SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

þ Annual Report Pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2004

or

o Transition Report Pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                                          to                                         

Commission file number 0-21292

MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.

Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o.

Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)

Yes þ No o.

As of June 30, 2004 (the last business day of the Registrant’s most recently completed second fiscal quarter) the aggregate market value of the shares (based upon the average bid/ask price) held by non-affiliates was approximately $98,235,496.

As of March 1, 2005, 3,674,054 shares of Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2005 Annual Meeting of Shareholders of the Registrant are incorporated by reference into Part III of this report.

MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.

*****

ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2004

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PART I

Item 1. Business

General

     Merchants and Manufacturers Bancorporation, Inc. (“Merchants”) was incorporated in Wisconsin in 1983 and is a registered bank holding company under the Bank Holding Company Act of 1956. As of December 31, 2004, we had total consolidated assets of $1.4 billion, consolidated loans of $1.0 billion and consolidated deposits of $1.0 billion. Our executive offices are located at 5445 South Westridge Drive, New Berlin, Wisconsin 53151 (telephone number (262) 827-6700).

     We are engaged in the community banking business through our Community Financial Group™, which includes our nine bank subsidiaries. We operate seven bank subsidiaries in Wisconsin, including Lincoln State Bank; Grafton State Bank; Franklin State Bank; Community Bank Financial; Fortress Bank of Westby, The Reedsburg Bank and Wisconsin State Bank. We also operate two additional bank subsidiaries, Fortress Bank of Cresco and Fortress Bank Minnesota, which operate in Iowa and Minnesota, respectively.

     Through our banks, we provide a broad range of services to individual and commercial customers. Collectively, our subsidiary banks enjoy the competitive advantages of being able to offer the products, services, operational capacity and the lending limit of a larger institution with the timely personal customer service typically offered by a community bank.

     In addition to traditional bank products, we offer our customers a broad range of residential mortgage services through CFG Mortgage, Inc., and a full range of investment, tax and life insurance products through CFG Financial Services, Inc. Each of these subsidiaries enable our member banks to provide a full range of financial products to their customers as well as contribute non-interest income to us.

     We also operate three additional non-bank operating subsidiaries: Lincoln Neighborhood Redevelopment Corporation, which was organized in 1988 for the purpose of redeveloping and rehabilitating certain areas located primarily on the near south side of Milwaukee; Merchants Merger Corporation which was formed in 1999 to facilitate bank acquisitions and Merchants New Merger Corporation which was formed to facilitate the Reedsburg Bank acquisition.

Growth Strategy

     Over the last five years, our total assets have increased from $533 million as of December 31, 1999 to $1.4 billion as of December 31, 2004. In addition to the growth of bank assets, over the last two years we have also created or acquired a mortgage company, a financial services company and a tax consultation and tax preparation firm. The key elements of our growth strategy going forward include acquisitions, internal growth and continued focus on expanding our non-interest income.

     Acquisitions We believe there are significant opportunities to establish our presence in additional markets through the acquisition of selected community banks, individual branches and other financial service businesses, primarily in Wisconsin. We generally look at four qualities when analyzing a potential acquisition:

	•	the profitability of the institution on a historical and forward looking basis;
	•	the stability and experience of the management team and board of directors;
	•	the growth potential of the geographical markets in which the institution operates; and
	•	the asset quality track record of the institution and management.

     Internal growth While we completed acquisitions in each of the last four years, significant opportunities exist to expand through internal growth by delivering quality products and by providing personal service to individuals and small to mid-sized businesses. By focusing on customer service and convenience, we provide the opportunity for clients to receive the personalized service they find attractive in smaller organizations and still realize many of the efficiencies available to larger organizations.

     In addition, we intend to expand through internal growth with the addition of quality employees and through de novo branching into high growth markets by our existing bank subsidiaries. During this growth period Merchants has made a significant investment in recruiting and developing highly qualified and productive commercial loan officers, mortgage loan officers, financial service representatives and accountants.

     Non-interest income During 2004 we consolidated all of our mortgage operations into our mortgage subsidiary, CFG Mortgage, Inc. The consolidation allows for improved execution in the secondary market, expanded product offerings and enhanced operational efficiencies. Through CFG Financial Services, Inc., we have significantly enhanced our ability to provide investment and insurance products as well as tax consultation and tax preparation services to our current customer base. Over time, we expect the mortgage and non-traditional bank businesses to significantly enhance our relationships with current bank clients and also provide our subsidiary banks with additional opportunities for deposit and loan growth with their non-bank client base.

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Recent Acquisition

     During 2004, we expanded our operations into the Wisconsin markets of Random Lake and Prairie du Chien through an acquisition. On August 12, 2004, we acquired Random Lake Bancorp, Limited. (“Random Lake”) and its wholly-owned subsidiary, Wisconsin State Bank. The purchase price for Random Lake was $11.5 million including $1.3 million in cash and 334,200 shares of Merchants common stock valued at $10.2 million based on a $30.50 per share price of Merchants common stock. At the date of the acquisition Random Lake had assets of $102.3 million, loans of $72.9 million and deposits of $80.0 million.

Our Bank Subsidiaries

     We currently provide community-oriented, commercial and retail banking services to individuals as well as to small to mid-size businesses in our communities through 43 banking facilities in Wisconsin, Iowa & Minnesota. The Banks have consistent products, services and delivery systems and comply with similar regulatory guidance. As such they are not segments as that term is defined in Financial Accounting Standards Board Statement No. 131. The table below provides information regarding each of our banks and their respective markets.

Our Banks

     Through our banks, we provide a broad range of services to individual and commercial customers. These services include accepting demand, savings and time deposits, including regular checking accounts, NOW accounts, money market accounts, savings accounts, certificates of deposit, individual retirement accounts and club accounts. Our banks also make secured and unsecured commercial, mortgage, construction and consumer term loans on both a fixed and variable rate basis. The terms on the loans retained in the banks’ portfolios generally range from one month to five years. Our banks also provide lines of credit to commercial borrowers and to individuals through home equity loans.

     Lincoln State Bank. Lincoln State Bank operates as a state banking association under the laws of the State of Wisconsin. It operates seven full service branch offices in the southeastern Wisconsin communities of Milwaukee, Muskego, New Berlin, Brookfield and Pewaukee. In addition it operates ten limited hours facilities in Milwaukee and Waukesha Counties. At December 31, 2004, Lincoln State Bank comprised 32.0% of our consolidated assets.

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     Grafton State Bank. Grafton State Bank operates as a state banking association under the laws of the State of Wisconsin. Its principal office and a branch office are located in Grafton, Wisconsin and another branch office is located in Saukville, Wisconsin. At December 31, 2004, Grafton State Bank comprised 13.1% of our consolidated assets.

     Franklin State Bank. Franklin State Bank operates as a state banking association under the laws of the State of Wisconsin. Its principal office and a branch office are located in Franklin, Wisconsin. In addition it also operates a limited hours facility in Franklin. At December 31, 2004, Franklin State Bank comprised 6.7% of our consolidated assets.

     Community Bank Financial. Community Bank Financial (f/k/a Community Bank of Oconto County) is a full service commercial bank serving all of Oconto County and the eastern portion of Shawano County. In addition to the main office in the city of Oconto Falls, which is located approximately 25 miles north of Green Bay, Wisconsin, Community Bank Financial operates three branch offices, one located in the city of Gillett, another located in the town of Little Suamico and another located in the village of Cecil. At December 31, 2004, Community Bank Financial comprised 7.0% of our consolidated assets.

     Fortress Bank of Westby. Fortress Bank of Westby is a full service commercial bank serving the banking needs of LaCrosse County, southeastern Monroe County and northern Vernon County, Wisconsin. Fortress Bank of Westby has offices in the southwestern Wisconsin communities of Westby, Coon Valley, Chaseburg, and West Salem. At December 31, 2004, the Fortress Bank of Westby comprised 10.1% of our consolidated assets.

     Fortress Bank of Cresco. Fortress Bank of Cresco is a full service commercial bank serving the banking needs of eastern Howard County and western Winneshiek County, Iowa from its office in Cresco, Iowa. At December 31, 2004, Fortress Bank of Cresco comprised 5.1% of our consolidated assets.

     Fortress Bank Minnesota. Fortress Bank Minnesota, (f/k/a Fortress Bank, N.A) is a full service commercial bank serving customers in Houston County and northeast Winona County in Minnesota from offices in Houston and Winona. At December 31, 2004, Fortress Bank Minnesota, comprised 4.1% of our consolidated assets.

     The Reedsburg Bank. The Reedsburg Bank is a full service commercial bank serving the banking needs of Sauk County, and portions of Juneau, Richland, and Adams Counties, Wisconsin. The Reedsburg Bank has offices in the Wisconsin communities of Reedsburg, North Freedom and Lime Ridge. At December 31, 2004, the Reedsburg Bank comprised 13.2% of our consolidated assets.

     Wisconsin State Bank. Wisconsin State Bank operates as a state banking association under the laws of the State of Wisconsin. Its principal office is located in Random Lake, Wisconsin and also has a branch office located in Belgium, Wisconsin and two other branch offices located in Prairie du Chien, Wisconsin. At December 31, 2004, Wisconsin State Bank comprised 7.4% of our consolidated assets.

Our Operating Subsidiaries

     CFG Financial Services, Inc. was formed in 2002 to provide tax as well as non-insured investment and insurance products to customers of the Banks. For the twelve months ended December 31, 2004, CFG Financial Services had revenues of $1.5 million.

     CFG Mortgage, Inc. was formed in 2002 to act as our mortgage broker. As of December 31, 2004, CFG Mortgage services $346.0 million of residential mortgages.

     Lincoln Neighborhood Redevelopment Corporation. The Lincoln Neighborhood Redevelopment Corporation was formed in June 1988. The Redevelopment Corporation was established to redevelop and rehabilitate certain areas located on the south-side of Milwaukee by, among other things:

	•	providing home mortgage loans to customers with low to moderate income;
	•	working with local businesses to keep commercial areas strong and attractive;
	•	pursuing means to preserve and create jobs;
	•	encouraging appropriate land-use;
	•	involving community residents in economic planning; and
	•	retaining and attracting businesses.

     As of December 31, 2004, the Redevelopment Corporation had assets of $1.4 million, $985,000 in liabilities and equity of $436,000.

     Merchants Merger Corp. Merchants Merger Corp. was formed in 1999 to facilitate mergers and future acquisitions.

     Merchants New Merger Corp. Merchants New Merger Corp. is the historical Reedsburg Bancorporation parent company that was renamed following the acquisition.

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Other Subsidiaries

     Lincoln State Bank, Grafton State Bank, Community Bank Financial, Fortress Bank of Westby, The Reedsburg Bank and Wisconsin State Bank each have a wholly owned subsidiary. In 1991 an investment subsidiary known as M&M — Lincoln Investment Corporation was formed to manage the majority of Lincoln State Bank’s investment portfolio and to enhance the overall return of the portfolio. The subsidiary received a capital contribution of approximately $13 million of mortgage-backed and other investment securities from Lincoln State Bank in exchange for 100% of the stock of the subsidiary. In 1992 an investment subsidiary known as Westby Investment Company, Inc. was formed to manage the majority of the Fortress Bank of Westby’s investment portfolio and to enhance the overall return of the portfolio. The subsidiary received a capital contribution of approximately $10 million of municipal and other investment securities from the Fortress Bank of Westby in exchange for 100% of the stock of the subsidiary. In 1992 an investment subsidiary known as Reedsburg Investment Corp. was formed to manage the majority of the Reedsburg Bank’s investment portfolio and to enhance the overall return of the portfolio. The subsidiary received a capital contribution of approximately $13 million of municipal and other investment securities from the Reedsburg Bank in exchange for 100% of the stock of the subsidiary. In 1994 an investment subsidiary known as Random Lake Investments, Inc. was formed to manage the majority of the Wisconsin State Bank’s investment portfolio and to enhance the overall return of the portfolio. The subsidiary received a capital contribution of approximately $7 million of municipal and other investment securities from Wisconsin State Bank in exchange for 100% of the stock of the subsidiary. In 1996 an investment subsidiary known as GSB Investments, Inc. was formed to manage the majority of Grafton State Bank’s investment portfolio and to enhance the overall return of the portfolio. The subsidiary received a capital contribution of approximately $10 million of mortgage-backed and other investment securities from Grafton State Bank in exchange for 100% of the stock of the subsidiary. In 2001 an investment subsidiary known as CBOC Investments, Inc. was formed to manage the majority of the Community Bank Financial investment portfolio and to enhance the overall return of the portfolio. The subsidiary received a capital contribution of approximately $11 million of municipal and other investment securities from Community Bank Financial in exchange for 100% of the stock of the subsidiary. These subsidiaries are an intrinsic component of their respective parent banks and assets thereof are included in the total assets of the respective Banks above.

Competition

     Our banks serve their surrounding communities in their respective markets located in Wisconsin, Iowa and Minnesota. There are presently in excess of one hundred other financial institutions in our service areas that directly compete with one or more of our banks. Our banks compete with other commercial banks, savings banks, credit unions, mortgage brokers, small-loan companies, insurance companies, investment banking firms and large retail companies.

     The principal methods of competition include, interest rates paid on deposits and charged on loans, personal contacts and efforts to obtain deposits and loans and types and quality of services provided and convenience of the locations.

Employees

     At December 31, 2004, we (along with our subsidiaries) employed 471 full-time and 100 part-time employees. We provide a wide range of benefits to employees, including educational activities, and consider our employee relations to be excellent. We conduct extensive training programs in order to enhance job-related knowledge and skills of our people and to train our employees with a sales-oriented approach to customers. Eligible employees participate in a 401(k) plan as well as group life and major medical insurance programs. None of our employees are represented by a labor union.

Supervision and Regulation

     We are extensively regulated under both federal and state laws. Laws and regulations to which Merchants and Manufacturers and our banks are subject govern, among other things, the scope of business, investments, reserve levels, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers and consolidations and the payment of dividends. These laws and regulations are intended to protect our depositors. Any change in applicable laws or regulations may have a material effect on our business and prospects, and legislative and policy changes may affect our operations. We cannot predict the nature or the extent of the effects on our business and earnings that fiscal or monetary policies, economic controls or new federal or state legislation may have in the future.

     The earnings and business of Merchants and its bank subsidiaries also are affected by the general economic and political conditions in the United States and abroad and by monetary and fiscal policies of various federal agencies. The Federal Reserve Board impacts the competitive conditions under which we operate by determining the cost of funds obtained from money market sources for lending and investing and by exerting influence on interest rates and credit conditions. In addition, legislative and economic factors can be expected to have an ongoing impact on the competitive environment within the financial services industry. The impact of fluctuating economic conditions and federal regulatory policies on the future profitability of our organization cannot be predicted with certainty.

     The following references to statutes and regulations affecting us and the banks are brief summaries only and do not claim to be complete and are qualified in their entirety by reference to the statutes and regulations.

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Sarbanes-Oxley Act of 2002

     On July 30, 2002, President Bush signed the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). This legislation impacts corporate governance of public companies, affecting their officers and directors, their audit committees, their relationships with their accountants and the audit function itself. Certain provisions of the Act became effective on July 30, 2002. Others became effective as the SEC adopted appropriate rules. The Sarbanes-Oxley Act implements a broad range of corporate governance and accounting measures for public companies designed to promote honesty and transparency in corporate America and better protect investors from corporate wrongdoing. The Sarbanes-Oxley Act’s principal legislation includes: a) the creation of an independent accounting oversight board to oversee the audit of public companies and auditors who perform such audits; b) auditor independence provisions which restrict non-audit services that independent accountants may provide to their audit clients; c) additional corporate governance and responsibility measures, including: (i) requiring a company’s chief executive officer and chief financial officer to certify financial statements; (ii) prohibiting trading of securities by officers and directors during periods in which certain employee benefit plans are prohibited from trading; (iii) requiring a company’s chief executive officer and chief financial officer to forfeit salary and bonuses, including profits on the sale of company securities, in certain situations; and (iv) protecting whistleblowers and informants; d) expansion of power of the audit committee, including the requirements that the audit committee: (i) have direct control of the engagement of the outside auditor; (ii) be able to hire and fire the auditor, and (iii) approve all non-audit services; e) expanded disclosure requirements, including accelerated reporting of stock transactions by insiders and the prohibition of most loans to directors and executive officers of non-financial institutions; mandatory disclosure by analysts of potential conflicts of interest; and f) a range of enhanced penalties for fraud and other violations.

Anti-Money Laundering Laws

     Our banks are subject to the Bank Secrecy Act and its implementing regulations and other anti-money laundering laws and regulations, including the USA PATRIOT Act of 2001. Among other things, these laws and regulations require our banks to take steps to prevent the use of each institution for facilitating the flow of illegal or illicit money, to report large currency transactions and to file suspicious activity reports. Each bank also is required to develop and implement a comprehensive anti-money laundering compliance program. Banks also must have in place appropriate “know your customer” policies and procedures. Violations of these requirements can result in substantial civil and criminal sanctions. The USA PATRIOT Act is designed to deny terrorists and criminals the ability to obtain access to the United States financial system, and has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The USA PATRIOT Act mandates or will require financial services companies to implement additional policies and procedures with respect to, or additional measures designed to address, any or all of the following matters, among others: money laundering, terrorist financing, identifying and reporting suspicious activities and currency transactions, and currency crimes. In addition, provisions of the USA PATRIOT Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions.

Bank Holding Company Regulation

     We are a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Under the Bank Holding Company Act, we are subject to periodic examination by the Federal Reserve and are required to file periodic reports of our operations and such additional information as the Federal Reserve may require.

     Investments and Activities. A bank holding company must obtain approval from the Federal Reserve before:

     • acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after the acquisition, it would own or control more than 5% of the shares of the bank or bank holding company (unless it already owns or controls the majority of the shares);

     • acquiring all or substantially all of the assets of another bank or bank holding company; or

     • merging or consolidating with another bank holding company.

     The Federal Reserve will not approve any acquisition, merger or consolidation that would have a substantially anticompetitive result unless the anticompetitive effects of the proposed transaction are clearly outweighed by a greater public interest in meeting the convenience and needs of the community to be served. The Federal Reserve also considers capital adequacy and other financial and managerial factors in reviewing acquisitions or mergers.

     With certain exceptions, a bank holding company is also prohibited from:

     • acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company; and

     • engaging, directly or indirectly, in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries.

     Bank holding companies may, however, engage in businesses found by the Federal Reserve to be closely related to the business of banking or of managing or controlling banks. These activities include:

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	•	making or servicing loans and certain types of leases;
	•	engaging in certain insurance and discount brokerage activities;
	•	performing certain data processing services;
	•	acting in certain circumstances as a fiduciary or investment or financial advisor;
	•	owning savings associations; and
	•	making investments in corporations or projects designed to promote community welfare.

     We are also authorized to engage in the expanded activities permitted under the Gramm-Leach-Bliley Act since we elected to become a “financial holding company” and to otherwise qualify for financial holding company status.

     Finally, subject to certain exceptions, the Bank Holding Company Act and the Change in Bank Control Act, and the Federal Reserve’s implementing regulations, require Federal Reserve approval prior to any acquisition of “control” of a bank holding company, such as Merchants and Manufacturers. In general, a person or company is presumed to have acquired control if it acquires as little as 5% of the outstanding shares of a bank or bank holding company and is conclusively determined to have acquired control if it acquires 25% or more of the outstanding shares of a bank or bank holding company.

     Source of Strength. The Federal Reserve expects us to act as a source of financial strength and support for our bank subsidiaries and to take measures to preserve and protect the banks in situations where additional investments in the banks may not otherwise be warranted. The Federal Reserve may require a bank holding company to terminate any activity or relinquish control of a non-bank subsidiary (other than a non-bank subsidiary of a bank) upon the Federal Reserve’s determination that the activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or non-bank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition.

     Capital Requirements. The Federal Reserve uses capital adequacy guidelines in its examination and regulation of bank holding companies and banks. If the capital falls below minimum guideline levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses. The Federal Reserve’s capital guidelines establish a risk-based requirement expressed as a percentage of total risk-weighted assets and a leverage requirement expressed as a percentage of total assets. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital (which consists principally of shareholders’ equity). The leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3% for strong bank holding companies and for bank holding companies that have implemented the Federal Reserve’s risk based capital measure for market risk (otherwise the minimum ratio is 4%).

     The risk-based and leverage standards presently used by the Federal Reserve are minimum requirements, and higher capital levels may be required if warranted by the particular circumstances or risk profiles of individual banking organizations. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions, which is Tier 1 capital less all intangible assets, well above the minimum levels.

     Dividends. The Federal Reserve has issued a policy statement concerning the payment of cash dividends by bank holding companies. The policy statement provides that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which could only be funded in ways that weakened the bank holding company’s financial health, such as by borrowing. Also, the Federal Reserve possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.

Bank Regulations

     Lincoln State Bank, Grafton State Bank, Franklin State Bank, Community Bank Financial, Fortress Bank of Westby, The Reedsburg Bank and Wisconsin State Bank operate under Wisconsin state bank charters and are subject to regulation by the Wisconsin Department of Financial Institutions Division of Banking and the FDIC. The Fortress Bank of Cresco, Iowa operates under an Iowa state bank charter and is subject to regulation by the FDIC and the Iowa Division of Banking. Fortress Bank Minnesota operates under a Minnesota bank charter and is subject to regulation by the FDIC and the Minnesota Department of Commerce. The state banking regulators detailed above and the FDIC regulate or monitor all areas of the banks’ operations, including capital requirements, issuance of stock, declaration of dividends, interest rates, deposits, record keeping, establishment of branches, acquisitions, mergers, loans, investments, borrowing, security devices and procedures and employee responsibility and conduct. The regulators place limitations on activities of the banks including the issuance of capital notes or debentures and the holding of real estate and personal property and require the banks to maintain a certain ratio of reserves against deposits. The regulators also require the banks to file reports annually showing receipts and disbursements of the banks, in addition to any periodic reports requested.

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Available Information

     We maintain our corporate website at www.mmbancorp.com and we make available, free of charge, through this website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports that we file with or furnish to the Securities and Exchange Commission, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

Item 2. Properties

     In 2004 our corporate headquarters relocated to a 59,000 square feet office building located in New Berlin, Wisconsin. At this location, we maintain all of our corporate operations and personnel. Merchants owns this property.

     The main office of Lincoln State Bank is at located at 3131 South 13th Street, Milwaukee, Wisconsin in a one-story building. Lincoln State Bank also operates branch offices at 2266 South 13th Street, 5400 West Forest Home Avenue and 1000 North Water Street. These offices are located in Milwaukee. Another branch of Lincoln State Bank is located in a one-story, 1,700 square foot building at 13510 Janesville Road, Muskego, Wisconsin. While another branch of Lincoln State Bank is located at 14000 West National Avenue, New Berlin, Wisconsin. The New Berlin branch is approximately 7,000 square feet. In 1995 Lincoln State Bank opened two other full-service branches one located Brookfield, Wisconsin and the other in Pewaukee, Wisconsin. Lincoln State Bank owns all of its facilities except the Downtown Milwaukee Water Street branch, the New Berlin branch and Brookfield branch which it leases from the buildings’ owners.

     In addition, Lincoln State Bank operates limited hour facilities at Villa St. Francis located at South 20th and Ohio Streets in Milwaukee, at Clement Manor located at South 92nd Street and West Howard Avenue in Milwaukee, at Friendship Village located at North 73rd and West Dean Road in Milwaukee, at Stoney Creek Adult Community in Muskego, at the Milwaukee Protestant Home located on North Downer Avenue in Milwaukee, at Forest Ridge located in Hales Corners, Wisconsin, at the Landmark located in West Allis, Wisconsin at Deer Creek located in New Berlin, Wisconsin and at Lexington Village located in the City of Greenfield, Wisconsin. Lincoln State Bank leases facilities at all of the limited hour locations.

     Grafton State Bank’s main office is located at 101 Falls Road, Grafton, Wisconsin in a seven-story building. Portions of the building that are not used by Grafton State Bank are leased to various tenants. Grafton State Bank owns the facility. Grafton State Bank also operates two branch facilities. One branch of Grafton State Bank is located at 112 North Port Washington Road in Grafton, while the other is located at 524 East Green Bay Avenue in Saukville, Wisconsin. Grafton State Bank owns the Saukville location while it leases the other branch facility.

     Franklin State Bank’s main office is located in a three-story building at 7000 South 76th Street in Franklin, Wisconsin. The bank leases 5,700 square feet from the building’s owner. The building was sold in 1999 to a group of investors and subsequently sub-leased back to Merchants and Manufacturers. Portions of the building that are not used by Franklin State Bank are leased to various tenants. In 1998 Franklin State Bank opened a branch facility at 9719 South Franklin Drive in the Franklin Business Park, Franklin, Wisconsin. Franklin State Bank owns the facility. In addition, Franklin State Bank operates a limited hour facility at Brenwood Park, also located in Franklin. Franklin State Bank leases its limited hour facility.

     Community Bank Financial’s main office is located in a one-story building at 500 Cherry Avenue, Oconto Falls, Wisconsin. Community Bank Financial operates branch facilities at 202 East Main Street, Gillett, Wisconsin, 1288 East Frontage Road, in the town of Little Suamico, Wisconsin and at 200 Golf View Road, in the village of Cecil, Wisconsin. Community Bank Financial owns all of its facilities except the Cecil facility which it leases from the building’s owner.

     Fortress Bank of Westby’s main office is located in a two-story building at 100 North Main Street, Westby, Wisconsin. Fortress Bank of Westby also operates branch offices in the Wisconsin communities of Coon Valley, Chaseburg and West Salem. Fortress Bank of Westby owns all of its properties.

     Fortress Bank of Cresco’s main office is located in a one-story building at 130 North Park Place, Cresco, Iowa. Fortress Bank of Cresco owns its facility.

     Fortress Bank Minnesota’s main office is located in a two-story building at 225 Lafayette, Houston, Minnesota. Fortress Bank Minnesota also operates a branch office in the Minnesota community of Winona. Fortress Bank Minnesota owns both facilities.

     The Reedsburg Bank’s main office is located in a two-story building at 201 Main Street, Reedsburg, Wisconsin. The Reedsburg Bank also operates branch offices in the Wisconsin communities of North Freedom and Lime Ridge. The Reedsburg Bank owns all of its properties.

     Wisconsin State Bank’s main office is located in a one-story building at 201 Allen Street, Random Lake, Wisconsin. Wisconsin State Bank also operates branch offices in the Wisconsin communities of Belgium and Prairie du Chien. Wisconsin State Bank owns all of its properties.

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Item 3. Legal Proceedings

     From time to time, we and our subsidiaries are party to legal proceedings arising out of our general lending activities and other operations. However, as of the date of this report, there are no pending legal proceedings to which we or our subsidiaries are a party, or to which their property is subject, which, if determined adversely to us, would individually or in the aggregate have a material adverse effect on our consolidated financial position.

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

     No matters were submitted to a vote of security holders during the fourth quarter of 2004.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities

     Our stock is not listed on any stock exchange or quoted on the National Association of Securities Dealers Quotation Automated Quotation System. Our stock has been quoted on “Pink Sheets”, an inter-broker quotation medium, since April 1993, and in the Over The Counter Bulletin Board, an electronic quotation service. Robert W. Baird & Co., Incorporated, a regional securities and investment banking firm headquartered in Milwaukee, Wisconsin, and Howe Barnes Investments, Incorporated, headquartered in Chicago, Illinois, act as the market makers for the Corporation’s stock. Our stock is quoted in the “Other Stocks” section of the Milwaukee Journal/Sentinel. Our common stock trading symbol is “MMBI.”

     The following table sets forth the quarterly high and low bid prices for the period indicated. The quotations below reflect inter-dealer prices, without retail mark-ups, mark-downs or commissions and do not necessarily represent actual transactions.

     The approximate number of holders of record of our common stock is 1,150 as of December 31, 2004.

     Holders of the our stock are entitled to receive such dividends as may be declared from time to time by the Board of Directors from funds legally available for such payments. Our ability to pay cash dividends is dependent primarily on the ability of each subsidiary to pay dividends to us. The ability of each subsidiary to pay dividends depends on its earnings and financial condition and on compliance with banking statutes and regulations.

     Quarterly dividends for the years ended December 31, 2004 and 2003 are shown in Item 6 “Selected Financial Data.”

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Item 6. Selected Financial Data

     The following table summarizes our certain historical financial data. This information is derived in part from, and should be read in conjunction with, our Consolidated Financial Statements presented elsewhere herein (dollars in thousands, except per share data):

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     Effective January 1, 2002, Merchants adopted Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets”. SFAS No. 142 changed the accounting for goodwill from a model that required amortization of goodwill, supplemented by impairment tests, to an accounting model that is based solely upon impairment tests.

     A reconciliation of Merchants Consolidated Statements of Earnings for each the years ending December 31, 2001 and 2000 from amounts reported to amounts exclusive of goodwill amortization is shown below.

Quarterly Financial Data

     The following table sets forth our selected quarterly financial data. The third and fourth quarter 2004 data includes Random Lake Bancorp Limited. and subsidiaries acquired by Merchants on August 12, 2004.

Fourth Quarter Results

     For the fourth quarter of 2004, Merchants reported a loss of $(811,000), or $(0.22) per fully diluted common share, compared to income of $2.1 million, or $0.63 per fully diluted common share, for the fourth quarter 2003.

Earnings for the fourth quarter ended December 31, 2004 included the following non-recurring items:

	•	A pre-tax charge of $1.2 million related to centralization and data processing conversions
	•	A pre-tax charge of $450,000 related to Sarbanes-Oxley compliance activities, and
	•	A pre-tax charge of $730,000 related to establishing a tax reserve for potential payments due to the Wisconsin Department of Revenue.

Earnings for the fourth quarter ended December 31, 2003 included the following item:

•

A pre-tax gain on sale of investment securities of $359,000.

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The net effect of these items was a decrease of $0.54 per fully diluted share.

     Net interest income was $11.6 million for the fourth quarter of 2004 compared to $9.4 million for the fourth quarter of 2003. The increase is due to the revenue resulting from the acquisitions of Reedsburg and WSB, as well as to the increase in loan volume funded by the growth in deposits and borrowings. Net interest margin was 3.77% for the fourth quarter 2004 compared to 3.78% for the same period in 2003. The pressure on the net interest margin in 2003 began to stabilize in 2004 producing an increasing net interest margin since the fourth quarter of 2003. Recent increases in market interest rates may improve the net interest margin as our balance sheet is positioned to take advantage of increasing rates.

     Merchants’ provision for loan losses was $461,000 for the fourth quarter of 2004 compared to $297,000 for the same quarter of 2003. Merchants’ ratio of allowance for loan losses to total loans was 1.02% and 1.07% at December 31, 2004 and 2003, respectively. The ratio of allowance for loan losses to non-performing loans was 119.7% at December 31, 2004 compared to 172.9% at December 31, 2003. The ratio of non-performing assets to total assets equaled 0.75% at December 31, 2004 compared to 0.63% at December 31, 2003.

     Non-interest income for the fourth quarter of 2004 was $3.0 million compared to $2.8 million for the fourth quarter of 2003. Service charges on deposit accounts increased $301,000 for the quarter ended December 31, 2004. The growth in non-interest income can be partially attributed to our acquisitions. The Reedsburg Bank generated $339,000 of non-interest income during the fourth quarter of 2004. In addition, fourth quarter net gains on the sale of securities amounted to $1,000 for 2004 compared to $359,000 during fourth quarter of 2003. The gains on sales of mortgage loans increased $15,000 when comparing the fourth quarter 2004 with the same period in 2003. In addition, the income associated with the change in the valuation of our mortgage servicing rights has decreased $71,000 when comparing the fourth quarter 2004 with the same period in 2003.

     Non-interest expense was $14.6 million for the 2004 fourth quarter compared to $9.0 million for the fourth quarter of 2003, an increase of 62.8%. When comparing the fourth quarter 2004 with the fourth quarter 2003, salaries and employee benefits increased $2.0 million, occupancy expense increased $569,000 and other non-interest expense increased $3.1 million. The growth in non-interest expense was caused in part by the acquisitions of Reedsburg, KCW and WSB. The Reedsburg and WSB operations added $2.5 million of expenses in the fourth quarter of 2004. The increase in non-interest expense can also be attributed to expenses incurred by implementing our “Vision Unlimited” project as well as the cost of complying with Sarbanes-Oxley.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

     The following presents management’s discussion and analysis of our financial condition and results of operations as of the dates and for the periods indicated. You should read this discussion in conjunction with our “Selected Consolidated Financial Data”, our consolidated financial statements and the accompanying notes, and the other financial data contained elsewhere in this report.

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     On August 12, 2004, we acquired Random Lake Bancorp Limited (“Random Lake”) and its wholly-owned subsidiary, Wisconsin State Bank (“WSB”). The purchase price for Random Lake was $11.5 million including $1.3 million in cash and 334,200 shares of Merchants common stock valued at $10.2 million based on a $30.50 price. The transaction was recorded as a purchase. Application of purchase accounting requires the inclusion of Random Lake and WSB’s operating results in the consolidated financial statements from the date of the acquisition. Accordingly Random Lake and WSB’s operating results are included in the consolidated results of operations since August 12, 2004.

     On November 1, 2003, we acquired Reedsburg Bancorporation, Inc. (“Reedsburg”) and its wholly-owned subsidiary, The Reedsburg Bank. The purchase price for Reedsburg was $36.0 million including $17.8 million in cash, $12.8 million in promissory notes and 146,800 shares of common stock valued at $5.4 million based on the average price over the contractual pricing period. The transaction was recorded as a purchase. Application of purchase accounting requires the inclusion of Reedsburg and The Reedsburg Banks’ operating results in the consolidated financial statements from the date of the acquisition. Accordingly Reedsburg and The Reedsburg Banks’ operating results are included in the consolidated results of operations since November 1, 2003.

     On November 30, 2002, we acquired Fortress Bancshares, Inc. (“Fortress”) and its wholly-owned subsidiaries, Fortress Bank of Westby, Wisconsin, Fortress Bank of Cresco, Iowa and Fortress Bank Minnesota (f/k/a Fortress Bank, N.A.) headquartered in Houston, Minnesota (“Fortress Banks”). The purchase price for Fortress was $21.5 million including $9.5 million in cash and 390,000 shares of common stock valued at $11.7 million based on the average price over the contractual pricing period. The transaction was recorded as a purchase. Application of purchase accounting requires the inclusion of Fortress and the Fortress Banks’ operating results in the consolidated financial statements from the date of the acquisition. Accordingly Fortress and the Fortress Banks’ operating results are included in the consolidated results of operations since November 30, 2002.

     This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of various factors. Important factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to, the following: (1) expected cost savings and synergies from our recently completed merger of Random Lake Bancorp Limited, might not be realized within the expected time frame; (2) the credit risks of lending activities, including changes in the level and direction of loan delinquencies and write-offs; (3) changes in management’s estimate of the adequacy of the allowance for loan losses; (4) competitive pressures among depository institutions; (5) interest rate movements and their impact on customer behavior and our net interest margin; (6) the impact of repricing and competitors’ pricing initiatives on loan and deposit products; (7) our ability to adapt successfully to technological changes to meet customers’ needs and developments in the market place; (8) our ability to access cost-effective funding; (9) changes in financial markets and general economic conditions; (10) new legislation or regulatory changes; (11) changes in accounting principles, policies or guidelines; (12) the result of the Corporation’s discussions with the Wisconsin Department of Revenue regarding tax treatment of its Nevada investment subsidiaries and (13) the effectiveness of the internal controls of Wisconsin State Bank (which are not covered by management’s evaluation of the Company’s internal control over financial reporting as of December 31, 2004 in Item 9A of this report in reliance on guidance from the Securities and Exchange Commission).

     Certain statements contained in or incorporated by reference into this report constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of invoking these safe harbor provisions. You can identify these statements from our use of the words “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “could,” “believe,” “estimate,” “predict,” “objective,” “potential,” “projection,” “forecast,” “goal,” “project,” “anticipate,” “target” and similar expressions. These forward-looking statements may include, among other things:

     • statements relating to projected growth, anticipated improvements in earnings, earnings per share and other financial performance measures, and management’s long term performance goals;

     • statements relating to the anticipated effects on results of operations or financial condition from expected developments or events;

     • statements relating to our business and growth strategies, including potential acquisitions; and

     • any other statements which are not historical facts.

     Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from our expectations of future results, performance or achievements expressed or implied by such forward-looking statements. Although we believe that the expectations reflected in any forward-looking statements are reasonable, we cannot guarantee future events or results. Except as may be required under federal law, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur. In addition, our past results of operations do not necessarily indicate our future results.

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Results of Operations

     For the year ended December 31, 2004, our net income was $4.0 million, or $1.15 per fully diluted common share, compared to $8.2 million, or $2.56 per fully diluted common share for the year ended December 31, 2003 and $6.4 million or $2.29 per fully diluted common share for the year ended December 31, 2002. The decrease in 2004 earnings reflects the implementation of our “Vision Unlimited” project, complying with the Sarbanes-Oxley Act of 2002 and establishing a reserve for potential Wisconsin Department of Revenue settlements.

     Earnings for the year ended December 31, 2004 included the following non-recurring items:

	•	A pre-tax charge of $1.7 million related to centralization and data processing conversions
	•	A pre-tax charge of $783,000 related to Sarbanes-Oxley compliance activities, and
	•	A pre-tax charge of $730,000 related to establishing a tax reserve for potential payments due to the Wisconsin Department of Revenue.

Earnings for the year ended December 31, 2003 included the following item:

•

Pre-tax mortgage related fee income of $4.4 million in 2003 compared to $2.6 million in 2004

The net effect of these items was a decrease of $1.02 per fully diluted share.

     In addition to these non-recurring items in 2004, numerous staff additions (primarily information technology, marketing and credit administration), equipment purchases and technology improvements were needed to implement our “Vision Unlimited” program. We believe these upgrades will benefit the organization in future periods as we leverage our infrastructure over a larger asset base.

     2004 has been a year of transition for our organization. Through a company-wide project called “Vision Unlimited”, we have standardized policies and procedures across the organization and have centralized many operational functions. In addition, we have successfully converted all of the banks to a single data processing platform. These changes will allow us to better manage risk, operate more efficiently and serve customers better. Each of our community banks will continue to keep its name, charter, board of directors and management teams but will transition its human resources from the bank’s operational activities to customer related activities. Bank employees will have the tools and resources they need to effectively focus on customer service, customer retention and customer prospecting. While we expect these changes to enhance shareholder value in the long run, a transition of this magnitude has involved short-term costs, which amounted to approximately $1.7 million before tax in 2004.

     The Corporation also faced two other significant challenges in 2004. Like all public companies, we are required to comply with the Sarbanes-Oxley Act of 2002. While we have used an outside third party at a significant cost, compliance with Sarbanes-Oxley was accomplished internally through our “Vision Unlimited” project. We originally expected our Sarbanes-Oxley compliance costs would range from $400,000 to $500,000 in 2004. However, due to the higher than anticipated volume of policies and procedures testing performed by our independent auditors, the cost of complying with the Sarbanes-Oxley Act of 2002 amounted to $783,000 in 2004.

     Like hundreds of other Wisconsin banking organizations, we are in discussion with the Wisconsin Department of Revenue (“WDR”) regarding the tax treatment of our Nevada investment subsidiaries. Nevada does not have an income tax and historically the earnings of these Nevada investment subsidiaries have not been subject to taxation in Wisconsin. We believe that we have complied with private letter rulings the WDR previously issued in connection with the formation and operation of our Nevada investment subsidiaries. However, the effect and intent of these rulings is in question and the WDR may take the position that some or all of the income of our Nevada investment subsidiaries is allocable to their Wisconsin corporate parents and taxable in Wisconsin. The WDR may also take the position that such a reallocation should apply to prior open tax years. The result of these discussions with the WDR could materially increase our future income tax expense and has resulted in a significant current year tax charge. As of December 31, 2004 we have not come to an agreement with the WDR and continue to dispute the WDR’s claims, but have established a $730,000 reserve in the event it should be necessary to make any future payments to the WDR.

Net Interest Income

     Net interest income equals the difference between interest earned on assets and the interest paid on liabilities and is a measure of how effectively management has balanced and allocated our interest rate sensitive assets and liabilities. Net interest income is the most significant component of earnings. Taxable-equivalent adjustments to interest income involve the conversion of tax-exempt sources of interest income to the equivalent amounts of interest income that would be necessary to derive the same net return if the investments had been subject to income taxes on a fully tax equivalent basis. A 34% incremental income tax rate, consistent with our historical experience, is used in the conversion of tax-exempt interest income to a taxable-equivalent basis.

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     Net interest income on a fully tax equivalent basis increased to $43.4 million in 2004, compared with $36.0 million in 2003 and $27.3 million in 2002. In 2004, net interest income increased $7.4 million due to internal growth in earning assets, the additional growth from the Random Lake acquisition and the full year growth impact from the Reedsburg acquisition partially offset by a lower net interest margin versus the prior year. In 2003, net interest income increased due to internal growth in earning assets as well as the additional growth from the Reedsburg and Fortress acquisitions. The net interest margin, on a fully tax-equivalent basis, was 3.86% for 2004, compared with 4.03% in 2003 and 4.48% in 2002. The relative low interest rate environment, along with the incremental effect of the acquisitions resulted in lower margins in 2004 and 2003.

     The following table sets forth, for the periods indicated, information regarding the average balances of assets and liabilities and the total dollar amount of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resulting yields, interest rate spread, ratio of interest-earning assets to interest-bearing liabilities, and net interest margin. Average balances have been calculated using average daily balances during such periods (dollars in thousands):

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     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):

Provision For Loan Losses

     During 2004, we made a provision of $1.8 million to the allowance for loan losses, as compared to a provision of $1.3 million in 2003 and $1.2 million in 2002. The increased 2004 provision reflects the growth in the overall loan portfolio especially in higher risk categories of commercial and commercial real estate loans and management’s assessment of general economic conditions. Net loan charge-offs for 2004 were $1.3 million, an increase of $265,000 from the $1.1 million of net charge-offs in 2003. This compares to net charge-offs of $1.1 million in 2002. Although we consider the allowance for loan losses to be adequate to provide for potential losses in the loan portfolio, there can be no assurance that losses will not exceed estimated amounts or that the subsidiary banks will not be required to make further and possibly larger additions to their allowance in the future.

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Non-Interest Income

     Non-interest income increased $374,000 in 2004 and $5.0 million in 2003. The 2004 growth in non-interest income can be attributed to higher fees collected on deposit accounts and the growth in tax, brokerage and insurance commissions generated by CFG Financial Services. The 2004 growth in non-interest income was also positively impacted by the completed acquisition of Wisconsin State Bank and the full-year inclusion of Reedsburg’s operations. The 2003 increase was primarily from growth in mortgage banking revenues and service charges collected on loans to which were the result of higher origination volumes and loan refinances. Additionally, non-interest income increased during 2003 from growth in tax, brokerage and insurance commissions due to growth in sales and the acquisitions of KCW and IFS during 2003 and was also positively impacted by the completed acquisitions of Fortress and Reedsburg. The composition of non-interest income is shown in the following table (dollars in thousands).

     Service charge income on deposit accounts increased $917,000 in 2004 and $1.0 million in 2003. The increases in both years continue to reflect the benefits from growth in deposit accounts, both internal and through acquisitions and fee structure modifications company wide.

     Service charges on loans decreased $411,000 from $2.6 million in 2003 to $2.2 million in 2004. The decrease is due directly to the higher level of mortgage and commercial loans refinanced and originated in 2003. The increase in loan fees from 2002 to 2003 can be attributed to the high volume of new loans generated and refinanced in 2003.

     Fees from tax services and brokerage and insurance services increased $382,000 from $1.2 million in 2003 to $1.5 million in 2004. The increase can be attributed to the growth in sales that occurred during 2003 and the full-year recognition of the KCW commissions. The increase in fees and commissions from 2002 to 2003 can be attributed to the acquisitions of KCW and IFS that occurred during 2003.

     We recorded a net gain of $191,000 on the sale of $14.1 million of securities in 2004, a gain of $360,000 on the sale of $15.1 million of securities in 2003 and a gain of $111,000 on the sale of $7.7 million of securities in 2002. The proceeds from the sale of the investments were used to fund loan demand or to reduce debt.

     We recorded $494,000 in gains on the sale of loans in 2004, compared to $1.9 million in 2003 and $695,000 in 2002. All-time low market interest rates led to higher secondary market sales of 15 and 30 year residential mortgage loans in 2003 and 2002. Higher interest rates in 2004 resulted in reduced opportunities to sell loans.

     Other non-interest income was $3.4 million in 2004, compared to $2.6 million in 2003 and $1.9 million in 2002. Other non-interest income includes credit and debit card income, safe deposit box fees, ATM fees and income associated the increased cash surrender value of life insurance policies. The increase for 2004 was due in part to the Wisconsin State Bank acquisition and the full-year recognition of the 2003 Reedsburg acquisition. The increase for 2003 was due in part to the Reedsburg acquisition and the full-year recognition of the 2002 Fortress acquisition.

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Non-Interest Expense

     Non-interest expense increased $13.1 million (40.0%) for the year ended December 31, 2004, and increased $10.6 million (47.9%) for the year ended December 31, 2003. In 2004, the acquisition of Wisconsin State Bank and the full-year recognition of the 2003 Reedsburg and KCW acquisitions contributed partially to the rise in expenses. Also affecting 2004 were nonrecurring expenses associated with our data processing conversions and complying with Sarbanes-Oxley. In 2003, the acquisitions of Reedsburg and KCW and the full-year impact of the 2002 acquisition of Fortress contributed to the rise in expenses. The major components of non-interest expense are shown in the following table (dollars in thousands).

     Salaries and employee benefits increased $6.0 million in 2004 due in part to acquisition of Wisconsin State Bank, the full-year recognition of the 2003 Reedsburg and KCW acquisitions and staff additions made to implement our “Vision Unlimited” centralization project. Also impacting salaries and employee benefits in 2004 were higher benefit costs and normal pay increases. Salaries and employee benefits increased $6.2 million in 2003. The increase was primarily due to the full-year recognition of the Fortress acquisition that was completed on November 30, 2002. Also impacting salaries and employee benefits in 2003 were additional staff hires particularly in the business development and acquisition support staff areas, higher benefit costs, changes in personnel and normal pay increases.

     Premises and equipment expense increased $2.3 million in 2004 primarily due to the acquisition of Wisconsin State Bank and the full-year recognition of the 2003 Reedsburg acquisition. Also impacting premises and equipment expense were increases in depreciation associated with new equipment and facilities as well as the regular maintenance of our existing facilities. Premises and equipment expense increased $660,000 in 2003. The increase was primarily due to the full-year recognition of the 2002 Fortress acquisition.

     Marketing and business development costs increased $812,000 in 2004, and increased $615,000 in 2003. The increase in 2004 can be attributed in part to the acquisition of Wisconsin State Bank and the full-year recognition of the 2003 Reedsburg acquisition as well as the development of a centralized marketing program and branding campaign that delivered a consistent message throughout our entire organization. The 2003 increase can be attributed to a campaign associated with developing our non-insured investment products, advertising of deposit products and effects of the Reedsburg acquisition and the full-year recognition of the 2002 Fortress acquisition.

     During 2004 we successfully converted all of our banks to a single data processing platform. We believe this upgrade in service has allowed us to better manage risk, operate more efficiently and serve our clients better. An upgrade of this magnitude can not be accomplished without the related costs. Data processing fees increased $1.1 million in 2004 and decreased $68,000 in 2003. The 2004 increase was due in part to the acquisition of Wisconsin State Bank and the full-year recognition of the 2003 Reedsburg acquisition. Also impacting data processing expense in 2004 were increased telecommunication expense, software licensing costs, and the further development of our internet banking service. The 2003 decrease was due to the efficiencies gained from a larger organization.

     In addition to the on-going data processing expense, we absorbed $573,000 in non-recurring data processing conversion and de-conversion costs paid to our current service bureau and to our bank’s prior service bureau providers to convert their data to the new system. In addition to the conversion cost, we incurred $830,000 of nonrecurring system installation expense. In 2004 we installed various product delivery systems to better manage risk, operate more efficiently and serve our clients better. The two largest system installations were an updated and centralized loan documentation system that allows all loan documents to be created at a centralized location and remotely printed at each one of our locations. In addition, in 2004 we also implemented a document imaging system that allows us to more efficiently view and store documents, provide our internet banking customers with on-line access to their processed checks and provides our clients with copies of items rather than storing original documents. The elimination of original documents greatly reduces the amount of storage space needed as well as gives our employees more timely access to information.

     Like all public companies, we are required to comply with the Sarbanes-Oxley Act of 2002. We utilized a combination of an independent third party and internal resources to complete the internal control evaluation and testing needed to comply with the new certification requirements. In addition to the third party, our external auditors were required to review and test our policies and procedures. In 2004 the cost of the independent third party review and the testing by our external auditors amounted to $783,000.

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Although the majority of this expense was due to the formation and testing of new policies and procedures, future expense will be incurred in the form of increased external auditor fees.

     Other expenses increased $703,000 in 2004 and $3.2 million in 2003. The increase in 2004 can be attributed primarily to the acquisitions of Wisconsin State Bank and the full-year recognition of the 2003 Reedsburg and KCW acquisitions. The increases in 2003 are the result of implementing our strategic plan, training our employees on sales techniques, maintaining our internet banking program, various consulting fees and legal fees. The Reedsburg and KCW acquisitions and the full-year recognition of the 2002 Fortress acquisition also impacted other expenses.

Income Taxes

     Our consolidated income tax rate varies from statutory rates principally due to interest income from tax-exempt securities and loans and interest income on assets held in the portfolios of our Nevada investment subsidiaries for which state taxes have historically not been imposed. Our recorded provisions for income taxes totaled $2.3 million in 2004, $4.1 million in 2003 and $3.2 million in 2002. The corresponding effective tax rate for the same years were 36.1%, 33.1% and 33.7%. In 2004 our effective tax rate increased due to the findings of Wisconsin Department of Revenue audits conducted at our Nevada investment subsidiaries which resulted in state taxes being imposed on a portion of the assets held in those subsidiaries. In addition, in 2004 we have established a $730,000 tax reserve in the event it should be necessary to make any future payments to the Wisconsin Department of Revenue with respect to our Nevada investment subsidiaries.

Loans Receivable

     Loans receivable (net of allowance) increased $180.1 million, or 21.2%, from $847.9 million at December 31, 2003, to $1.0 billion at December 31, 2004. The 2004 loan growth can be attributed to both internal growth as well as acquisition growth associated with the Wisconsin State Bank acquisition. At the time of the acquisition, Wisconsin State Bank had $72.9 million of loans. In 2004, the Corporation performed an evaluation of the purpose and collateral of each loan. This evaluation resulted in a reallocation of loan dollars between primarily commercial real estate and commercial loans. Loans receivable consist mainly of commercial business loans secured by business assets, real estate and guarantees as well as mortgages secured by residential properties located in our primary market area. The following table shows the composition of our loan portfolio on the dates indicated:

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     The following table presents information as of December 31, 2004 regarding first mortgage and commercial business loan maturities and contractual principal repayments of loans during the periods indicated. Loans with adjustable interest rates are shown maturing in the year of their contractual maturity. Also provided are the amounts due after one year classified according to the sensitivity to changes in interest rates.

Allowance For Loan Losses

     Management believes the allowance for loan losses accounting policy is critical to the portrayal and understanding of our financial condition and results of operations. As such, selection and application of this “critical accounting policy” involves judgments, estimates, and uncertainties that are susceptible to change. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood.

     The allowance for loan losses is maintained at an amount that we believe will be adequate to absorb probable losses on existing loans, based on an evaluation of the collectibility of loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, the value of underlying collateral, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, as an integral part of their examination process regulatory agencies periodically review our allowance for loan losses and may require us to make additions to the allowance based on their evaluation of information available at the time of their examinations. The allowance for loan losses increased from $9.1 million at December 31, 2003, to $10.6 million at December 31, 2004. The 2004 allowance for loan losses growth can be attributed to provisions made during 2004 offset by net charge-offs as well as the Wisconsin State Bank allowance at the time of the acquisition. At the time of the acquisition, the Wisconsin State Bank had a $1.0 million allowance for loan losses. The remaining increase was due to the growth in the loan portfolio, the general uncertainty regarding economic conditions and the increase in non-performing loans and charge-offs recorded in 2004 and 2003. The ratio of the allowance for loan losses to total loans was 1.02% at December 31, 2004 and 1.07% at December 31, 2003. Based on the present economic environment and our analysis of the financial condition of the borrowers, we consider the present allowance to be appropriate and adequate to cover probable losses inherent in the loan portfolio, however, changes in future economic conditions and in the financial condition of borrowers cannot be predicted at this time. Deterioration in such conditions could result in increases in charge-offs or adversely classified loans and accordingly, in additional provisions for loan losses.

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     The balance of the allowance for loan losses and actual loss experience for the last five years is summarized in the following table:

Non-performing and Delinquent Loans

     When in the opinion of management, serious doubt exists as to the collectability of a loan, the loan is placed on non-accrual status and interest previously accrued but unpaid is deducted from interest income. We do not recognize income on any loans past due 90 days or more. In 2004, $538,000 of additional income on nonaccrual loans would have been reported if the loans had been current in accordance with their original terms and had been outstanding throughout the year. Additionally, in 2003 we would have reported an additional $613,000 of interest income on non-accrual loans had the loans been in accordance with their original terms.

     Nonperforming assets increased by $2.9 million from $7.2 million at December 31, 2003 to $10.2 million at December 31, 2004. The increase in non-performing assets can be attributed to the increase in nonaccrual loans, primarily commercial business loans and commercial real estate loans which was partially offset by the sale of property previously held in other real estate owned. Other real estate owned is principally comprised of commercial properties acquired in partial or total satisfaction of problem loans. Management believes that losses on non-performing assets will be minimal due to the collateral position in each situation.

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     The following table summarizes non-performing assets on the dates indicated (dollars in thousands):