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SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549
 FORM 10-Q þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 March 31, 2005
 or o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
 Commission file Number 0-21292 MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. 
  Wisconsin
    
    39-1413328(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification Number)
 5445 S. Westridge Drive
New Berlin, Wisconsin 53151
 
  (262) 827-6700 
  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 whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2) Yes þ No o As of May 05, 2005, 3,674,054 shares of Common Stock were outstanding.




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MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. FORM 10-Q INDEX Page NumberPart I. Financial InformationItem 1. Financial StatementsUnaudited Consolidated Statements of Financial Condition
as of March 31, 2005, December 31, 2004, and March 31,
2004
    
    
    3Unaudited Consolidated Statements of Income for the Three
Months ended March 31, 2005 and 2004
    
    
    4Unaudited Consolidated Statements of Cash Flows for the
Three Months ended March 31, 2005 and 2004
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    24Part II. Other InformationItems 1-6
    
    
    25Signatures
    
    
    26Certification of the CEOCertification of the CFOCertification of the CEOCertification of the CFO
  2




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##### Table of Contents



Part I. Financial Information Merchants and Manufacturers Bancorporation, Inc.
 
 Unaudited Consolidated Statements of Financial Condition
 March 31,
    
    
    December 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2004(Amounts In Thousands, ExceptShare and Per Share Amounts)ASSETSCash and due from banks
    
    $
    27,015
    
    
    $
    33,839
    
    
    $
    24,774Interest bearing deposits in banks
    
    
    2,657
    
    
    
    1,178
    
    
    
    4,956Federal funds sold
    
    
    5,346
    
    
    
    9,253
    
    
    
    5,456Cash and cash equivalents
    
    
    35,018
    
    
    
    44,270
    
    
    
    35,186Available-for-sale securities
    
    
    170,437
    
    
    
    172,564
    
    
    
    158,476Loans, less allowance for loan losses of $10,368 at
March 31, 2005, $10,622 at December 31, 2004
and $9,412 at March 31, 2004
    
    
    1,067,094
    
    
    
    1,028,059
    
    
    
    871,881Accrued interest receivable
    
    
    6,154
    
    
    
    5,419
    
    
    
    4,784FHLB stock
    
    
    19,931
    
    
    
    19,649
    
    
    
    16,519Premises and equipment
    
    
    29,888
    
    
    
    30,355
    
    
    
    21,536Goodwill and intangible assets
    
    
    35,665
    
    
    
    35,714
    
    
    
    30,107Other assets
    
    
    21,083
    
    
    
    21,035
    
    
    
    22,088Total assets
    
    $
    1,385,270
    
    
    $
    1,357,065
    
    
    $
    1,160,577LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Deposits:Non-interest bearing
    
    $
    136,653
    
    
    $
    148,482
    
    
    $
    110,955Interest bearing
    
    
    915,753
    
    
    
    884,564
    
    
    
    807,081Total deposits
    
    
    1,052,406
    
    
    
    1,033,046
    
    
    
    918,036Short-term borrowings
    
    
    63,219
    
    
    
    61,322
    
    
    
    29,097Long-term borrowings
    
    
    119,387
    
    
    
    111,054
    
    
    
    84,309Subordinated debentures
    
    
    46,394
    
    
    
    46,394
    
    
    
    36,084Accrued interest payable
    
    
    2,542
    
    
    
    1,944
    
    
    
    1,522Other liabilities
    
    
    9,606
    
    
    
    11,566
    
    
    
    9,669Total liabilities
    
    
    1,293,554
    
    
    
    1,265,326
    
    
    
    1,078,717Stockholders equityPreferred stock, $1.00 par value; 250,000 shares authorized,
Shares issued and shares outstanding  none
    
    
    
    
    
    
    
    
    
    
    Common stock $1.00 par value; 25,000,000 shares authorized
at March 31, 2005 and at December 31, 2004, and 6,000,000 at
March 31, 2004; shares issued: 3,770,251 at March 31, 2005
and December 31, 2004, 3,436,036 at March 31, 2004;
shares outstanding: 3,674,054 at March 31, 2005 and
December 31, 2004 and 3,335,356 at March 31, 2004
    
    
    3,770
    
    
    
    3,770
    
    
    
    3,436Additional paid-in capital
    
    
    53,421
    
    
    
    53,421
    
    
    
    43,622Retained earnings
    
    
    37,628
    
    
    
    36,486
    
    
    
    35,814Accumulated other comprehensive income (loss)
    
    
    (660
    )
    
    
    505
    
    
    
    1,555Treasury stock, at cost (96,197 shares at March 31, 2005 and
December 31, 2004 and 100,680 shares at March 31, 2004)
    
    
    (2,443
    )
    
    
    (2,443
    )
    
    
    (2,567
    )Total stockholders equity
    
    
    91,716
    
    
    
    91,739
    
    
    
    81,860Total liabilities and stockholders equity
    
    $
    1,385,270
    
    
    $
    1,357,065
    
    
    $
    1,160,577
 See Notes to unaudited consolidated financial statements.




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Merchants and Manufacturers Bancorporation, Inc. 
 Unaudited Consolidated Statements of Income
 Three Months EndedMarch 31,2005
    
    
    2004(In Thousands, Except Per Share Amounts)Interest income:Interest and fees on loans
    
    $
    15,796
    
    
    $
    12,819Interest and dividends on securities:Taxable
    
    
    400
    
    
    
    468Tax-exempt
    
    
    612
    
    
    
    381Interest on mortgage-backed securities
    
    
    873
    
    
    
    646Interest on interest bearing deposits in
banks and federal funds sold
    
    
    38
    
    
    
    54Total interest income
    
    
    17,719
    
    
    
    14,368Interest expense:Interest on deposits
    
    
    3,917
    
    
    
    3,100Interest on short-term borrowings
    
    
    457
    
    
    
    151Interest on long-term borrowings
    
    
    1,080
    
    
    
    734Interest on subordinated debentures
    
    

    727
    
    
    
    557Total interest expense
    
    
    6,181
    
    
    
    4,542Net interest income
    
    
    11,538
    
    
    
    9,826Provision for loan losses
    
    
    390
    
    
    
    450Net interest income after provision for
loan losses
    
    
    11,148
    
    
    
    9,376Non-interest income:Service charges on deposit accounts
    
    
    953
    
    
    
    725Service charges on loans
    
    
    725
    
    
    
    427Securities gains, net
    
    
    0
    
    
    
    177Gain on sale of loans, net
    
    
    103
    
    
    
    144Gain on sale of fixed assets, net
    
    
    395
    
    
    
    0Tax fees, brokerage and insurance commissions
    
    
    565
    
    
    
    619Other
    
    
    1,352
    
    
    
    603Total noninterest income
    
    
    4,093
    
    
    
    2,695Noninterest expenses:Salaries and employee benefits
    
    
    7,247
    
    
    
    5,860Premises and equipment
    
    
    1,870
    
    
    
    1,476Data processing fees
    
    
    847
    
    
    
    361Marketing and business development
    
    
    394
    
    
    
    334Other
    
    
    2,219
    
    
    
    2,051Total noninterest expense
    
    
    12,577
    
    
    
    10,082Income before income taxes
    
    
    2,664
    
    
    
    1,986Income taxes
    
    
    861
    
    
    
    582Net income
    
    $
    1,803
    
    
    $
    1,407Basic earnings per share
    
    $
    0.49
    
    
    $
    0.42Diluted earnings per share
    
    $
    0.49
    
    
    $
    0.42Dividends per share
    
    $
    0.18
    
    
    $
    0.18
 See notes to unaudited consolidated financial statements. 4




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Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries 
 Unaudited Consolidated Statements of Cash Flows
 Three Months Ended March 31,2005
    
    
    2004(In Thousands)Cash Flows From Operating ActivitiesNet income
    
    $
    1,803
    
    
    $
    1,407Adjustments to reconcile net income to cash
provided by operating activities:Provision for loan losses
    
    
    390
    
    
    
    450Depreciation
    
    
    623
    
    
    
    454Amortization and accretion of premiums and discounts, net
    
    
    192
    
    
    
    429Securities gains, net
    
    
    0
    
    
    
    (177
    )Gain on sale of loans, net
    
    
    (103
    )
    
    
    (144
    )Gain on sale of fixed assets, net
    
    
    (395
    )
    
    
    0Increase in accrued interest receivable
    
    
    (735
    )
    
    
    (363
    )Increase (decrease) in accrued interest payable
    
    
    598
    
    
    
    105Other
    
    
    (1,324
    )
    
    
    188Net cash provided by operations before loan originations and sales
    
    
    1,049
    
    
    
    2,349Loans originated for sale
    
    
    (10,284
    )
    
    
    (11,865
    )Proceeds from sales of loans
    
    
    11,474
    
    
    
    11,066Net cash provided by operating activities
    
    
    2,239
    
    
    
    1,550Cash Flows From Investing ActivitiesPurchase of available-for-sale securities
    
    
    (8,875
    )
    
    
    (35,529
    )Proceeds from sales of available-for-sale securities
    
    
    0
    

    
    
    7,253Proceeds from redemptions and maturities of available-for-sale securities
    
    
    9,021
    
    
    
    26,926Net increase in loans
    
    
    (40,522
    )
    
    
    (23,723
    )(Purchase) sale of premises and equipment, net
    
    
    239
    
    
    
    (1,399
    )Purchase of Federal Home Loan Bank stock
    
    
    282
    
    
    
    (274
    )Net cash used in investing activities
    
    
    (40,419
    )
    
    
    (26,746
    )Cash Flows From Financing ActivitiesNet increase in deposits
    
    
    19,360
    
    
    
    6,087Net increase (decrease) in short-term borrowings
    
    
    1,897
    
    
    
    (4,947
    )Dividends paid
    
    
    (661
    )
    
    
    (600
    )Proceeds from long-term borrowings
    
    
    30,231
    
    
    
    23,500Repayment of long-term borrowings
    
    
    (21,899
    )
    
    
    (11,500
    )Proceeds from sale of treasury stock
    
    
    0
    
    
    
    187Net cash provided by financing activities
    
    
    28,928
    
    
    
    12,727Decrease in cash and cash equivalents
    
    
    (9,252
    )
    
    
    (12,469
    )Cash and cash equivalents at beginning of period
    
    
    44,270
    
    
    
    47,655Cash and cash equivalents at end of period
    
    $
    35,018
    
    
    $
    35,186Supplemental Cash Flow Information and Noncash Transactions:Interest paid
    
    $
    5,583
    
    
    $
    4,437Income taxes paid
    
    
    200
    
    
    
    164Loans transferred to other real estate owned
    
    
    10
    
    
    
    273Supplemental Schedules of Noncash Investing Activities,
change in accumulated other comprehensive income, unrealized
gains on available-for-sale securities, net
    
    $
    (1,165
    )
    
    $
    892
 See notes to unaudited consolidated financial statements 5




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Merchants and Manufacturers Bancorporation, Inc. 
 
 NOTE A  Basis of Presentation The accompanying unaudited consolidated financial statements include the accounts of Merchants and
Manufacturers Bancorporation, Inc. and its wholly owned subsidiaries: Lincoln State Bank, Franklin
State Bank, Grafton State Bank, Community Bank Financial, The Reedsburg Bank, Fortress Bank,
Fortress Bank Cresco, Fortress Bank Minnesota, Wisconsin State Bank (collectively, the
Banks), Merchants Merger Corp., Community Financial Group Services, Inc., Merchants New Merger
Corp., Community Financial Group Mortgage, Inc. and Lincoln Neighborhood Redevelopment Corporation.
Lincoln State Bank also includes the accounts of its wholly owned subsidiary, M&M Lincoln
Investment Corporation. Grafton State Bank also includes the accounts of its wholly owned
subsidiary, GSB Investments, Inc. and Community Bank Financial also includes the accounts of its
wholly owned subsidiary, CBOC Investments, Inc. The Reedsburg Bank also includes the accounts of
its wholly owned subsidiary, Reedsburg Investments, Inc. Fortress Bank also includes the
accounts of its wholly owned subsidiary, Westby Investment Company, Inc. Wisconsin State Bank also
includes the accounts of its wholly owned subsidiary Random Lake Investments, Inc. Community
Financial Group Services, Inc. also includes the accounts of its wholly owned subsidiaries
Community Financial Group, Inc. and Keith C. Winters & Associates. LTD (KCW). All significant
intercompany balances and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the three-month period
ended March 31, 2005 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2005. For further information, refer to the consolidated financial
statements and footnotes thereto included in our Form 10-K for the year ended December 31, 2004. The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions which affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
as of date of the financial statements, as well as the reported amounts of income and expenses
during the reported periods. Actual results could differ from those estimates. 6




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NOTE B  Earnings Per Share Presented below are the calculations for basic and diluted earnings per share: Three Months EndedMarch 31,Basic
    
    2005
    
    
    2004(In Thousands, except per share data)Net income
    
    $
    1,803
    
    
    $
    1,407Weighted average shares outstanding
    
    
    3,674
    
    
    
    3,331Basic earnings per share
    
    $
    0.49
    
    
    $
    0.42
 Diluted:
    
    (In Thousands, except per share data)Net income
    
    $
    1,803
    
    
    $
    1,407Weighted average shares outstanding
    
    
    3,674
    
    
    
    3,331Effect of dilutive stock options outstanding
    
    
    8
    
    
    
    37Diluted weighted average shares outstanding
    
    
    3,682
    
    
    
    3,368Diluted earnings per share
    
    $
    0.49
    
    
    $
    0.42
 NOTE C  Comprehensive Income The following table presents our comprehensive income. Three Months EndedMarch 31,2005
    
    
    2004(In Thousands)Net income
    
    $
    1,803
    
    
    $
    1,407Other comprehensive income
Change in unrealized securities gains
(losses)
    
    
    (1,789
    )
    
    
    1,169Reclassification adjustment for gains
included in net income
    
    
    0
    
    
    
    177Income tax effect
    
    
    624
    
    
    
    (454
    )Total comprehensive income
    
    $
    638
    
    
    $
    2,299
 7




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NOTE D  Loans Receivable In 2005, 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. The following table shows the composition of our loan portfolio on the dates
indicated (dollars in thousands): March 31,
    
    
    December 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2004First Mortgage:Conventional single-family residential
    
    $
    150,269
    
    
    $
    142,926
    
    
    $
    116,382Commercial and multifamily residential
    
    
    454,909
    
    
    
    436,612
    
    
    
    382,072Construction
    
    
    76,226
    
    
    
    76,267
    
    
    
    52,062Farmland
    
    
    55,694
    
    
    
    55,710
    
    
    
    45,863737,098
    
    
    
    711,515
    
    
    
    596,379Commercial business loans
    
    
    260,174
    
    
    
    240,575
    
    
    
    215,390Consumer and installment loans
    
    
    45,594
    
    
    
    49,136
    
    
    
    49,158Home equity loans
    
    
    27,078
    
    
    
    26,592
    
    
    
    15,538Other
    
    
    7,518
    
    
    
    10,863
    
    
    
    4,828340,364
    
    
    
    327,166
    
    
    
    284,914Total loans
    
    
    1,077,462
    
    
    
    1,038,681
    
    
    
    881,293Less allowance for loan losses
    
    
    10,368
    
    
    
    10,622
    
    
    
    9,412Loans, net
    
    $
    1,067,094
    
    
    $
    1,028,059
    
    
    $
    871,881
 NOTE E  Stock-Based Compensation Plan At March 31, 2005 we had a stock-based key officer and employee compensation plan. We account 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 following table
illustrates the effect on net income and earnings per share if we 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. Three Months EndedMarch 31,2005
    
    
    2004(Amounts In Thousands,Except Per Share Data)Net income, as reported
    
    $
    1,803
    
    
    $
    1,407Deduct total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects
    
    
    5
    
    
    
    334Pro forma net income
    
    $
    1,798
    
    
    $
    1,073Earnings per share:Basic:As reported
    
    $
    0.49
    
    
    $
    0.42Pro forma
    
    $
    0.49
    
    
    $
    0.34Diluted:As reported
    
    $
    0.49
    
    
    $
    0.42Pro forma
    
    $
    0.49
    
    
    $
    0.33
 8




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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 at March 31, 2005: dividend yield of 2.00%; expected price volatility
of 21.82%; blended risk-free interest rates of 4.50%; and expected life of 9.75 years. NOTE F  Recent Acquisition On August 12, 2004, we 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 price. 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. The quarter-to-quarter and year-to-year
comparisons are impacted by our completion of the acquisition of Random Lake. The acquisition was
accounted for using the purchase method of accounting, and accordingly, the assets and liabilities
of Random Lake were recorded at their respective fair values on August 12, 2004 and account
balances acquired are included in our financial results. NOTE G  Recent Accounting Pronouncements 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. 9




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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. On April 14, 2005, the Securities and Exchange Commission (SEC) adopted a new rule that amends
the compliance dates for Financial Accounting Standards Boards Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment. Under the new rule, the Corporation is
required to adopt FAS 123(R) in the first quarter of fiscal 2006, beginning January 1, 2006. The
Corporation has not yet determined the method of adoption or the effect of adopting FASB 123(R),
and it has not determined whether the adoption will result in amounts that are similar to the
current pro forma disclosures under Statement No. 123. NOTE H  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 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. 10




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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 it does for on-balance-sheet
instruments. Off-balance-sheet financial instruments whose contracts represented credit and/or interest rate
risk at March 31, 2005, December 31, 2004 and March 31, 2004, are as follows: March 31,
    
    
    December 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2004(Amounts In Thousand)Commitments to originate mortgage loans
    
    $
    26,469
    
    
    $
    20,104
    
    
    $
    37,069Unused lines of credit:Commercial business
    
    
    158,676
    
    
    
    144,647
    
    
    
    105,198Home equity
    
    
    24,450
    
    
    
    21,935
    
    
    
    14,561Credit cards
    
    
    16,274
    
    
    
    18,865
    
    
    
    16,417Standby letters of credit
    
    
    12,477
    
    
    
    12,574
    
    
    
    10,799
 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 by a 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 issuing
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
issuing Bank would be required to fund the commitment. The maximum potential amount of future
payments the issuing Bank could be required to make is represented by the contractual amount shown
in the summary above. If the commitment is funded, the issuing Bank would be entitled to seek
recovery from the customer. Credit card commitments are unsecured. At March 31, 2005 no amounts
have been recorded as liabilities for the issuing Banks potential obligations under these
guarantees. 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. 11




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Overview The Corporation had net income of $1.8 million, or $0.49 per diluted share, for the three months
ended March 31, 2005 compared to $1.4 million, or $0.42 per diluted share, for the three months
ended March 31, 2004, representing a 28.1% increase in net income and a 16.7% increase in diluted
earnings per share. The increase in net income for the current quarter compared to the prior year
period is attributed to strong balance sheet growth, strength in our core banking business,
increased operating efficiencies and one-time gains on the sale of assets. The quarter-to-quarter comparisons are impacted by the Corporations completion of the Random Lake
acquisition on August 12, 2004. The acquisition was accounted for using the purchase method of
accounting, and accordingly, the assets and liabilities of Random Lake were recorded at their
respective fair values on August 12, 2004. The Corporation acquired approximately $102.3 million
in assets, $72.9 million in loans, $80.0 million in deposits and recognized goodwill and intangible
assets of approximately $6.1 million related to the transaction. Financial Condition Total Assets Total assets increased $28.2 million, or 2.1%, to $1.4 billion at March 31, 2005 compared to $1.4
billion at December 31, 2004. The asset growth can be attributed to significant loan growth. Investment Securities Available-for-sale investment securities decreased $2.1 million, or 1.2%, from $172.6 million at
December 31, 2004, to $170.4 million at March 31, 2005. The investment security decline can be
attributed to maturities and principal pay downs. Loans Receivable Loans receivable, net of allowance for loan losses, increased $39.0 million from $1.0 billion at
December 31, 2004 to $1.1 billion at March 31, 2005. The growth in loans can be attributed to the
growth in commercial business loans, commercial real estate loans and multifamily mortgage loans
that were partially offset by the decrease in consumer and installment loans. Currently, loans
receivable consists mainly of commercial loans secured by business assets, real estate and
guarantees as well as mortgages secured by residential properties located in our primary market
areas. At March 31, 2005 we designated $1.0 million of loans as held for sale. 12




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##### Table of Contents



Total Deposits and Borrowings Total deposits increased $19.4 million, or 1.9%, from $1.0 billion on December 31, 2004 to $1.1
billion on March 31, 2005. The increase in deposits can be attributed to the growth in
certificates of deposit and commercial checking accounts currently offered by our subsidiary banks. Short-term borrowings totaled $63.2 million at March 31, 2005, compared to $61.3 million at
December 31, 2004, an increase of 3.1%. Short-term borrowings consist of federal funds borrowed
from correspondent banks, repurchase agreements and a holding company line of credit from our
primary correspondent bank. Long-term debt increased by $8.3 million, or 7.5%, from $111.1 million
on December 31, 2004 to $119.4 million on March 31, 2005. Long-term debt consists of Federal Home
Loan Bank advances and acquisition notes associated with the Reedsburg transaction. Subordinated Debentures totaled $46.4 million at both March 31, 2005 and December 31, 2004. We had
obligations represented by subordinated debentures at March 31, 2005 totaling $46.4 million with
our wholly-owned trusts that were created for the purpose of issuing trust preferred securities.
The subordinated debentures were the sole assets of the trusts at March 31, 2005. In accordance
with FIN 46, we began deconsolidating the wholly-owned trusts that issued the trust preferred
securities in 2004. As a result, these securities no longer are consolidated on our balance sheet.
Instead, the subordinated debentures held by the trusts are disclosed on the balance sheet as
subordinated debentures. Capital Resources Stockholders equity totaled $91.7 million at both March 31, 2005 and December 31, 2004. The
component changes in stockholders equity consist of net income of $1.8 million, a $1.2 million net
decrease in accumulated other comprehensive income, less payments of dividends to shareholders of
$661,000. We and our banks continue to exceed our regulatory capital requirements. Under the Federal Reserve Boards risk-based guidelines, capital is measured against our subsidiary
banks risk-weighted assets. Our tier 1 capital (common stockholders equity less goodwill) to
risk-weighted assets was 7.76% at March 31, 2005, above the 4.0% minimum required. Total capital
to risk-adjusted assets was 9.94%; also above the 8.0% minimum requirement. The leverage ratio was
at 6.59% compared to the 4.0% minimum requirement. According to FDIC capital guidelines, our
subsidiary banks are considered to be well capitalized as well. 13




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##### Table of Contents



Nonperforming Assets and Allowance for Losses Generally a loan is classified as nonaccrual and the accrual of interest on such loan is
discontinued when the contractual payment of principal or interest has become 90 days past due or
management has serious doubts about further collectibility of principal or interest. Generally,
loans are restored to accrual status when the obligation is brought current, has performed in
accordance with the contractual terms for a reasonable period of time and the ultimate
collectibility of the total contractual principal and interest is no longer in doubt. Nonperforming assets are summarized, for the dates indicated, as follows (dollars in thousands): March 31,
    
    
    December 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2004Non-accrual loans:Conventional single-family residential
    
    $
    897
    
    
    $
    726
    
    
    $
    700Commercial and multifamily residential
    
    
    2,867
    
    
    
    3,997
    
    
    
    2,218Commercial business loans
    
    
    1,143
    
    
    
    3,123
    
    
    
    669Consumer and installment loans
    
    
    840
    
    
    
    1,025
    
    
    
    842Total non-accrual loans
    
    
    5,747
    
    
    
    8,871
    
    
    
    4,429Other real estate owned
    
    
    1,306
    
    
    
    1,296
    
    
    
    2,130Total nonperforming assets
    
    $
    7,053
    
    
    $
    10,167
    
    
    $
    6,559Ratios:Non-accrual loans to total loans
    
    
    0.53
    %
    
    
    0.85
    %
    
    
    0.50
    %Nonperforming assets to total assets
    
    
    0.51
    %
    
    
    0.75
    %
    
    
    0.57
    %Loan loss allowance to non-accrual loans
    
    
    180.41
    %
    
    
    119.74
    %
    
    
    212.51
    %Loan loss allowance to total loans
    
    
    0.96
    %
    
    
    1.02
    %
    
    
    1.07
    %
 Nonperforming assets decreased by $3.1 million from $10.2 million at December 31, 2004 to $7.1
million at March 31, 2005, a decrease of 30.6%. We believe any losses on current non-accrual loans
balances will be negligible, due to the collateral position in each situation. However, additional
charge offs may occur upon sale of the other real estate. The following table presents changes in the allowance for loan losses (dollars in thousands): Three Months EndedMarch 31,2005
    
    
    2004Balance at beginning of period
    
    $
    10,622
    
    
    $
    9,135Provision for loan losses
    
    
    390
    
    
    
    450Charge-offs:Commercial and multifamily residential
    
    
    8
    
    
    
    95Commercial business loans
    
    
    623
    
    
    
    88Consumer and installment loans
    
    
    100
    
    
    
    79Total charge-offs
    
    
    731
    
    
    
    262Recoveries:Commercial and multifamily residential
    
    
    12
    
    
    
    2Commercial business loans
    
    
    20
    
    
    
    38Consumer and installment loans
    
    
    55
    
    
    
    49Total recoveries
    
    
    87
    
    
    
    89Net charge-offs
    
    
    644
    
    
    
    173Balance at March 31, 2005
    
    $
    10,368
    
    
    $
    9,412
 14




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##### Table of Contents



We believe 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 a materially different
financial condition or results of operations is a reasonable likelihood. We maintain our allowance for loan losses at a level that management believes will be adequate to
absorb probable losses on existing loans based on an evaluation of the collectibility of loans and
prior loss experience. We also use a risk rating system to evaluate the adequacy of the allowance
for loan losses. With this system, each loan is risk rated between one and ten by the originating
loan officer or loan committee, with one being the best case and ten being a loss or the worst
case. Historical loan loss reserve factors are multiplied against the balances for each loan type
to determine an appropriate level for the allowance for loan losses. Loans with risk ratings
between six and nine are monitored much closer by the officers. Control of our loan quality is
continually monitored by management and is reviewed by the Board of Directors. We consistently
apply our methodology for determining the adequacy of the allowance for loan losses, but may make
adjustments to its methodologies and assumptions based on historical information related to
charge-offs and managements evaluation of the current loan portfolio. The allowance for loan losses is based on estimates, and ultimate losses will vary from current
estimates. These estimates are reviewed quarterly, and as adjustments, either positive or
negative, become necessary, a corresponding increase or decrease is made in the provision for loan
losses. The methodology used to determine the adequacy of the allowance for loan losses for the
first three months of 2005 is consistent with prior periods. 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 Watch loans. As of March 31, 2005, loans classified as Special Mention,
Substandard, Doubtful and Loss loans totaled $45.2 million compared to $40.9 million as of December
31, 2004, an increase of $4.3 million or 10.5%. Management believes the quality of the loan
portfolio remains strong due to the collateral position of our classified loans. 15




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##### Table of Contents



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 losses 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 allowances may
become necessary. Comparison of Three Months Ended March 31, 2005 and 2004 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 as well being the most significant component of
earnings. Net interest income on a fully taxable-equivalent basis for the three months ended March
31, 2005 was $11.9 million, an increase of 18.2% from the $10.0 million reported for the same
period in 2004. The increase is due partly from revenue resulting from the acquisition Wisconsin
State Bank as well as the increase in loan and investment volume funded by an increase in deposits
and long-term borrowings. Our net interest margin on a fully taxable-equivalent basis was 3.85% and
3.84% for the first quarter of 2005 and 2004, respectively. The slowly rising interest rate
environment, the incremental effect of the acquisition as well as the increased amortization of
purchase accounting premiums associated with our acquisitions resulted in slightly higher margins.
The increase in market interest rates offset by an increase in premium amortization during the
first quarter caused the average rate on a fully taxable-equivalent basis earned on interest
earning assets to increase from 5.58% for the three months ended March 31, 2004 to 5.85% for the
three month period ended March 31, 2005. Similarly, the increase in market interest rates offset
by an increase in premium amortization during the first quarter caused the average rate on a fully
taxable-equivalent basis paid on interest bearing liabilities to increase from 1.93% for the three
months ended March 31, 2004 to 2.24% for the three month period ended March 31, 2005. 16




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##### Table of Contents



The following table presents, for the periods indicated, the total dollar amount of interest income
from average interest earning assets and the resultant yields, as well as the interest expense on
average interest bearing liabilities, and the resultant costs, expressed both in dollars and rates
(dollars in thousands): AVERAGE BALANCES, INTEREST RATES AND YIELDS For the Three Months Ended March 31,2005
    
    
    2004Average Balance
    
    
    Interest
    
    
    Average Rate
    
    
    Average Balance
    
    
    Interest
    
    
    Average RateAssetsLoans, net (1)(2)
    
    $
    1,047,163
    
    
    $
    15,750
    
    
    
    6.10
    %
    
    $
    860,888
    
    
    $
    12,770
    
    
    
    5.97
    %Loans exempt from federal income taxes (3)
    
    
    3,656
    
    
    
    68
    
    
    
    7.56
    %
    
    
    3,951
    
    
    
    74
    
    
    
    7.53
    %Taxable investment securities (4)
    
    
    33,423
    
    
    
    395
    
    
    
    4.79
    %
    
    
    46,250
    
    
    
    468
    
    
    
    4.07
    %Mortgage-related securities (4)
    
    
    92,991
    
    
    
    873
    
    
    
    3.81
    %
    
    
    79,965
    
    
    
    646
    
    
    
    3.25
    %Investment securities exempt from federal
income taxes (3)(4)
    
    
    64,865
    
    
    
    930
    
    
    
    5.82
    %
    
    
    43,907
    
    
    
    577
    
    
    
    5.29
    %Other securities
    
    
    10,505
    
    
    
    63
    
    
    
    2.43
    %
    
    
    17,172
    
    
    
    54
    
    
    
    1.26
    %Interest earning assets
    
    
    1,252,603
    
    
    
    18,079
    
    
    
    5.85
    %
    
    
    1,052,133
    
    
    
    14,589
    
    
    
    5.58
    %Non interest earning assets
    
    
    110,583
    
    
    
    
    
    
    
    
    
    
    
    92,455Average assets
    
    $
    1,363,186
    
    
    
    
    
    
    
    
    
    
    $
    1,144,588Liabilities and Stockholders EquityNOW deposits
    
    $
    94,709
    
    
    
    133
    
    
    
    0.57
    %
    
    $
    85,639
    
    
    
    105
    
    
    
    0.49
    %Money market deposits
    
    
    242,963
    
    
    
    788
    
    
    
    1.32
    %
    
    
    262,717
    
    
    
    731
    
    
    
    1.12
    %Savings deposits
    
    
    134,732
    
    
    
    297
    
    
    
    0.89
    %
    
    
    115,954
    
    
    
    235
    
    
    
    0.82
    %Time deposits
    
    
    424,842
    
    
    
    2,721
    
    
    
    2.61
    %
    
    
    333,274
    
    
    
    2,029
    
    
    
    2.45
    %Short-term borrowings
    
    
    62,510
    
    
    
    457
    
    
    
    2.96
    %
    
    
    36,890
    
    
    
    151
    
    
    
    1.65
    %Long-term borrowings
    
    
    117,045
    
    
    
    1,079
    
    
    
    3.74
    %
    
    
    78,233
    
    
    
    734
    
    
    
    3.77
    %Subordinated debentures
    
    
    46,394
    
    
    
    727
    
    
    
    6.36
    %
    
    
    35,000
    
    
    
    557
    
    
    
    6.40
    %Interest bearing liabilities
    
    
    1,123,195
    
    
    
    6,202
    
    
    
    2.24
    %
    
    
    947,707
    
    
    
    4,542
    
    
    
    1.93
    %Demand deposits and other non interest
bearing liabilities
    
    
    146,115
    
    
    
    
    
    
    
    
    
    
    
    115,795Stockholders equity
    
    
    93,876
    
    
    
    
    
    
    
    
    
    
    
    81,086Average liabilities and stockholders equity
    
    $
    1,363,186
    
    
    
    
    
    
    
    
    
    
    $
    1,144,588Net interest spread (5)
    
    
    
    
    
    $
    11,877
    
    
    
    3.61
    %
    
    
    
    
    
    $
    10,047
    
    
    
    3.65
    %Net interest earning assets
    
    $
    129,408
    
    
    
    
    
    
    
    
    
    
    $
    104,426Net interest margin on a fully tax
equivalent basis (6)
    
    
    
    
    
    
    
    
    
    
    3.85
    %
    
    
    
    
    
    
    
    
    
    
    3.84
    %Net interest margin (6)
    
    
    
    
    
    
    
    
    
    
    3.74
    %
    
    
    
    
    
    
    
    
    
    
    3.76
    %Ratio of average interest-earning assets to
average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    1.12
    
    
    
    
    
    
    
    
    
    
    
    1.11
   (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. 17




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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): VOLUME, RATE AND MIX ANALYSIS OF NET INTEREST INCOME Three Months Ended March 31, 2005Compared to March 31, 2004Change
    
    
    ChangeDue to
    
    
    Due to
    
    
    TotalVolume
    
    
    Rate
    
    
    ChangeInterest-Earning Assets:Loans, net (1)
    
    $
    2,700
    
    
    $
    280
    
    
    $
    2,980Loans exempt from federal income
taxes (2)
    
    
    (6
    )
    
    
    0
    
    
    
    (6
    )Taxable investment securities
    
    
    (203
    )
    
    
    130
    
    
    
    (73
    )Mortgage-related securities
    
    
    111
    
    
    
    116
    
    
    
    227Investment securities exempt from
federal income taxes (2)
    
    
    292
    
    
    
    61
    
    
    
    353Other securities
    
    
    (7
    )
    
    
    16
    
    
    
    9Total interest-earning assets
    
    $
    2,887
    
    
    $
    603
    
    
    $
    3,490Interest-Bearing Liabilities:NOW deposits
    
    $
    11
    
    
    $
    17
    
    
    $
    28Money market deposits
    
    
    (43
    )
    
    
    100
    
    
    
    57Savings deposits
    
    
    39
    
    
    
    23
    
    
    
    62Time deposits
    
    
    567
    
    
    
    125
    
    
    
    692Short-term borrowings
    
    
    142
    
    
    
    164
    
    
    
    306Long-term borrowings
    
    
    352
    
    
    
    (7
    )
    
    
    345Subordinated debentures
    
    
    174
    
    
    
    (4
    )
    
    
    170Total interest-bearing liabilities
    
    $
    1,242
    
    
    $
    418
    
    
    $
    1,660Net change in net interest income
    
    
    
    
    
    
    
    
    
    $
    1,830
   (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 For the three months ended March 31, 2005, the provision for loan losses was $390,000 compared to
$450,000 for the same period in 2004. We use a risk-based assessment of our loan portfolio to
determine the level of the loan loss allowance. This procedure is based on internal reviews
intended to determine the adequacy of the loan loss allowance in view of presently known factors.
However, changes in economic conditions in the future financial conditions of borrowers cannot be
predicted and may result in increased future provisions to the loan loss allowance. 18




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##### Table of Contents



Non-Interest Income Non-interest income for the three months ended March 31, 2005, was $4.1 million compared to $2.7
million for the three months ended March 31, 2004, an increase of $1.4 million, or 51.9%. All
categories of non-interest income are affected by the acquisition of Wisconsin State Bank. The
composition of non-interest income is shown in the following table (dollars in thousands). For the Three Months Ended March 31,2005
    
    
    2004Service charges on deposit accounts
    
    $
    953
    
    
    $
    725Service charges on loans
    
    
    725
    
    
    
    427Securities gains, net
    
    
    0
    
    
    
    177Gain on sale of loans, net
    
    
    103
    
    
    
    144Gain on sale of premises, net
    
    
    395
    
    
    
    0Tax fees, brokerage and insurance commissions
    
    
    565
    
    
    
    619Other
    
    
    1,352
    
    
    
    603Total non-interest income
    
    $
    4,093
    
    
    $
    2,695
 Service charges on deposit accounts for the three months ended March 31, 2005 was $953,000
compared to $725,000 for the three months ended March 31, 2004, an increase of $228,000, or 31.4%.
The increase in 2005 is the result of growth in deposit accounts, both internal and through
acquisition, fee structure modifications company wide and the acquisition of Wisconsin State Bank. Service charges on loans for the three months ended March 31, 2005 was $725,000 compared to
$427,000 for the three months ended March 31, 2004, an increase of $298,000, or 69.8%. The increase
is due directly to an increase in commercial loan fees, mortgage related servicing and fee income
and the acquisition of Wisconsin State Bank. We recorded no net gain on the sale of securities in the first quarter of 2005 compared to a gain
of $177,000 on the sale of $7.3 million of securities during the same period in 2004. Gains on the sale of loans were $103,000 for the three months ended March 31, 2005 compared to
$144,000 for the three months ended March 31, 2004. Slightly higher market interest rates led to
lower secondary market sales volume of 15 and 30 year residential mortgage loans in the first
quarter of 2005. Other fee income for the three month period ending March 31, 2005 included non-recurring fee income
of $490,000 related to the sale of Pulse EFT Association to Discover Financial Services as well as
additional income related to the acquisition of Wisconsin State Bank. 19




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##### Table of Contents



Non-Interest Expense Non-interest expense for the three months ended March 31, 2005 was $12.6 million compared to $10.1
million for the three months ended March 31, 2004, an increase of $2.5 million, or 24.7%. Generally
speaking, the increase in 2005 expenses are in part the result of the cost of implementing our
Vision Unlimited program throughout 2004 and the acquisition of Wisconsin State Bank. Vision
Unlimited is the company-wide project of standardizing policies and procedures across the
organization and as well as centralizing many operational functions. There were no non-recurring
costs associated with data processing conversions, system installations or Sarbanes-Oxley
implementation during the period ended March 31, 2004 or the similar period in 2005. For the Three Months Ended March 31,2005
    
    
    2004Salaries and employee benefits
    
    $
    7,247
    
    
    $
    5,860Premises and equipment
    
    
    1,870
    
    
    
    1,476Data processing fees
    
    
    847
    
    
    
    361Marketing and business development
    
    
    394
    
    
    
    334Federal deposit insurance premiums
    
    
    36
    
    
    
    41Other
    
    
    2,183
    
    
    
    2,010Total noninterest expense
    
    $
    12,577
    
    
    $
    10,082
 Salaries and employee benefits for the three months ended March 31, 2005 was $7.2 million
compared to $5.9 million for the three months ended March 31, 2004, an increase of $1.4 million, or
23.7%. The increase in salaries and benefits is due in part to including Wisconsin State Banks
2005 operating results. Also impacting salaries and employee benefits in the 2004 were additional
staff hires particularly in holding company management, marketing and information technology areas,
higher benefit costs, changes in personnel and normal pay raises. Premises and equipment expense for the three months ended March 31, 2005 was $1.9 million compared
to $1.5 million for the three months ended March 31, 2004, an increase of $394,000, or 26.7%.
Higher utility costs, building lease payments, depreciation, maintenance of our facilities and
acquisitions contributed to the increase. Data processing fees for the three months ended March 31, 2005 was $847,000 compared to $361,000
for the three months ended March 31, 2004, an increase of $486,000, or 134.6%. The increase was
due to our system wide conversion to a single data processing system corporate wide in between July
and October of 2004 as well as equipment and software upgrades. Marketing and business development expense for the three months ended March 31, 2005 was $394,000
compared to $334,000 for the three months ended March 31, 2004, an increase of $60,000, or 18.0%.
The increase was due increased donations and contributions and the inclusion of Wisconsin State
Banks marketing and business development expenses. Other expenses for the three months ended March 31, 2005 was $2.2 million compared to $2.0 million
for the three months ended March 31, 2004, an increase of $173,000, or 8.6%. The increase in 2005
other expenses is solely due the acquisition of Wisconsin State Bank. We are focused on
controlling expenses during 2005. 20




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##### Table of Contents



Income Taxes Income taxes for the three-month period ended March 31, 2005 was $861,000 compared to $582,000 for
the three months ended March 31, 2004, an increase of $279,000, or 47.9%. The effective tax rate
for the three months ended March 31, 2005 was 32.3% compared to 29.3% for the same period in 2004.
The increased tax rate is due to the fully taxed income nature of the non-recurring income
experienced during the period ended March 31, 2005. Net Income On an after tax basis, for the three month period ended March 31, 2005, we reported net income of
$1.8 million compared to $1.4 million for the same period in 2004, an increase of 28.1%. Liquidity Our cash flows are composed of three classifications: cash flows from operating activities, cash
flows from investing activities, and cash flows from financing activities. Net cash provided by
operating activities was $2.2 million for the three months ended March 31, 2005, compared to $1.6
million provided by operating activities in 2004, an increase of $689,000. Net cash used in
investing activities increased by $13.7 million, to $40.4 million for the three months ended March
31, 2005, from $26.7 million used in the same period in 2004. Net cash provided by financing
activities was $28.9 million for the three months ended March 31, 2005 compared to $12.7 million
provided by financing activities during the three-month period in 2004, an increase of $16.2
million. The Corporation expects to have available cash to meet its liquidity needs. Liquidity management
is monitored by the Asset/Liability Management committee, which takes into account the
marketability of assets, the sources and stability of funding and the level of unfunded
commitments. In the event that additional short-term liquidity is needed, the Banks have
established relationships with our correspondent banks to provide short-term borrowings in the form
of federal funds purchased. While there are no firm lending commitments in place, we believe that
the Banks could borrow $101.2 million for a short time from these banks on a collective basis. The
Banks are members of the Federal Home Loan Bank (FHLB) and each has the ability to borrow from the
FHLB. As a contingency plan for significant funding needs, the Asset/Liability Management
committee may also consider the sale of investment securities, selling securities under agreement
to repurchase or the temporary curtailment of lending activities. 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 falling interest rates, a negative gap
tends to positively affect net interest income while a positive gap tends to result in a decrease
in net interest income. During a period of rising interest rates, a positive gap tends to result
in an increase in net interest income while a negative gap tends to adversely affect net interest
income. 21




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##### Table of Contents



The following table shows the interest rate sensitivity gap for four different time intervals as of
March 31, 2005. Certain assumptions regarding prepayment and withdrawal rates made are based upon
the Corporations historical experience and management believes such assumptions are reasonable. Amounts Maturing or Repricing as of March 31, 2005Within
    
    
    Six to Twelve
    
    
    One to Five
    
    
    OverSix Months
    
    
    Months
    
    
    Years
    
    
    Five Years
    
    
    Total(Dollars in Thousands)Interest-earning assets:Fixed-rate mortgage loans
    
    $
    90,330
    
    
    $
    90,166
    
    
    $
    306,560
    
    
    $
    15,245
    
    
    $
    502,301Adjustable-rate mortgage loans
    
    
    196,073
    
    
    
    17,111
    
    
    
    20,486
    
    
    
    1,127
    
    
    
    234,797Total mortgage loans
    
    
    286,403
    
    
    
    107,277
    
    
    
    327,046
    
    
    
    16,372
    
    
    
    737,098Commercial business loans
    
    
    159,137
    
    
    
    28,484
    
    
    
    69,641
    
    
    
    2,912
    
    
    
    260,174Consumer loans
    
    
    16,217
    
    
    
    6,346
    
    
    
    21,997
    
    
    
    1,034
    
    
    
    45,594Home equity loans
    
    
    26,645
    
    
    
    2
    
    
    
    410
    
    
    
    21
    
    
    
    27,078Other loans
    
    
    4,264
    
    
    
    710
    
    
    
    1,528
    
    
    
    1,016
    
    
    
    7,518Mortgage-related securities
    
    
    8,345
    
    
    
    16,643
    
    
    
    51,844
    
    
    
    13,342
    
    
    
    90,174Fixed rate investment securities and other
    
    
    5,224
    
    
    
    2,949
    
    
    
    21,377
    
    
    
    50,713
    
    
    
    80,263Variable rate investment securities and other
    
    
    27,934
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    27,934Total interest-earning assets
    
    $
    534,169
    
    
    $
    162,411
    
    
    $
    493,843
    
    
    $
    85,410
    
    
    $
    1,275,833Interest-bearing liabilities:DepositsTime deposits
    
    $
    214,704
    
    
    $
    90,077
    
    
    $
    141,662
    
    
    $
    169
    
    
    $
    446,612NOW accounts
    
    
    5,878
    
    
    
    5,878
    
    
    
    58,780
    
    
    
    27,430
    
    
    
    97,966Savings accounts
    
    
    8,506
    
    
    
    8,628
    
    
    
    85,057
    
    
    
    39,693
    
    
    
    141,884Money market accounts
    
    
    27,160
    
    
    
    12,902
    
    
    
    129,020
    
    
    
    60,209
    
    
    
    229,291Short-term borrowings
    
    
    61,209
    
    
    
    2,010
    
    
    
    0
    
    
    
    0
    
    
    
    63,219Long-term borrowings
    
    
    15,190
    
    
    
    13,999
    
    
    
    86,051
    
    
    
    4,147
    
    
    
    119,387Subordinated debentures
    
    
    28,352
    
    
    
    0
    
    
    
    0
    
    
    
    18,042
    
    
    
    46,394Total interest-bearing liabilities
    
    $
    360,999
    
    
    $
    133,494
    
    
    $
    500,570
    
    
    $
    149,690
    
    
    $
    1,144,753Interest-earning assets less
interest-bearing liabilities
    
    $
    173,170
    
    
    $
    28,917
    
    
    
    ($6,727
    )
    
    
    ($64,280
    )
    
    $
    131,080Cumulative interest rate sensitivity gap
    
    $
    173,1701
    
    
    $
    202,087
    
    
    $
    195,360
    
    
    $
    131,080Cumulative interest rate sensitivity gap as a
percentage of total assets
    
    
    12.50
    %
    
    
    14.59
    %
    
    
    14.10
    %
    
    
    9.46
    %
 At March 31, 2005, the Corporations cumulative interest-rate sensitive gap as a percentage of
total assets was a positive 12.50% for six months and a positive 14.59% for one-year maturities.
Therefore, we are positively gapped at one year 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 may 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. 22




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##### Table of Contents



Forward-Looking Statements When used in this Quarterly Report on Form 10-Q and in other filings with the Securities and
Exchange Commission, in press releases or other public shareholder communications, or in oral
statements made with the approval of an authorized executive officer, the words or phrases
believe, will likely result, are expected to, will continue, is anticipated, estimate,
project, plans, or similar expressions are intended to identify forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. You are cautioned not
to place undue reliance on any forward-looking statements, which speak only as of the date made.
These statements may relate to our future financial performance, strategic plans or objectives,
revenues or earnings projections, or other financial items. By their nature, these statements are
subject to numerous uncertainties that could cause actual results to differ materially from those
anticipated in the statements. 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) the credit risks of lending
activities, including changes in the level and direction of loan delinquencies and write  offs;
(2) changes in managements estimate of the adequacy of the allowance for loan losses; (3)
competitive pressures among depository institutions; (4) interest rate movements and their impact
on customer behavior and our net interest margin; (5) the impact of repricing and competitors
pricing initiatives on loan and deposit products; (6) our ability to adapt successfully to
technological changes to meet customers needs and developments in the market place; (7) our
ability to access cost-effective funding; (8) changes in financial markets and general economic
conditions; (9) new legislation or regulatory changes; and (10) changes in accounting principles,
policies or guidelines. We do not undertake any obligation to update any forward-looking statement to reflect circumstances
or events that occur after the date on which the forward-looking statement is made. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk The Corporation has not experienced any material changes to its market risk position since December
31, 2004, from that disclosed in the Corporations 2004 Form 10-K Annual Report. 23




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##### Table of Contents



Item 4. Controls and Procedures As of the end of the period covered by this report, the Corporations Chairman of the Board and
Chief Executive Officer and the Corporations Chief Financial Officer carried out an evaluation,
with the participation of other members of management as they deemed appropriate, of the
effectiveness of the design and operation of the Corporations disclosure controls and procedures
as contemplated by Exchange Act Rule 13a-15. Based upon, and as of the date of that evaluation,
the Chairman of the Board and Chief Executive Officer and the Chief Financial Officer concluded
that the Corporations disclosure controls and procedures are effective, in all material respects,
in timely alerting them to material information relating to the Corporation (and its consolidated
subsidiaries) required to be included in the periodic reports the Corporation is required to file
and submit to the SEC under the Exchange Act. 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 Chief 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. There was no change in the Corporations internal control over financial reporting 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. 24




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##### Table of Contents



Part II. Other Information 
 Item 1.          Legal Proceedings As of March 31, 2005 there were no material pending legal
proceedings, other than ordinary routine litigation incidental to
the business of the Corporation, to which the Corporation or any
of its subsidiaries was a party or to which any of their property
was subject. Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds  NONEItem 3.
    
    Defaults upon Senior Securities  NONEItem 4
    
    Submission of Matters to Vote of Security Holders  NONEItem 5
    
    Other Information  NONEItem 6.
    
    Exhibits
 The following exhibits are filed as part of this report: EXHIBIT 31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by the Chief Executive OfficerEXHIBIT 31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by the Chief Financial OfficerEXHIBIT 32.1*
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 by the Chief Executive OfficerEXHIBIT 32.2*
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 by the Chief Financial Officer
   *
    
    These certifications are 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. 25




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MERCHANTS AND MANUFACTURERS
BANCORPORATION, INC.
(Registrant)Date       May 06, 2005.
    /s/ Michael J. MurryMichael J. MurryChairman of the Board of Directors
and Chief Executive Officer
Principal Executive Officer Date       May 06 , 2005.
    /s/ Frederick R. KlugFrederick R. KlugExecutive Vice President & Chief
Financial Officer
Principal Financial Officer 26




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##### Table of Contents



10-Q EXHIBIT LIST EXHIBIT NO.
    
    DESCRIPTIONEXHIBIT 31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by the Chief Executive OfficerEXHIBIT 31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by the Chief Financial OfficerEXHIBIT 32.1*
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 by the Chief Executive OfficerEXHIBIT 32.2*
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 by the Chief Financial Officer
   *
    
    These certifications are 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.