UNITED STATES 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

For the quarterly period ended June 30, 2005


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.

(Exact name of registrant as specified in its charter)


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

(Address of principal executive office)

(262) 827-6700

Registrant’s telephone number, including area code:

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 August 1, 2005, 3,700,545 shares of Common Stock were outstanding.

MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.

FORM 10-Q

INDEX


	Page Number
Part I. Financial Information

Item 1. Financial Statements

Unaudited Consolidated Statements of Financial Condition as of June 30, 2005, December 31, 2004, and June 30, 2004		3

Unaudited Consolidated Statements of Income for the Three Months and Six Months ended June 30, 2005 and June 30, 2004		4

Unaudited Consolidated Statements of Cash Flows for the Six Months ended June 30, 2005 and June 30, 2004		5

Notes to Unaudited Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12

Item 3. Quantitative and Qualitative Disclosures About Market Risk		25

Item 4. Controls and Procedures		25

Part II. Other Information

Items 1-6		26

Signatures		28
Certification
Certification
Certification
Certification

Part I. Financial Information

Merchants and Manufacturers Bancorporation, Inc.

Unaudited Consolidated Statements of Financial Condition


	June 30,			December 31,			June 30,
	2005			2004			2004
	(Dollars in Thousands, Except Share and Per Share Amounts)
ASSETS
Cash and due from banks	$	31,778		$	33,839		$	25,040
Interest bearing deposits in banks		1,328			1,178			1,578
Federal funds sold		970			9,253			1,181

Cash and cash equivalents		34,076			44,270			27,799
Available-for-sale securities		172,948			172,564			157,434
Loans, less allowance for loan losses of $10,381 at June 30, 2005, $10,622 at December 31, 2004 and $9,716 at June 30, 2004		1,099,854			1,028,059			894,686
Accrued interest receivable		6,251			5,419			4,639
FHLB stock		20,118			19,649			16,928
Premises and equipment		30,876			30,355			22,063
Goodwill and intangible assets		35,530			35,714			29,975
Other assets		21,343			21,035			22,358

Total assets	$	1,420,996		$	1,357,065		$	1,175,882


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits:
Non-interest bearing	$	138,244		$	148,482		$	115,187
Interest bearing		932,221			884,564			803,622

Total deposits		1,070,465			1,033,046			918,809
Short-term borrowings		71,162			61,322			34,065
Long-term borrowings		123,926			111,054			96,728
Junior subordinated debt owed to unconsolidated trusts		46,394			46,394			36,084
Accrued interest payable		2,654			1,944			1,575
Other liabilities		12,044			11,566			8,647

Total liabilities		1,326,645			1,265,326			1,095,908

Stockholders’ equity
Preferred 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; shares issued: 3,770,251 at June 30, 2005 and December 31, 2004, 3,436,036 at June 30, 2004; shares outstanding: 3,699,253 at June 30, 2005, 3,674,054 at December 31, 2004 and 3,335,930 at June 30, 2004		3,770			3,770			3,436
Additional paid-in capital		53,594			53,421			43,615
Retained earnings		38,605			36,486			36,685
Accumulated other comprehensive income (loss)		159			505			(1,211	)
Treasury stock, at cost (70,998 shares at June 30, 2005, 96,197 shares at December 31, 2004 and 100,106 shares at June 30, 2004)		(1,777	)		(2,443	)		(2,551	)

Total stockholders’ equity		94,351			91,739			79,974

Total liabilities and stockholders’ equity	$	1,420,996		$	1,357,065		$	1,175,882

See notes to unaudited consolidated financial statements.

Merchants and Manufacturers Bancorporation, Inc.

Unaudited Consolidated Statements of Income


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
	(Dollars In Thousands, Except Per Share Amounts)
Interest income:
Interest and fees on loans	$	17,016	$	12,937	$	32,812	$	25,756
Interest and dividends on securities:
Taxable		425		436		825		904
Tax-exempt		561		390		1,173		771
Interest on mortgage-backed securities		893		769		1,766		1,415
Interest on interest bearing deposits in banks and federal funds sold		36		44		74		98

Total interest income		18,931		14,576		36,650		28,944

Interest expense:
Interest on deposits		4,605		3,016		8,522		6,116
Interest on short-term borrowings		572		145		1,029		296
Interest on long-term borrowings		1,165		787		2,245		1,521
Interest on junior subordinated debt owed to unconsolidated trusts		773		555		1,500		1,112

Total interest expense		7,115		4,503		13,296		9,045

Net interest income		11,816		10,073		23,354		19,899
Provision for loan losses		390		451		780		901

Net interest income after provision for loan losses		11,426		9,622		22,574		18,998

Non-interest income:
Service charges on deposit accounts		1,036		784		1,989		1,509
Service charges on loans		949		354		1,674		781
Securities gains, net		—		6		—		183
Gain on sale of loans, net		96		150		199		294
Gain on sale of fixed assets, net		—		158		395		158
Tax fees, brokerage and insurance commissions		475		380		1,040		999
Other		876		822		2,228		1,425

Total noninterest income		3,432		2,654		7,525		5,349

Noninterest expenses:
Salaries and employee benefits		6,971		5,767		14,218		11,627
Premises and equipment		1,807		1,352		3,677		2,828
Data processing fees		884		400		1,731		761
Marketing and business development		657		574		1,051		908
Sarbanes-Oxley implementation		—		67		—		67
Other		2,106		1,981		4,325		4,032

Total noninterest expense		12,425		10,141		25,002		20,223

Income before income taxes		2,433		2,135		5,097		4,124
Income taxes		794		663		1,655		1,245

Net income	$	1,639	$	1,472	$	3,442	$	2,879


Basic earnings per share	$	0.45	$	0.44	$	0.94	$	0.86


Diluted earnings per share	$	0.44	$	0.44	$	0.93	$	0.86


Dividends per share	$	0.18	$	0.18	$	0.36	$	0.36

See notes to unaudited consolidated financial statements.

Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries

Unaudited Consolidated Statements of Cash Flows


	Six Months Ended June 30,
	2005			2004
	(Dollars in Thousands)
Cash Flows From Operating Activities
Net income	$	3,442		$	2,879
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan losses		780			901
Depreciation		1,394			929
Amortization and accretion of premiums and discounts, net		364			492
Securities gains, net		—			(183	)
Gain on sale of loans, net		(199	)		(294	)
Gain on sale of fixed assets, net		(395	)		(158	)
Increase in accrued interest receivable		(832	)		(218	)
Increase in accrued interest payable		710			158
Other		1,502			354

Net cash provided by operating activities before loan originations and sales		6,766			4,860
Loans originated for sale		(20,764	)		(40,942	)
Proceeds from sales of loans		21,772			39,547

Net cash provided by operating activities		7,774			3,465

Cash Flows From Investing Activities
Purchase of available-for-sale securities		(28,721	)		(63,838	)
Proceeds from sales of available-for-sale securities		26			10,032
Proceeds from redemptions and maturities of available-for-sale securities		26,628			49,786
Net increase in loans		(73,559	)		(46,514	)
Purchase of premises and equipment, net		(1,520	)		(2,401	)
Purchase of Federal Home Loan Bank stock		(469	)		(683	)

Net cash used in investing activities		(77,615	)		(53,618	)

Cash Flows From Financing Activities
Net increase in deposits		37,419			6,861
Dividends paid		(1,323	)		(1,200	)
Net increase in short-term borrowings		9,840			58
Proceeds from long-term borrowings		44,386			42,941
Repayment of long-term borrowings		(31,514	)		(18,559	)
Proceeds from sale of treasury stock		839			196

Net cash provided by financing activities		59,647			30,297

Decrease in cash and cash equivalents		(10,194	)		(19,856	)
Cash and cash equivalents at beginning of period		44,270			47,655

Cash and cash equivalents at end of period	$	34,076		$	27,799


Supplemental Cash Flow Information and Noncash Transactions:
Interest paid	$	12,586		$	8,887
Income taxes paid		490			2,149
Loans transferred to other real estate owned		175			554

Supplemental Schedules of Noncash Investing Activities:
Change in accumulated other comprehensive income, unrealized (losses) on available-for-sale securities, net	$	(346	)	$	(1,874	)

See notes to unaudited consolidated financial statements

Merchants and Manufacturers Bancorporation, Inc.

Notes to Unaudited Consolidated Financial Statements

June 30, 2005

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 Financial 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 Financial Services, Inc. also includes the accounts of its wholly owned subsidiaries Community Financial Services, LLC (CFS) 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 and six-month periods ended June 30, 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.

NOTE B — Earnings Per Share

Presented below are the calculations for basic and diluted earnings per share:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
	(Dollars in Thousands, Except Per Share Data)
Basic:
Net income	$	1,639	$	1,472	$	3,442	$	2,879
Weighted average shares outstanding		3,676		3,336		3,675		3,334
Basic earnings per share	$	0.45	$	0.44	$	0.94	$	0.86


	(Dollars in Thousands, Except Per Share Data)
Diluted:
Net income	$	1,639	$	1,472	$	3,442	$	2,879
Weighted average shares outstanding		3,676		3,336		3,675		3,334
Effect of dilutive stock options outstanding		13		23		11		30

Diluted weighted average shares outstanding		3,689		3,359		3,686		3,364
Diluted earnings per share	$	0.44	$	0.44	$	0.93	$	0.86

NOTE C — Comprehensive Income

The following table presents our comprehensive income.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
				(Dollars in Thousands)
Net income	$	1,639		$	1,472		$	3,442		$	2,879
Other comprehensive income
Change in unrealized securities gains (losses)		2,271			(6,644	)		(535	)		(3,084	)
Reclassification adjustment for gains included in net income		—			6			—			183
Income tax effect		(793	)		2,317			189			1,027

Total comprehensive income (loss)	$	3,117		$	(2,849	)	$	3,095		$	1,005

NOTE D — Loans Receivable

The following table shows the composition of our loan portfolio on the dates indicated:


	June 30,		December 31,		June 30,
	2005		2004		2004
			(Dollars in Thousands)
First Mortgage:
Conventional single-family residential	$	156,313	$	142,926	$	114,011
Commercial and multifamily residential		471,694		436,612		387,459
Construction		80,150		76,267		58,722
Farmland		55,863		55,710		49,120

		764,020		711,515		609,312


Commercial business loans		262,653		240,575		225,680
Consumer and installment loans		48,263		49,136		46,737
Home equity loans		27,620		26,592		17,656
Other		7,679		10,863		5,017

		346,215		327,166		295,090

Total loans		1,110,235		1,038,681		904,402

Less allowance for loan losses		10,381		10,622		9,716

Loans, net	$	1,099,854	$	1,028,059	$	894,686

NOTE E — Stock-Based Compensation Plan

At June 30, 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 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 Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
			(Dollars in Thousands, Except Per Share Data)
Net income, as reported	$	1,639	$	1,472	$	3,442	$	2,879
Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		—		—		6		334

Pro forma net income	$	1,639	$	1,472	$	3,436	$	2,545


Earnings per share:
Basic:
As reported	$	0.45	$	0.44	$	0.94	$	0.86
Pro forma	$	0.45	$	0.44	$	0.93	$	0.76
Diluted:
As reported	$	0.44	$	0.44	$	0.93	$	0.86
Pro forma	$	0.44	$	0.44	$	0.93	$	0.76

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 June 30, 2005: dividend yield of 1.89%; expected price volatility of 21.83%; blended risk-free interest rates of 4.50%; and expected life of 9.50 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 as of January 1, 2005 and would potentially effect the accounting treatment of future acquisitions.

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 Corporation 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.

On April 14, 2005, the Securities and Exchange Commission (“SEC”) adopted a new rule that amends the compliance dates for FAS 123(R), Share-Based Payment. Under the new rule, the Corporation is required to adopt FAS 123(R) beginning January 1, 2006. The Corporation has not yet determined the method of adoption or the effect of adopting FAS 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.

As of the effective date, the Corporation will have the option of applying the Statement using a modified prospective application or a modified retrospective application. Under the prospective method compensation cost would be recognized for (1) all awards granted after the required effective date and for awards modified, cancelled, or repurchased after that date and (2) the portion of prior awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated for pro forma disclosures under SFAS 123. Under the retrospective application method compensation cost would be recognized as in (1) above and (2) for prior periods would be restated consistent with the pro forma disclosures required for those periods by SFAS 123. The Corporation has not yet made a decision on which method of application it will elect.

In May 2005, the FASB issued FASB Statement No. 154, Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3 (“FAS 154”). FAS 154 replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting and reporting of a change in accounting principle. FAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. For the Corporation this Statement is effective for calendar year 2006 and early adoption, although permitted, is not planned. No significant impact is expected on the consolidated financial statements at the time of adoption.

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.

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 June 30, 2005, December 31, 2004 and June 30, 2004, are as follows:


	June 30,		December 31,		June 30,
	2005		2004		2004
			(Dollars in Thousands)
Commitments to originate mortgage loans	$	24,345	$	20,104	$	45,513

Unused lines of credit:
Commercial business		162,552		144,647		105,559
Home equity		26,728		21,935		15,570
Credit cards		16,264		18,865		16,861

Standby letters of credit		15,109		12,574		11,025

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 June 30, 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.

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

Overview

The Corporation had net income of $1.6 million, or $0.44 per diluted share, for the three months ended June 30, 2005 compared to $1.5 million, or $0.44 per diluted share, for the three months ended June 30, 2004, representing an 11.4% increase in net income. For the six months ended June 30, 2005, the Corporation had net income of $3.4 million, or $0.93 per diluted share, compared to $2.9 million, or $0.86 per diluted share, for the six months ended June 30, 2004, representing a 19.6% increase in net income and an 8.1% increase in diluted earnings per share. The increase in net income for the current quarter and year-to-date compared to the prior year periods is attributed to strong balance sheet growth, strength in our core banking business and increased operating efficiencies. The six months ended June 30, 2005 also includes a one-time gain on the sale of fixed assets of $395,000.

The quarter-to-quarter and year-to-year 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 $63.9 million, or 4.7%, to $1.42 billion at June 30, 2005 compared to $1.36 billion at December 31, 2004. The asset growth can be attributed to significant internal loan growth.

Investment Securities

Available-for-sale investment securities increased $384,000, or 0.2%, from $172.6 million at December 31, 2004, to $172.9 million at June 30, 2005. The investment securities increase is due to purchases partially offset by maturities and principal pay downs.

Loans Receivable

Loans receivable, net of allowance for loan losses, increased $71.8 million from $1.0 billion at December 31, 2004 to $1.1 billion at June 30, 2005. The growth in loans can be attributed to the growth in commercial business loans, commercial real estate loans, single-family residential 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 June 30, 2005 we designated $1.2 million of loans as held for sale.

Total Deposits and Borrowings

Total deposits increased $37.4 million, or 3.6%, from $1.0 billion on December 31, 2004 to $1.1 billion on June 30, 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 $71.2 million at June 30, 2005, compared to $61.3 million at December 31, 2004, an increase of 16.0%. 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 $12.9 million, or 11.6%, from $111.1 million on December 31, 2004 to $123.9 million on June 30, 2005. Long-term debt consists of Federal Home Loan Bank advances and acquisition notes associated with the Reedsburg transaction. The increase in borrowings reflects strong loan growth that was only partially funded by an increase in total deposits.

Junior subordinated debt owed to unconsolidated trusts totaled $46.4 million at both June 30, 2005 and December 31, 2004. We had obligations represented by subordinated debentures at June 30, 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 June 30, 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 junior subordinated debt owed to unconsolidated trusts.

Capital Resources

Stockholders’ equity totaled $94.4 million at June 30, 2005 compared to $91.7 million at December 31, 2004. The component changes in stockholders’ equity consist of net income of $3.4 million, a net decrease of $346,000 in accumulated other comprehensive income, sale of treasury stock of $839,000, less payments of dividends to shareholders of $1.3 million. 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 to risk-weighted assets was 7.71% at June 30, 2005, above the 4.0% minimum required. Total capital to risk-adjusted assets was 9.77%; also above the 8.0% minimum requirement. The leverage ratio was at 6.58% compared to the 4.0% minimum requirement. According to FDIC capital guidelines, our subsidiary banks are considered to be “well capitalized” as well.

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:


	June 30,			December 31,			June 30,
	2005			2004			2004
	(Dollars in Thousands)
Non-accrual loans:
Conventional single-family residential	$	1,126		$	726		$	642
Commercial and multifamily residential		2,921			3,997			2,302
Commercial business loans		1,383			3,123			588
Consumer and installment loans		791			1,025			1,167

Total non-accrual loans		6,221			8,871			4,699

Other real estate owned		1,471			1,296			1,907

Total nonperforming assets	$	7,692		$	10,167		$	6,606


Ratios:
Non-accrual loans to total loans		0.56	%		0.85	%		0.52	%
Nonperforming assets to total assets		0.54	%		0.75	%		0.56	%
Loan loss allowance to non-accrual loans		166.87	%		119.74	%		206.77	%
Loan loss allowance to total loans		0.94	%		1.02	%		1.07	%

Nonperforming assets decreased by $2.5 million from $10.2 million at December 31, 2004 to $7.7 million at June 30, 2005, a decrease of 24.3%. The decrease in non-accrual assets is due to the completion of loan renewal documents as well as pay downs on loans from other banking institutions. We believe any losses on current non-accrual loan 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:


	Three Months Ended				Six Months Ended
	June 30, 2005		June 30, 2004		June 30, 2005		June 30, 2004
			(Dollars in Thousands)
Balance at beginning of period	$	10,368	$	9,462	$	10,623	$	9,136
Provision for loan losses		390		451		780		901
Charge-offs:
Commercial and multifamily residential		19		37		27		95
Commercial business loans		184		109		807		197
Consumer and installment loans		246		129		347		183

Total charge-offs		449		275		1,181		475


Recoveries:
Commercial and multifamily residential		3		2		15		2
Commercial business loans		27		31		47		69
Consumer and installment loans		42		45		97		83

Total recoveries		72		78		159		154


Net charge-offs		377		197		1,022		321


Balance at end of period	$	10,381	$	9,716	$	10,381	$	9,716

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 six 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 June 30, 2005, loans classified as Special Mention, Substandard, Doubtful and Loss loans totaled $47.9 million compared to $40.9 million as of December 31, 2004, an increase of $7.0 million or 17.0%. Management believes the quality of the loan portfolio remains strong due to the collateral position of our classified loans.

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 and Six Months Ended June 30, 2005 and 2004

Net Income

Net income for the three months ended June 30, 2005 was $1.6 million, or $0.44 per diluted share, compared to $1.5 million, or $0.44 per diluted share, for the three months ended June 30, 2004, representing an 11.4% increase in net income. Net income for the six months ended June 30, 2005 was $3.4 million, or $0.93 per diluted share, compared to $2.9 million, or $0.86 per diluted share, for the same period in the prior year, representing a 19.6% increase in net income and an 8.1% increase in diluted earnings per share.

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 as being the most significant component of earnings. Net interest income on a fully taxable-equivalent basis for the three months ended June 30, 2005 was $12.1 million, an increase of 20.0% from the $10.1 million reported for the same period in 2004, and for the six months ended June 30, 2005 was $24.0 million, an increase of 20.3% from the $20.0 million reported for the same period in 2004. The increase is due partly from revenue resulting from the acquisition of Wisconsin State Bank as well as the increase in loan volume funded by an increase in deposits and short and long-term borrowings. Our net interest margin on a fully taxable-equivalent basis was 3.78% for both three month periods ended June 30, 2005 and 2004, and 3.81% and 3.77% for the six month periods ended June 30, 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 during the current year caused the average rate on a fully taxable-equivalent basis earned on interest earning assets to increase from 5.46% for the three months ended June 30, 2004 to 5.99% for the three months ended June 30, 2005, and from 5.48% for the six months ended June 30, 2004, to 5.92% for the six months ended June 30, 2005. Similarly, the increase in market interest rates offset by an increase in premium amortization during the current year caused the average rate on a fully taxable-equivalent basis paid on interest bearing liabilities to increase to 2.46% and 2.35% for the three and six months ended June 30, 2005, respectively, compared to 1.88% and 1.90% for the same periods in the prior year.

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:

AVERAGE BALANCES, INTEREST RATES AND YIELDS


	For the Three Months Ended June 30,
	2005							2004
	Average				Average			Average				Average
	Balance		Interest		Rate			Balance		Interest		Rate
	(Dollars in thousands)
Assets
Loans, net (1)(2)	$	1,089,378	$	16,975		6.25	%	$	886,342	$	12,883		5.85	%
Loans exempt from federal income taxes (3)		3,416		62		7.29	%		4,418		82		7.46	%
Taxable investment securities (4)		35,516		425		4.80	%		40,475		436		4.33	%
Mortgage-related securities (4)		89,817		893		3.99	%		92,360		769		3.35	%
Investment securities exempt from federal income taxes (3)(4)		63,669		850		5.35	%		42,760		390		3.67	%
Other securities		6,041		36		2.39	%		9,087		44		1.95	%

Interest earning assets		1,287,837		19,241		5.99	%		1,075,442		14,604		5.46	%

Non interest earning assets		126,142							94,594

Average assets	$	1,413,979						$	1,170,036


Liabilities and Stockholders’ Equity
NOW deposits	$	98,075		141		0.58	%	$	87,049		101		0.47	%
Money market deposits		224,590		836		1.49	%		255,746		671		1.06	%
Savings deposits		137,065		306		0.90	%		124,592		261		0.84	%
Time deposits		460,864		3,322		2.89	%		336,471		1,983		2.37	%
Short-term borrowings		72,193		572		3.18	%		35,039		145		1.66	%
Long-term borrowings		118,865		1,165		3.93	%		88,850		787		3.56	%
Junior subordinated debt owed to unconsolidated trusts		46,394		773		6.68	%		36,084		555		6.19	%

Interest bearing liabilities		1,158,046		7,115		2.46	%		963,831		4,503		1.88	%

Demand deposits and other non interest bearing liabilities		162,410							124,853
Stockholders’ equity		93,523							81,352

Average liabilities and stockholders’ equity	$	1,413,979						$	1,170,036

Net interest spread (5)			$	12,126		3.53	%			$	10,101		3.58	%
Net interest earning assets	$	129,791						$	111,611
Net interest margin on a fully tax equivalent basis (6)						3.78	%						3.78	%
Net interest margin (6)						3.68	%						3.77	%
Ratio of average interest-earning assets to average interest-bearing liabilities						1.11							1.12


(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.

AVERAGE BALANCES, INTEREST RATES AND YIELDS


	For the Six Months Ended June 30,
	2005							2004
	Average				Average			Average				Average
	Balance		Interest		Rate			Balance		Interest		Rate
	(Dollars in thousands)
Assets
Loans, net (1)(2)	$	1,068,354	$	32,727		6.18	%	$	873,615	$	25,653		5.91	%
Loans exempt from federal income taxes (3)		3,535		129		7.35	%		4,184		156		7.50	%
Taxable investment securities (4)		34,720		825		4.79	%		43,361		904		4.19	%
Mortgage-related securities (4)		92,383		1,766		3.85	%		86,162		1,415		3.30	%
Investment securities exempt from federal income taxes (3)(4)		63,961		1,777		5.60	%		43,333		771		3.58	%
Other securities		8,260		74		1.81	%		13,130		98		1.50	%

Interest earning assets		1,271,213		37,298		5.92	%		1,063,785		28,997		5.48	%

Non interest earning assets		122,015							93,919

Average assets	$	1,393,228						$	1,157,704


Liabilities and Stockholders’ Equity
NOW deposits	$	97,448		274		0.57	%	$	86,344		206		0.48	%
Money market deposits		232,679		1,624		1.41	%		259,231		1,403		1.09	%
Savings deposits		135,667		603		0.90	%		120,190		495		0.83	%
Time deposits		443,042		6,021		2.74	%		334,958		4,012		2.41	%
Short-term borrowings		67,429		1,029		3.08	%		35,964		296		1.66	%
Long-term borrowings		117,909		2.245		3.84	%		83,541		1,521		3.66	%
Junior subordinated debt owed to unconsolidated trusts		46,394		1,500		6.52	%		36,084		1,112		6.20	%

Interest bearing liabilities		1,140,568		13,296		2.35	%		956,312		9,045		1.90	%

Demand deposits and other non interest bearing liabilities		159,471							120,173
Stockholders’ equity		93,189							81,219

Average liabilities and stockholders’ equity	$	1,393,228						$	1,157,704

Net interest spread (5)			$	24,002		3.57	%			$	19,952		3.58	%
Net interest earning assets	$	130,645						$	107,473
Net interest margin on a fully tax equivalent basis (6)						3.81	%						3.77	%
Net interest margin (6)						3.70	%						3.76	%
Ratio of average interest-earning assets to average interest-bearing liabilities						1.11							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.

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.

VOLUME, RATE AND MIX ANALYSIS OF NET INTEREST INCOME


	Three Months Ended June 30, 2005									Six Months Ended June 30, 2005
	Compared to June 30, 2004									Compared to June 30, 2004
	Change			Change						Change			Change
	Due to			Due to			Total			Due to			Due to			Total
	Volume			Rate			Change			Volume			Rate			Change
							(Dollars in Thousands)
Interest-Earning Assets:
Loans, net (1)	$	3,143		$	949		$	4,092		$	5,861		$	1,213		$	7,074
Loans exempt from federal income taxes (2)		(18	)		(2	)		(20	)		(24	)		(3	)		(27	)
Taxable investment securities		(92	)		81			(11	)		(279	)		200			(79	)
Mortgage-related securities		(21	)		145			124			106			245			351
Investment securities exempt from federal income taxes (2)		237			223			460			459			547			1,006
Other securities		(25	)		17			(8	)		(53	)		29			(24	)

Total interest-earning assets	$	3,224		$	1,413		$	4,637		$	6,070		$	2,231		$	8,301

Interest-Bearing Liabilities:
NOW deposits	$	14		$	26		$	40		$	28		$	40		$	68
Money market deposits		(69	)		234			165			(119	)		340			221
Savings deposits		28			17			45			66			42			108
Time deposits		840			499			1,339			1,408			601			2,009
Short-term borrowings		230			197			427			370			363			733
Long-term borrowings		289			89			378			647			77			724
Junior subordinated debt owed to unconsolidated trusts		170			48			218			328			60			388

Total interest-bearing liabilities	$	1,502		$	1,110		$	2,612		$	2,728		$	1,523		$	4,251

Net change in net interest income							$	2,025								$	4,050


(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 June 30, 2005, the provision for loan losses was $390,000 compared to $451,000 for the same period in 2004. For the six months ended June 30, 2005, the provision for loan losses was $780,000 compared to $901,000 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.

Non-Interest Income

Non-interest income for the three months ended June 30, 2005 was $3.4 million compared to $2.7 million for the three months ended June 30, 2004, an increase of $778,000, or 29.3%. Non-interest income for the six months ended June 30, 2005 was $7.5 million compared to $5.3 million for the same period in 2004, an increase of $2.2 million, or 40.7%. 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.


	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
			(Dollars in Thousands)
Service charges on deposit accounts	$	1,036	$	784	$	1,989	$	1,509
Service charges on loans		949		354		1,674		781
Securities gains, net		—		6		—		183
Gain on sale of loans, net		96		150		199		294
Gain on sale of fixed assets, net		—		158		395		158
Tax fees, brokerage and insurance commissions		475		380		1,040		999
Other		876		822		2,228		1,425

Total non-interest income	$	3,432	$	2,654	$	7,525	$	5,349

Service charges on deposit accounts for the three months ended June 30, 2005 was $1.0 million compared to $784,000 for the three months ended June 30, 2004, an increase of $252,000, or 32.1%. Service charges on deposit accounts for the six months ended June 30, 2005 was $2.0 million compared to $1.5 million for the six months ended June 30, 2004, an increase of $480,000, or 31.8%. 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 June 30, 2005 was $949,000 compared to $354,000 for the three months ended June 30, 2004, an increase of $595,000, or 168.1%. Service charges on loans for the six months ended June 30, 2005 was $1.7 million compared to $781,000 for the six months ended June 30, 2004, an increase of $893,000, or 114.3%. 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 a net gain on the sale of securities of zero for the three and six months ended June 30, 2005 compared to a gain of $6,000 on the sale of $2.8 million of securities and a gain of $183,000 on the sale of $10.0 million of securities during the same periods in 2004.

Gains on the sale of loans were $96,000 and $199,000 for the three and six months ended June 30, 2005, respectively, compared to $150,000 and $294,000 for the three and six months ended June 30, 2004. Slightly higher market interest rates led to lower secondary market sales volume of 15 and 30 year residential mortgage loans in 2005 compared to 2004.

Tax fees and brokerage and insurance commissions were $475,000 and $1.0 million for the three and six months ended June 30, 2005, respectively, compared to $380,000 and $999,000 for the three and six months ended June 30, 2004.

Other fee income for the three and six month periods ending June 30, 2005 included non-recurring fee income of $50,000 and $540,000, respectively, 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.

Non-Interest Expense

Non-interest expense for the three months ended June 30, 2005 was $12.4 million compared to $10.1 million for the three months ended June 30, 2004, an increase of $2.3 million, or 22.5%. Non-interest expense for the six months ended June 30, 2005 was $25.0 million compared to $20.2 million for the six months ended June 30, 2004, an increase of $4.8 million, or 23.6%. 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 or system installations during the period ended June 30, 2004 or the similar period in 2005. The costs associated with Sarbanes-Oxley implementation for the six months ended June 30, 2005 were zero compared to $67,000 for the six months ended June 30, 2004. The major components of non-interest expense are shown in the following table:


	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
			(Dollars in Thousands)
Salaries and employee benefits	$	6,971	$	5,767	$	14,218	$	11,627
Premises and equipment		1,807		1,352		3,677		2,828
Data processing fees		884		400		1,731		761
Marketing and business development		657		574		1,051		908
Sarbanes-Oxley implementation		—		67		—		67
Other		2,106		1,981		4,325		4,032

Total noninterest expense	$	12,425	$	10,141	$	25,002	$	20,223

Salaries and employee benefits for the three months ended June 30, 2005 were $7.0 million compared to $5.8 million for the three months ended June 30, 2004, an increase of $1.2 million, or 20.9%. Salaries and employee benefits for the six months ended June 30, 2005 were $14.2 million compared to $11.6 million for the six months ended June 30, 2004, an increase of $2.6 million, or 22.3%. 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 2005 was additional personnel hired in 2004 to complete the centralization of many operational functions.

Premises and equipment expense increased $455,000 to $1.8 million and $849,000 to $3.7 million for the three and six months ended June 30, 2005, respectively, compared to $1.4 million and $2.8 million for the same periods in the prior year. New branch openings, higher utility costs, increased depreciation, continuing maintenance of our facilities and acquisitions contributed to the increase.

Data processing fees for the three months ended June 30, 2005 were $884,000 compared to $400,000 for the three months ended June 30, 2004, an increase of $484,000, or 121.0%. Data processing fees for the six months ended June 30, 2005 were $1.7 million compared to $761,000 for the six months ended June 30, 2004, an increase of $970,000, or 127.5%. The increase was due to our system wide conversion to a single data processing system corporate wide between July and October of 2004 as well as equipment and software upgrades. Four of our banks were converted from an in-house data processing system to an outside service bureau utilized for the entire corporation.

Marketing and business development expense increased $83,000 to $657,000 and $143,000 to $1.1 million for the three and six months ended June 30, 2005, respectively, compared to $574,000 and $908,000 for the same periods in the prior year. The increase was due to increased donations and contributions and the inclusion of Wisconsin State Bank’s marketing and business development expenses.

Other expenses for the three and six months ended June 30, 2005 were $2.1 million and $4.3 million, respectively, compared to $2.0 million and $4.0 million for the three and six months ended June 30, 2004, respectively. The increase in 2005 other expenses is solely due to the acquisition of Wisconsin State Bank. We continue to be focused on controlling expenses during 2005.

Income Taxes

Income taxes for the three months ended June 30, 2005 were $794,000 compared to $663,000 for the three months ended June 30, 2004, an increase of $131,000, or 19.8%. Income taxes for the six months ended June 30, 2005 were $1.7 million compared to $1.2 million for the six months ended June 30, 2004, an increase of $410,000, or 32.9%. The effective tax rate increased to 32.6% and 32.5% for the three and six months ended June 30, 2005, respectively, compared to 31.1% and 30.2% for the same periods in the prior year. The increase in the effective tax rate is primarily due to an increase in state income taxes during the period ended June 30, 2005.

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 $7.8 million for the six months ended June 30, 2005, compared to $3.5 million provided by operating activities for the six months ended June 31, 2004, an increase of $4.3 million. Net cash used in investing activities increased by $24.0 million, to $77.6 million for the six months ended June 30, 2005, from $53.6 million used in the same period in 2004. Net cash provided by financing activities was $59.6 million for the six months ended June 30, 2005 compared to $30.3 million provided by financing activities during the six month period in 2004, an increase of $29.4 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 The Corporation’s primary sources of funds are deposits, including brokered certificates of deposit, borrowings from the FHLB and proceeds from principal and interest payments on loans and investment securities. Although maturities and scheduled amortization of loans are predictable sources of funds, deposit flows, prepayments on loans and investment securities are influenced significantly by general interest rates, economic conditions and competition. 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 $138.0 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.

The following table shows the interest rate sensitivity gap for four different time intervals as of June 30, 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 June 30, 2005
	Within			Six to Twelve			One to Five			Over
	Six Months			Months			Years			Five Years			Total
	(Dollars in Thousands)
Interest-earning assets:
Fixed-rate mortgage loans	$	93,149		$	96,272		$	305,063		$	15,120		$	509,604
Adjustable-rate mortgage loans		207,844			18,314			27,526			732			254,416

Total mortgage loans		300,993			114,586			332,589			15,852			764,020
Commercial business loans		156,335			30,074			73,816			2,428			262,653
Consumer loans		16,025			7,442			23,509			1,287			48,263
Home equity loans		26,646			2			751			221			27,620
Other loans		4,530			350			1,817			982			7,679
Mortgage-related securities		11,064			10,944			53,377			14,470			89,855
Fixed rate investment securities and other		1,605			6,550			25,960			48,978			83,093
Variable rate investment securities and other		23,473			—			—			—			23,473

Total interest-earning assets	$	540,671		$	169,948		$	511,819		$	84,218		$	1,306,656


Interest-bearing liabilities:
Deposits
Time deposits	$	191,132		$	131,648		$	147,844		$	3,235		$	473,859
NOW accounts		5,729			5,729			57,291			26,736			95,485
Savings accounts		8,196			8,344			81,959			38,248			136,747
Money market accounts		28,530			12,613			126,127			58,860			226,130
Short-term borrowings		71,162			—			—			—			71,162
Long-term borrowings		20,249			19,250			79,287			5,140			123,926
Junior subordinated debt owed to unconsolidated trusts		28,352			—			—			18,042			46,394

Total interest-bearing liabilities	$	353,350		$	177,584		$	492,508		$	150,261		$	1,173,703


Interest-earning assets less interest-bearing liabilities	$	187,321			($7,636	)	$	19,311			($66,043	)	$	132,953

Cumulative interest rate sensitivity gap	$	187,321		$	179,685		$	198,996		$	132,953

Cumulative interest rate sensitivity gap as a percentage of total assets		13.18	%		12.65	%		14.00	%		9.36	%

At June 30, 2005, the Corporation’s cumulative interest-rate sensitive gap as a percentage of total assets was a positive 13.18% for amounts maturing or repricing within six months and a positive 12.65% 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.

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.

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, as of the end of such period, the Corporation’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Corporation in reports that the Corporation files or submits 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.

Part II. Other Information

Item 1. Legal Proceedings

As of June 30, 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

(a) On June 30, 2005, the Company sold 18,397 shares of common stock out of treasury to eight accredited investors at a price of $38.75 per share, for aggregate proceeds of approximately $713,000. Six of the investors are directors of the Company and the other two investors are directors of bank subsidiaries of the Company. The Company believes it has satisfied the exemption from the securities registration requirement provided by section 4(2) of the Securities Act and Regulation D promulgated thereunder in this offering since the shares of common stock were sold in a private placement to sophisticated, accredited investors, each of whom provided representations which the Company deemed necessary to satisfy itself that he was an accredited investor and was purchasing for investment and not with a view to resale in connection with a public offering.

(b) NONE

Item 3. Defaults upon Senior Securities — NONE

Item 4. Submission of Matters to Vote of Security Holders

ANNUAL MEETING OF SHAREHOLDERS. On May 24, 2005, at the Annual Meeting of the shareholders of the Corporation, the Corporation’s shareholders reelected J. Michael Bartels, Thomas J. Sheehan, Rodney T. Goodell and James A. Sass as directors for three-year terms expiring on the date of the annual shareholders meeting to be held in 2008.

SHAREHOLDER VOTE WITH RESPECT TO MATTERS ACTED UPON AT THE ANNUAL MEETING:

ELECTION OF DIRECTORS. Under Wisconsin law, the number of persons corresponding to the number of director positions to be filled at the Annual Meeting who received the highest number of votes would be elected as directors. J. Michael Bartels, Thomas J. Sheehan, Rodney T. Goodell and James A. Sass were standing for reelection. The vote with respect to the reelection of each was as follows:


	Total votes		Votes represented		Votes cast “FOR”
Director	eligible to be cast		in person or proxy		the reelection		Votes Withheld

J. Michael Bartels		3,674,054		2,883,929		2,861,198		22,731
Thomas J. Sheehan		3,674,054		2,883,929		2,850,110		33,819
Rodney T. Goodell		3,674,054		2,883,929		2,872,371		11,558
James A. Sass		3,674,054		2,883,929		2,865,392		18,537

Item 5. Other Information — NONE

Item 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 Officer

EXHIBIT 31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer

EXHIBIT 32.1*		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer

EXHIBIT 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.

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 August 5, 2005		/s/ Michael J. Murry

		Michael J. Murry
		Chairman of the Board of Directors
		and Chief Executive Officer
		Principal Executive Officer

Date August 5, 2005		/s/ Frederick R. Klug

		Frederick R. Klug
		Executive Vice President & Chief
		Financial Officer
		Principal Financial Officer

10-Q EXHIBIT LIST


EXHIBIT NO.		DESCRIPTION

EXHIBIT 31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer

EXHIBIT 31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer

EXHIBIT 32.1*		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer

EXHIBIT 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.

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

MERCHANTS & MANUFACTURERS BANCORPORATION INC 10-Q