loans held for sale
are based on commitments on hand from investors or prevailing market prices. 37




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Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 18. Fair Values of Financial Instruments (Continued)  FHLB stock: FHLB stock is carried at cost which is its redeemable value since the market for
this stock is restricted.  Accrued interest receivable and payable: The carrying amounts of accrued interest receivable
and payable equal their fair values.  Deposits: The fair values disclosed for demand deposits (interest and non-interest checking,
passbook savings, and certain types of money market accounts) are, by definition, equal to the
amount payable on demand at the reporting date. Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates within the marketplace.Short-term borrowings: The carrying amounts of short-term borrowings approximate their fair
values.Long-term borrowings: The fair values of long-term borrowings are estimated using discounted
cash flow analysis based on current interest rates being offered on instruments with similar
terms and credit quality.Junior subordinated debt owed to unconsolidated trusts: The carrying amount of the variable
rate junior subordinated debt owed to unconsolidated trusts equals its fair value. Fair values
for the fixed-rate instruments are estimated by using a discounted cash flow calculation that
applies interest rates currently being offered on fixed-rate issuances within the marketplace.Off-balance-sheet instruments: The estimated fair value of fee income on letters of credit at
December 31, 2004 and 2003 is insignificant. Loan commitments on which the committed interest
rate is less that the current market rate are also insignificant at December 31, 2004 and 2003. 38




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Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 18. Fair Values of Financial Instruments (Continued) The estimated fair values of the Corporations financial instruments are as follows: 2004
    
    
    2003Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    EstimatedAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair Value(Amounts In Thousands)Financial assets:Cash and due from banks
    
    $
    33,839
    
    
    $
    33,839
    
    
    $
    29,376
    
    
    $
    29,376Interest bearing deposits in banks
    
    
    1,178
    
    
    
    1,178
    
    
    
    2,647
    
    
    
    2,647Federal funds sold
    
    
    9,253
    
    
    
    9,253
    
    
    
    15,632
    
    
    
    15,632Available-for-sale securities
    
    
    172,564
    
    
    
    172,564
    
    
    
    156,597
    
    
    
    156,597Loans, net
    
    
    1,028,059
    
    
    
    1,032,960
    
    
    
    847,938
    
    
    
    852,570Accrued interest receivable
    
    
    5,419
    
    
    
    5,419
    
    
    
    4,421
    
    
    
    4,421FHLB stock
    
    
    19,649
    
    
    
    19,649
    
    
    
    16,245
    
    
    
    16,245Financial liabilities:Deposits
    
    
    1,033,046
    
    
    
    1,033,069
    
    
    
    911,948
    
    
    
    911,632Short-term borrowings
    
    
    61,322
    
    
    
    61,322
    
    
    
    34,007
    
    
    
    34,007Long-term borrowings
    
    
    111,054
    
    
    
    111,215
    
    
    
    72,346
    
    
    
    72,910Junior subordinated debt owed to
unconsolidated trusts
    
    
    46,394
    
    
    
    47,461
    
    
    
    36,084
    
    
    
    36,084Accrued interest payable
    
    
    1,944
    
    
    
    1,944
    
    
    
    1,417
    
    
    
    1,417
 39




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Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 19. Parent Company Only Condensed Financial Information Condensed Balance Sheets
(Parent Company Only) December 31,2004
    
    
    2003(Amounts In Thousands)AssetsCash and cash equivalents
    
    $
    
    
    
    $
    Loans receivable
    
    
    85
    
    
    
    Investment in subsidiaries
    
    
    145,832
    
    
    
    131,942Premises and equipment
    
    
    8,040
    
    
    
    1,478Other assets
    
    
    3,346
    
    
    
    4,701Total assets
    
    $
    157,3
    
    
    
    03         $138,121LiabilitiesShort-term borrowings
    
    $
    7,000
    
    
    $
    7,375Long-term borrowings
    
    
    10,254
    
    
    
    12,818Junior subordinated debt owed to unconsolidated trusts
    
    
    46,394
    
    
    
    36,084Other liabilities
    
    
    1,916
    
    
    
    1,870Total liabilities
    
    
    65,564
    
    
    
    58,147Stockholders equityCommon stock
    
    
    3,770
    
    
    
    3,436Additional paid-in capital
    
    
    53,421
    
    
    
    43,691Retained earnings
    
    
    36,486
    
    
    
    35,007Accumulated other comprehensive income
    
    
    505
    
    
    
    663Treasury stock
    
    
    (2,443
    )
    
    
    (2,823
    )Total stockholders equity
    
    
    91,739
    
    
    
    79,974Total liabilities and stockholders equity
    
    $
    157,30
    
    
    
    3         $138,121
 40




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##### Table of Contents



Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 19. Parent Company Only Condensed Financial Information (Continued) Condensed Statements of Income
(Parent Company Only) Years Ended December 31,2004
    
    
    2003
    
    
    2002(Amounts In Thousands)Income:Interest on loans, including fees
    
    $
    3
    
    
    $
    23
    
    
    $
    Dividends from subsidiaries
    
    
    8,314
    
    
    
    7,298
    
    
    
    3,459Other
    
    
    7,728
    
    
    
    2,915
    
    
    
    2,27316,045
    
    
    
    10,236
    
    
    
    5,732Expenses:Salaries and employee benefits
    
    
    7,378
    
    
    
    3,870
    
    
    
    3,663Occupancy
    
    
    1,816
    
    
    
    1,465
    
    
    
    1,225Interest
    
    
    3,310
    
    
    
    1,419
    
    
    
    257Other
    
    
    5,204
    
    
    
    1,669
    
    
    
    1,10017,708
    
    
    
    8,423
    
    
    
    6,245Income (loss) before income tax benefit and equity
in undistributed net income of subsidiaries
    
    
    -1663
    
    
    
    1,813
    
    
    
    (513
    )Income tax benefit
    
    
    3,404
    
    
    
    1,876
    
    
    
    1,371Income before equity in undistributed net income
of subsidiaries
    
    
    1,741
    
    
    
    3,689
    
    
    
    858Equity in undistributed net income of subsidiaries
    
    
    2,261
    
    
    
    4,539
    
    
    
    5,527Net income
    
    $
    4,002
    
    
    $
    8,228
    
    
    $
    6,385
 41




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##### Table of Contents



Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 19. Parent Company Only Condensed Financial Information (Continued) Condensed Statements of Cash Flows
(Parent Company Only) Years Ended December 31,2004
    
    
    2003
    
    
    2002(Amounts In Thousands)Cash Flows From Operating ActivitiesNet income
    
    $
    4,002
    
    
    $
    8,228
    
    
    $
    6,385Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Equity in undistributed net income of subsidiaries
    
    
    (2,261
    )
    
    
    (4,539
    )
    
    
    (5,527
    )Depreciation
    
    
    530
    
    
    
    156
    
    
    
    131Gain on sale of premises and equipment
    
    
    
    
    
    
    
    
    
    
    (69
    )Other, net
    
    
    1,537
    
    
    
    3,123
    
    
    
    (1,255
    )Net cash provided by (used in) operating
activities
    
    
    3,808
    
    
    
    6,968
    
    
    
    (335
    )Cash Flows From Investing ActivitiesPayment for acquisition
    
    
    (1,300
    )
    
    
    (20,282
    )
    
    
    (9,786
    )Net change in loans
    
    
    (85
    )
    
    
    500
    
    
    
    (500
    )Capital infusion, subsidiaries
    
    
    (125
    )
    
    
    (8,825
    )
    
    
    Investment in Merchants and Manufacturers
Statutory Trusts
    
    
    (310
    )
    
    
    (774
    )
    
    
    (310
    )Purchases of equipment, net
    
    
    (7,092
    )
    
    
    (1,065
    )
    
    
    (221
    )Net cash (used in) investing activities
    
    
    (8,912
    )
    
    
    (30,446
    )
    
    
    (10,817
    )Cash Flows From Financing ActivitiesNet increase (decrease) in short-term borrowings
    
    
    (375
    )
    
    
    (325
    )
    
    
    3,898Payments on long-term borrowings
    
    
    (2,564
    )
    
    
    
    
    
    
    Dividends paid
    
    
    (2,523
    )
    
    
    (2,213
    )
    
    
    (1,790
    )Issuance of junior subordinated debt owed to
unconsolidated trusts
    
    
    10,310
    
    
    
    25,774
    
    
    
    10,310Stock dividend
    
    
    
    
    
    
    (16
    )
    
    
    Common stock transactions, net
    
    
    256
    
    
    
    35
    
    
    
    (1,058
    )Net cash provided by financing activities
    
    
    5,104
    
    
    
    23,255
    
    
    
    11,360Increase (decrease) in cash and cash
equivalents
    
    
    
    
    
    
    (223
    )
    
    
    208Cash and cash equivalents at beginning of year
    
    
    
    
    
    
    223
    
    
    
    15Cash and cash equivalents at end of year
    
    $
    
    
    
    $
    
    
    
    $
    223
 42




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##### Table of Contents



10-K EXHIBIT LIST EXHIBIT NO.
    
    DESCRIPTIONEXHIBIT 21.1
    
    SubsidiariesEXHIBIT 23.1
    
    Consent of Independent Registered Public Accounting FirmEXHIBIT 31.1
    
    Certification of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002EXHIBIT 31.2
    
    Certification of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002EXHIBIT 32.1*
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002EXHIBIT 32.2*
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
   *
    
    This certification is not filed for purposes of Section 18 of the Securities Exchange Act of
1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended.