SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON D.C. 20549
 
 FORM 10-Q
 
 [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2003
 
 or
 
 [  ] 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) 
 19105 West Capitol Drive, Suite 200
 Brookfield, Wisconsin 53045  (Address of principal executive office)
 
 (262) 790-2120
 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  X No
 
 Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
 
 Yes  XNo
 As of November 1, 2003, 2,875,630 shares of Common Stock were outstanding.
   MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
 
 FORM 10-Q
 
 INDEX
 
 Page
 Number
 Part I. Financial Information
 
 Item 1. Financial StatementsUnaudited Consolidated Statements of Financial Condition as of September 30, 2003, December 31, 2002, and September 30, 2002
3Unaudited Consolidated Statements of Income for the Three Months and Nine Months ended September 30, 2003 and 2002
4Unaudited Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2003 and 2002
5Notes to Unaudited Consolidated Financial Statements
6Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
13Item 3. Quantitative and Qualitative Disclosure About Market Risk
25Item 4. Controls and Procedures
26Part II. Other InformationItems 1-6
27Signatures
28 2  Part I. Financial Information
 Merchants and Manufacturers Bancorporation, Inc.
 Unaudited Consolidated Statements of Financial Condition
 September 30,
December 31,
September 30,2003


2002


2002(Amounts In Thousands, Except
Share and Per Share Amounts)ASSETSCash and due from banks

$
22,947

$
31,539

$
19,479Interest bearing deposits in banks


4,449


3,825


2,905Federal funds sold


8,222


26,391


18,483Cash and cash equivalents


35,618


61,755


40,867Available-for-sale securities


122,214


130,125


74,161Loans, less allowance for loan losses of $7,927 at
September 30, 2003, $7,663 at December 31, 2002
and $6,100 at September 30, 2002


727,548


657,775


495,392Accrued interest receivable


4,408


4,248


3,043FHLB stock


15,488


14,935


2,826Premises and equipment


15,535


15,406


10,808Intangible assets


11,778


9,681


2,877Other assets


16,793


15,170


10,704Total assets

$
949,382

$
909,095

$
644,393LIABILITIES AND STOCKHOLDERS' EQUITYLiabilities:Deposits:Non-interest bearing

$
95,055

$
97,288

$
69,670Interest bearing


665,064


632,168


448,406Total deposits


760,119


729,456


518,076Short-term borrowings


21,021


18,088


9,046Long-term borrowings


63,064


72,322


53,900Accrued interest payable


1,140


1,403


775Company Obligated Mandatorily Redeemable Preferred Securities


20,000


10,000


--Other liabilities


10,900


8,497


6,769Total liabilities


876,244


839,766


588,566Stockholders' equityPreferred stock, $1.00 par value; 250,000 shares authorized,shares issued and shares outstanding  none


--


--


--Common stock $1.00 par value; 6,000,000 shares authorized;shares issued: 2,977,231 at September 30, 2003 and December 31,2002, 2,587,509 at September 30, 2002; shares outstanding:2,875,630 at September 30, 2003, 2,875,155 at December 31, 2002and 2,485,433 at September 30, 2002


2,977


2,977


2,588Additional paid-in capital


26,302


26,308


14,952Retained earnings


46,000


41,489


40,216Accumulated other comprehensive income


736


1,448


964Treasury stock, at cost (101,601 shares at September 30, 2003,102,076 shares at December 31, 2002 and September 30, 2002


(2,877
)

(2,893
)

(2,893
)Total stockholders' equity


73,138


69,329


55,827Total liabilities and stockholders' equity

$
949,382

$
909,095

$
644,393See notes to unaudited consolidated financial statements. 3   Merchants and Manufacturers Bancorporation, Inc.
 Unaudited Consolidated Statements of Income
 Three Months Ended
September 30,

**Nine Months Ended
September 30,**2003
2002

2003
2002Interest income:
*(In Thousands, except per share data)*Interest and fees on loans
$11,228
$8,799

$33,258
$26,059Interest and dividends on securities:Taxable
465
138

1,549
474Tax-exempt
334
210

1,012
671Interest on mortgage-backed securities
406
484

1,471
1,427Interest on interest bearing deposits in
Banks and federal funds sold
30
102

149
313Total interest income
12,463
9,733

37,439
28,944Interest expense:Interest on deposits
2,747
2,475

8,728
7,531Interest on short-term borrowings
83
96

404
424Interest on long-term borrowings
615
523

1,905
1,663Interest on Company Obligated Manadatorily Redeemable Preferred Securities
325
--

632
--Total interest expense
3,770
3,094

11,669
9,618Net interest income
8,693
6,639

25,770
19,326Provision for loan losses
372
282

1,014
844Net interest income after provision for loan losses
8,321
6,357

24,756
18,482Non-interest income:Service charges on deposit accounts
661
440

1,896
1,146Service charges on loans
771
180

2,120
625Securities gains, net
0
0

1
210Gain on sale of loans, net
568
227

1,744
360Net gain on sale of premises
0
89

2
267Other
1,043
465

2,613
1,427Total noninterest income
3,043
1,401

8,376
4,035Noninterest expenses:Salaries and employee benefits
4,728
2,932

13,619
8,803Premises and equipment
1,260
842

3,725
2,465Data processing fees
268
276

857
948Marketing and business development
383
270

1,151
711Federal deposit insurance premiums
31
24

97
75Other
1,508
813

4,333
2,587Total noninterest expense
8,178
5,157

23,782
15,589Income before income taxes
3,186
2,601

9,350
6,928Income taxes
1,083
863

3,200
2,288Net income
$ 2,103
$ 1,738

$ 6,150
$ 4,640Basic earnings per share
$ 0.73
$ 0.70

$ 2.14
$ 1.86Diluted earnings per share
$ 0.73
$ 0.70

$ 2.13
$ 1.86Dividends per share
$ 0.19
$ 0.19

$ 0.57
$ 0.53See notes to unaudited consolidated financial statements.
 4   Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Unaudited Consolidated Statements of Cash Flows
 Nine Months Ended September 30,2003

2002(In Thousands)Cash Flows From Operating ActivitiesNet income
$
6,150

$
4,640Adjustments to reconcile net income to cash
provided by operating activities:Provision for loan losses

1,014


844Depreciation

1,209


736Amortization and accretion of premiums and discounts, net

634


117Securities gains, net

(1
)

(210
)Gain on sale of loans, net

(1,744
)

(360
)Gain on sale of premises and equipment, net

--


(267
)(Decrease) increase in accrued interest receivable

(160
)

124Decrease in accrued interest payable

(263
)

(253
)Other, net

(260
)

2,705Net cash provided by operations before loan
originations and sales

6,579


8,076Loans originated for sale

(161,182
)

(58,715
)Proceeds from sales of loans

163,231


58,066Net cash provided by operating activities

8,628


7,427Cash Flows From Investing ActivitiesPurchase of available-for-sale securities

(43,621
)

(30,386
)Proceeds from sales of available-for-sale securities

7,353


7,008Proceeds from redemptions and maturities of available-for-sale securities

42,385


16,416Net increase in loans

(71,405
)

(23,675
)Purchase of premises and equipment

(1,338
)

(1,266
)Purchase of Federal Home Loan Bank stock

(848
)

(141
)Net cash used in investing activities

(67,474
)

(32,044
)Cash Flows From Financing ActivitiesNet increase in deposits

30,663


40,292Net increase (decrease) in short-term borrowings

2,933


(8,000
)Dividends paid

(1,639
)

(1,318
)Proceeds from long-term borrowings

15,000


6,500Repayment of long-term borrowings

(24,258
)

(8,400
)Issuance of Company-obligated mandatorily redeemable preferred securities

10,000


--Purchase of treasury stock

(1
)

(1,072
)Proceeds from sale of treasury stock

11


14Net cash provided by financing activities

32,709


28,016Increase (decrease) in cash and cash equivalents

(26,137
)

3,399Cash and cash equivalents at beginning of period

61,755


37,468Cash and cash equivalents at end of period
$
35,618

$
40,867Supplemental Cash Flow Information and Noncash Transactions:Interest paid
$
11,933

$
9,882Income taxes paid

3,503


2,358Loans transferred to other real estate owned

313


2,897Supplemental Schedules of Noncash Investing Activities, change in accumulatedother comprehensive income, unrealized gains on available-for-sale securities, net
$
(712
)
$
634See notes to unaudited consolidated financial statements 
 5 Merchants and Manufacturers Bancorporation, Inc.
 Notes to Unaudited Consolidated Financial Statements
 September 30, 2003
 
 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 of Oconto County, Fortress Bank of Westby, Fortress Bank of Cresco, Fortress Bank, N.A. (collectively, the Banks), Merchants Merger Corp., CBG Financial Services, Inc., CBG Services, 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 subsidiaries, GSB Investments, Inc. and CBG Mortgage, Inc. Community Bank of Oconto County also includes the accounts of its wholly owned subsidiary, CBOC Investments, Inc. Fortress Bank of Westby also includes the accounts of its wholly owned subsidiaries, Westby Investment Company, Inc. and Fortress Mortgage Services Company. CBG Financial Services also includes the accounts of its wholly owned subsidiaries Link Community Financial Services and Keith C. Winters & Associates. 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 nine-month periods ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in our Form 10-K for the year ended December 31, 2002.
 
 The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of date of the financial statements, as well as the reported amounts of income and expenses during the reported periods. Actual results could differ from those estimates.
 6 NOTE B -- Earnings Per Share
 
 Presented below are the calculations for basic and diluted earnings per share:
 
 Three Months EndedSeptember 30,
Nine Months EndedSeptember 30,Basic
2003
2002
2003
2002*(In Thousands, except per share data)*Net income
$ 2,103
$ 1,738
$ 6,150
$ 4,640Weighted average shares outstanding
2,876
2,485
2,875
2,491Basic earnings per share
$ 0.73
$ 0.70
$ 2.14
$ 1.86Diluted:*(In Thousands, except per share data)*Net income
$ 2,103
$ 1,738
$ 6,150
$ 4,640Weighted average shares outstanding
2,876
2,485
2,875
2,491Effect of dilutive stock options outstanding
17
2
14
0Diluted weighted average shares outstanding
2,893
2,487
2,889
2,491Diluted earnings per share
$ 0.73
$ 0.70
$ 2.13
$ 1.86
 
 NOTE C -- Comprehensive Income
 
 The following table presents our comprehensive income.
  Three Months EndedSeptember 30,
Nine Months EndedSeptember 30,2003
2002
2003
2002*(In Thousands)*Net income
$2,103
$ 1,738
$6,150
$ 4,640Other comprehensive incomeChange in unrealized securities gains (losses)
(1,551)
498
(1,132)
815Reclassification adjustment for gains
included in net income
0
0
1
210Income tax effect
546
(169)
419
(391)Total comprehensive income
$1,098
$ 2,067
$5,438
$ 5,274 
 7 NOTE D -- Loans Receivable
 
 Loans are comprised of the following categories (dollars in thousands):
 
 September 30,
2003
December 31, 2002
September 30,
2002First Mortgage:Conventional single-family residential

$
88,895

$
98,075

$
71,084Commercial and multifamily residential


230,534


198,250


176,228Construction


48,792


32,995


35,348Farmland


26,371


20,847


8,853394,592


350,167


291,513Commercial business loans


278,484


246,787


169,862Consumer and installment loans


44,297


51,883


31,183Home equity loans


14,300


9,492


7,445Other


3,802


7,109


1,489340,883


315,271


209,979Total loans


735,475


665,438


501,492Less allowance for loan losses


7,927


7,663


6,100Loans, net

$
727,548

$
657,775

$
495,392 
 NOTE E  Stock-Based Compensation Plan
 
 At September 30, 2003 we had a stock-based key officer and employee compensation plan. We account for this plan under the recognitions and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees , and related Interpretations. No stock-based employee compensation cost is reflected in the consolidated statements of 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
September 30,
Nine Months Ended
September 30,2003


2002


2003


2002(Amounts In Thousands, Except Per Share Data)Net income, as reported

$
2,103

$
1,738

$
6,150

$
4,640Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects


268


177


495


307Pro forma net income

$
1,835

$
1,561

$
5,655

$
4,333Earnings per share:Basic:As reported

$
0.73

$
0.70

$
2.14

$
1.86Pro forma

$
0.64

$
0.63

$
1.97

$
1.74Diluted:As reported

$
0.73

$
0.70

$
2.13

$
1.86Pro forma

$
0.63

$
0.63

$
1.96

$
1.74 
 8 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 September 30, 2003 and September 30, 2002, respectively: dividend yield of 2.08% and 2.35%; expected price volatility of 14.76% and 14.84%; blended risk-free interest rates of 3.14% and 5.14%; and expected lives of 10 years, respectively.
 
 NOTE F -- Recent Acquisitions
 
 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, N.A. headquartered in Houston, Minnesota (Fortress Banks). The purchase price for Fortress was $21.0 million including $9.4 million in cash and 389,722 shares of common stock valued at $11.7 million based on the average price over the contractual pricing period. At the date of the acquisition, Fortress had consolidated assets of $222.5 million, consolidated loans of $144.8 million and consolidated deposits of $175.2 million. The year-to-year comparisons are significantly impacted by our completion of the acquisition of Fortress. The acquisition was accounted for using the purchase method of accounting, and accordingly, the assets and liabilities of Fortress were recorded at their respective fair values on November 30, 2002 and account balances acquired are included in our financial results.
 
 On April 15, 2003 we acquired Integrated Financial Services, Inc. (IFS) and on May 1, 2003, we acquired Keith C. Winters & Associates (KCW). IFS is an insurance agency based in Mequon, Wisconsin and was organized in 1999. KCW is a tax preparation and tax consulting firm with two offices in Franklin, Wisconsin and has been in business for more than 30 years.
 
 Effective November 1, 2003, we completed our acquisition of Reedsburg Bancorporation, Inc. ("Reedsburg") (See Note J).
 
 NOTE G -- Pending Acquisition
 
 On April 24, 2003, we announced the signing of a Definitive Agreement to acquire Random Lake Bancorp Limited (Random Lake). Random Lake serves as a one-bank holding company for Wisconsin State Bank. As of September 30, 2003, Random Lake has total assets of $93.9 million with four locations in Wisconsin. The proposed acquisition is subject to a number of closing conditions and there can be no assurance that the proposed acquisition will be completed or, if completed, that the terms of the proposed acquisition will be as presently contemplated.
 9 
 NOTE H  Recent Accounting Pronouncements
 
 Financial Accounting Standards Board Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - an Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34." FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002, and were adopted in the Corporation's financial statements for the year ended December 31, 2002. Implementation of the remaining provisions of FIN 45 on January 1, 2003 did not have a significant impact on the Corporation's financial statements. The Corporation considers the fees collected in connection with the issuance of letters of credit to be representative of the fair value of its obligation undertaken in issuing the guarantee.
 
 FIN No. 46 "Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51." FIN 46 establishes accounting guidance for consolidation of variable interest entities (VIE) that function to support the activities of the primary beneficiary. The primary beneficiary of a VIE is the entity that absorbs a majority of the VIE's expected losses, receives a majority of the VIE's expected residual returns, or both, as a result of ownership, controlling interest, contractual relationship or other business relationship with a VIE. Prior to the implementation of FIN 46, VIEs were generally consolidated by an enterprise when the enterprise had a controlling financial interest through ownership of a majority of voting interest in the entity. The provisions of FIN 46 were effective immediately for all arrangements entered into after January 31, 2003. If a VIE existed prior to February 1, 2003, FIN 46 was effective at the beginning of the first interim period beginning after June 15, 2003. However, on October 8, 2003, the Financial Accounting Standards Board (FASB) deferred the implementation date of FIN 46 until the first period ending after December 15, 2003.
 
 The Corporation expects to adopt FIN 46 in connection with its consolidated financial statements for the year ending December 31, 2003. The Corporation formed Merchants and Manufacturers Statutory Trust I in November 2002 to issue $10,000,000 of trust preferred securities and Merchants and Manufacturers Statutory Trust II in May 2003 to issue $10,000,000 of trust preferred securities. Also, in October 2003 the Corporation formed Merchants and Manufacturers Statutory Trust III and Merchants and Manufacturers Statutory Trust IV to issue a total of $15,000,000 of trust preferred securities (See Note J). In its current form, FIN 46 may require the Corporation to de-consolidate its investment in Merchants and Manufacturers Statutory Trust I and Merchants and Manufacturers Statutory Trust II in future financial statements and may not allow the Corporation to consolidate Merchants and Manufacturers Statutory Trust III and Merchants and Manufacturers Statutory Trust IV in future financial statements. The potential de-consolidation of subsidiary trusts of bank holding companies formed in connection with the issuance of trust preferred securities, like the four trusts formed by the Corporation, appears to be an unintended consequence of FIN 46. It is currently unknown if, or when, the FASB will address this issue. In July 2003, the Board of Governors of the Federal Reserve System issued a supervisory letter instructing bank holding companies to continue to include trust preferred securities in their Tier I capital for regulatory capital purposes until notice is given to the contrary. The Federal Reserve stated that it intends to review the regulatory implications of any accounting treatment changes and, if necessary or warranted, provide further appropriate guidance. There can be no assurance that the Federal Reserve will continue to permit institutions to include trust preferred securities in Tier I capital for regulatory capital purposes. As of September 30, 2003, assuming the Corporation was not
 10 permitted to include the $20 million in trust preferred securities issued by Merchants and Manufacturers Statutory Trust I and Merchants and Manufacturers Statutory Trust II in its Tier 1 capital, the Corporation would still exceed the regulatory required minimums for capital adequacy purposes. If the trust preferred securities were no longer permitted to be included in Tier 1 capital, the Corporation believes it would be permitted to redeem the capital securities, which bear interest at a fixed rate of 8.25% with respect to a total $17,500,000 of trust preferred securities issued by Merchants and Manufacturers Statutory Trust II and Merchants and Manufacturers Statutory Trust III, a variable rate equal to 3-month LIBOR plus 3.35% with respect to $7,500,000 of trust preferred securities issued by Merchants and Manufacturers Statutory Trust I and a variable rate equal to 3-month LIBOR plus 2.95% with respect to $7,500,000 of trust preferred securities issued by Merchants and Manufacturers Statutory Trust IV, without penalty.
 
 The interpretations of FIN 46 and its application to various transaction types and structures are evolving. Management continuously monitors emerging issues related to FIN 46, some of which could potentially impact the Corporation's financial statements.
 
 The Financial Accounting Standards Board has issued Statement 149, Amendment of Statement 133 on Derivative Instruments and Hedging. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. The Statement is effective for contracts entered into or modified after September 30, 2003 and for hedging relationships designated after September 30, 2003. Implementation of the Statement is not expected to have a material impact on the financial statements.
 
 The Financial Accounting Standards Board has issued Statement 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and requires that certain freestanding financial instruments be reported as liabilities in the balance sheet. Depending on the type of financial instrument, it is required to be accounted for at either fair value or the present value of future cash flows determined at each balance sheet date with the change in that value reported as interest expense in the income statement. Prior to the application of Statement No. 150, either those financial instruments were not required to be recognized, or if recognized were reported in the balance sheet as equity and changes in the value of those instruments were normally not recognized in net income. For the Corporation, the Statement was effective July 1, 2003 and implementation did not have a material impact on the consolidated financial statements.
 
 
 NOTE I  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.
 11 
 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 September 30, 2003, December 31, 2002 and September 30, 2002, are as follows:
 
 September 30, 2003
December 31, 2002
September 30, 2002(Amounts In Thousands)Commitments to originate mortgage loans
$
21,684

$
23,845

$
21,352Unused lines of credit:Commercial business

86,511


71,074


60,613Home equity

12,831


11,088


7,676Credit cards

12,430


10,832


7,787Other

--


97


--Standby letters of credit

10,736


9,346


7,566
 
 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 one of the Banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds collateral, which may include accounts receivable, inventory, property, equipment, and income-producing properties, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Bank would be required to fund the commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount shown in the summary above. If the commitment is funded, the Bank would be entitled to seek recovery from the customer. Credit card commitments are unsecured. At September 30, 2003 no amounts have been recorded as liabilities for the Banks 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.
 12 
 NOTE J -- Subsequent Events
 
 Effective November 1, 2003, the Corporation consummated the merger (the "Merger") of Merchants New Merger Corp., a wholly owned subsidiary of the Corporation ("Merger Corp."), with and into Reedsburg pursuant to the Agreement and Plan of Reorganization, dated as of April 24, 2003, as amended as of May 15, 2003 (the "Merger Agreement"), among the Corporation, Merger Corp. and Reedsburg. As a result of the Merger, Reedsburg became a wholly owned subsidiary of the Corporation. As of September 30, 2003, Reedsburg has assets of $142 million with four locations in central Wisconsin.
 
 Pursuant to the Merger Agreement, Reedsburg shareholders will receive $900 per share, resulting in total merger consideration of $36 million. Reedsburg shareholders will receive 85% of the merger consideration in the form of cash and promissory notes and the remaining 15% in the form of the Corporation's common stock. The Corporation will issue up to $20 million of the total merger consideration in promissory notes. The daily average price of the Corporation's common stock during the valuation period specified in the Merger Agreement was $36.759, resulting in an exchange ratio of 3.6726 shares of the Corporation's common stock for each share of Reedsburg common stock. Thus, each share of Reedsburg common stock will be exchanged for $765 of cash and/or promissory notes and 3.6726 shares of the Corporation's common stock.
 
 The Corporation completed an offering of a total of $15,000,000 of trust preferred securities on October 15, 2003, and will use all or a part of the proceeds of the offering to fund the cash portion of the consideration to be issued in the Merger. On October 15, 2003, Merchants and Manufacturers Statutory Trust III, a Connecticut statutory trust wholly owned by the Corporation, issued $7,500,000 of fixed rate capital securities to one accredited investor and used the proceeds to purchase a like amount of fixed rate junior subordinated debentures of the Corporation. Also, on October 15, 2003, Merchants and Manufacturers Statutory Trust IV, a Connecticut statutory trust wholly owned by the Corporation, issued $7,500,000 of floating rate capital securities to one accredited investor and used the proceeds from the capital securities to purchase a like amount of floating rate junior subordinated debentures of the Corporation. The fixed rate capital securities accrue and pay dividends quarterly at a fixed rate equal to 8.25% and the floating rate capital securities accrue and pay dividends quarterly at a variable rate equal to 3-month LIBOR plus 2.95%. The Corporation has fully and unconditionally guaranteed all of the obligations of the trusts. The guarantee covers the quarterly dividends and payments on the liquidation or redemption of the capital securities, but only to the extent of funds held by the trusts. The capital securities are mandatorily redeemable upon maturity of the debentures on October 15, 2033 or earlier as provided in the indenture with respect to the debentures. The Corporation has the right to redeem the debentures on or after October 15, 2008.
 
 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 Financial Condition
 
 Total Assets
 
 Total assets increased $40.3 million, or 4.4% to $949.4 million at September 30, 2003 compared to $909.1 million at December 31, 2002. The growth in loans caused the majority of the increase.
 13 Investment Securities
 
 Investment securities available-for-sale decreased $7.9 million, or 6.1%, from $130.1 million at December 31, 2002, to $122.2 million at September 30, 2003. Sales of investment securities and amounts repaid were partially offset by purchases of investments during the period.
 
 Loans Receivable
 
 Loans receivable, net of allowance for loan losses increased $69.7 million from $657.8 million at December 31, 2002 compared to $727.5 million at September 30, 2003. The growth in loans can be attributed to the growth in commercial business and construction loans that were partially offset by the decrease in consumer and residential mortgage 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 September 30, 2003 we designated $546,000 of loans as held for sale.
 
 Total Deposits and Borrowings
 
 Total deposits increased $30.6 million, or 4.2%, from $729.5 million on December 31, 2002 to $760.1 million on September 30, 2003. The increase in deposits can be attributed to the growth in retail money market accounts and savings accounts currently offered by our subsidiary banks. Uncertainties in the stock market also contributed to the deposit increase. Short-term borrowings increased by $2.9 million, or 16.2%, from $18.1 million on December 31, 2002 to $21.0 million on September 30, 2003. Short-term borrowings consist of federal funds borrowed from correspondent banks and repurchase agreements. Long-term debt decreased by $9.3 million, or 12.8%, from $72.3 million on December 31, 2002 to $63.1 million on September 30, 2003. Long-term debt consists of Federal Home Loan Bank advances.
 
 On May 30, 2003, Merchants and Manufacturers Statutory Trust II, a Connecticut statutory trust wholly owned by the Corporation, issued $10,000,000 of fixed rate capital securities to one accredited investor. The Trust used the proceeds from the capital securities to purchase a like amount of fixed rate junior subordinated debentures of the Corporation. The capital securities accrue and pay dividends quarterly at a fixed rate equal to 8.25%. The Corporation has fully and unconditionally guaranteed all of the obligations of the Trust. The guarantee covers the quarterly dividends and payments on the liquidation or redemption of the capital securities, but only to the extent of funds held by the Trust. The capital securities are mandatorily redeemable upon maturity of the debentures on May 30, 2033 or earlier as provided in the indenture with respect to the debentures. The Corporation has the right to redeem the debentures on or after May 30, 2008.
 
 On November 12, 2002, Merchants and Manufacturers Statutory Trust I, a Connecticut statutory trust wholly owned by the Corporation, issued $10,000,000 of floating rate capital securities to one accredited investor. The Trust used the proceeds from the capital securities to purchase a like amount of floating rate junior subordinated debentures of the Corporation. The capital securities accrue and pay dividends quarterly at a variable rate, reset quarterly, equal to 3-month LIBOR plus 3.35%. The Corporation has fully and unconditionally guaranteed all of the obligations of the Trust. The guarantee covers the quarterly dividends and payments on the liquidation or redemption of the capital securities, but only to the extent of funds held by the Trust. The capital securities are mandatorily redeemable upon maturity of the debentures on November 12, 2032 or earlier as provided in the indenture with respect to the debentures. The Corporation has the right to redeem the debentures on or after November 12, 2007.
 
 14 Holders of the capital securities have no voting rights, are unsecured and rank junior in priority of payment to all of the Corporations indebtedness and senior to the Corporations capital stock. The capital securities are included on the balance sheet as liabilities; however for regulatory purposes they are allowed in the calculation of Tier 1 capital as of December 31, 2002 and September 30, 2003. See Note H to the unaudited consolidated financial statements for a description of certain risks relating to the accounting and regulatory treatment of the capital securities.
 
 Capital Resources
 
 Stockholders' equity at September 30, 2003 was $73.1 million compared to $69.3 million at December 31, 2002, an increase of $3.8 million. The change in stockholders' equity consists of net income of $6.2 million, less payments of dividends to shareholders of $1.6 million and a $712,000 net decrease in accumulated other comprehensive income. We and our banks continue to exceed our regulatory capital requirements.
 
 Under the Federal Reserve Boards risk-based guidelines, capital is measured against our subsidiary banks risk-weighted assets. Our tier 1 capital (common stockholders equity less goodwill) to risk-weighted assets was 10.3% at September 30, 2003, well above the 4.0% minimum required. Total capital to risk-adjusted assets was 11.4%; also well above the 8.0% minimum requirement. The leverage ratio was at 8.6% compared to the 4.0% minimum requirement. According to FDIC capital guidelines, our subsidiary banks are considered to be well capitalized as well.
 
 In October 2003, prior to the consummation of our acquisition of Reedsburg, we issued a total of $15 million of additional trust preferred securities. See Note J to the unaudited consolidated financial statements. As our acquisition oriented growth strategy continues, we may be required to add additional capital to maintain our current "well capitalized" rating.
 
 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.
 15 
 Nonperforming assets are summarized, for the dates indicated, as follows (dollars in thousands):
 
 September 30,
2003
December 31,
2002
September 30,
2002Non-accrual loans:Conventional single-family residential
$
639

$
613

$
564Commercial and multifamily residential

1,634


820


858Commercial business loans

1,002


1,246


715Consumer and installment loans

673


524


522Total non-accrual loans

3,948


3,203


2,659Other real estate owned

1,907


2,382


2,877Total nonperforming assets
$
5,855

$
5,585

$
5,536Ratios:Non-accrual loans to total loans

0.54
%

0.48
%

0.54
%Nonperforming assets to total assets

0.63


0.61


0.86Loan loss allowance to non-accrual loans

200.79


239.24


229.41Loan loss allowance to total loans

1.08


1.15


1.22 
 Nonperforming assets increased by $270,000 from $5.6 million at December 31, 2002 to $5.9 million at September 30, 2003, an increase of 4.8%. The growth in non-accrual loans contributed to the increase. We believe that any losses on current non-accrual loans balances will be negligible, due to the collateral position in each situation. However, additional losses may occur upon sale of the other real estate.
 
 The following table presents changes in the allowance for loan losses (dollars in thousands):
  Three Months Ended
Nine Months EndedSeptember 30,
2003
September 30,
2002
September 30,
2003
September 30, 2002Balance at beginning of period

$
8,009

$
5,927

$
7,663

$
5,563Provision for loan losses


372


282


1,014


844Charge-offs:Commercial and multifamily residential


99


0


128


0Commercial business loans


317


1


352


90Consumer and installment loans


143


120


457


307Total charge-offs


559


121


937


397Recoveries:Commercial and multifamily residential


0


0


28


17Commercial business loans


62


0


82


5Consumer and installment loans


43


12


77


68Total recoveries


105


12


187


90Net charge-offs


454


109


750


307Balance at September 30,

$
7,927

$
6,100

$
7,927

$
6,100 
 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 materially different financial condition or results of operations is a reasonable likelihood.
 
 16 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 seven by the originating loan officer or loan committee, with one being the best case and seven being a loss or the worst case. Loan loss reserve factors are multiplied against the balances in each risk-rating category to determine an appropriate level for the allowance for loan losses. Loans with risk ratings between four and six 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 and our credit quality committee on a quarterly basis. 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 third quarter 2003 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. Once a quarter at each banks Board of Directors meeting a watch list is presented, showing all loans listed as Management Attention, Substandard, Doubtful and Loss. An asset is classified Substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all the weaknesses  inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets classified as Loss are those considered uncollectible and viewed as non-bankable assets, worthy of charge-off. Assets that do not currently expose us to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that may or may not be within the control of the customer are deemed to be Management Attention. As of September 30, 2003 the loans classified as Management Attention were $25.0 million compared to $22.3 million as of December 31, 2002, an increase of $2.7 million or 12.1%. The increase can be attributed to the economic downturn currently being experienced by our commercial loan customers.
 17 
 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 believe 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 at Board of Directors meetings. 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 Nine Months Ended September 30, 2003 and 2002
 
 Net Interest Income
 
 Net interest income equals the difference between interest earned on assets and the interest paid on liabilities and is a measure of how effectively management has balanced and allocated our interest rate sensitive assets and liabilities as well being the most significant component of earnings. Net interest income on a fully taxable-equivalent basis for the three months ended September 30, 2003 was $8.9 million, an increase of 31.6% from the $6.8 million reported for the same period in 2002, and for nine months ended September 30, 2003 was $26.4 million, an increase of 33.8% from the $19.7 million reported for the same period in 2002. The increase is due to revenue resulting from the acquisition of Fortress as well as the increase in loan and investment volume made possible by an increase in deposits. Net interest income for the nine months ended September 30, 2003 included $6.1 million from the Fortress Banks. Our net interest margin on a fully taxable-equivalent basis was 4.02% and 4.50% for the third quarters of 2003 and 2002, respectively. The compression in the net interest margin has been affected by the purchase accounting adjustments associated with the acquisition of Fortress and the interest rate cuts made by the Federal Reserve during 2002 and 2003. Management believes that, should the Federal Reserve make additional rate reductions, we could potentially experience further margin compression. The reduction in market interest rates during the quarter caused the average rate on a fully taxable-equivalent basis earned on interest earning assets to decrease from 6.56% for the three months ended September 30, 2002, to 5.73% for the three month period ended September 30, 2003, and from 6.71% for the nine months ended September 30, 2002, to 5.91% for the nine month period ended September 30, 2003.
 18 
 The following table presents, for the periods indicated, the total dollar amount of interest income from average interest earning assets and the resultant yields, as well as the interest expense on average interest bearing liabilities, and the resultant costs, expressed both in dollars and rates (dollars in thousands):
  AVERAGE BALANCES, INTEREST RATES AND YIELDS
  **For the Three Months Ended September 30,**2003
2002Average Balance
Interest
Average
Rate
Average
Balance
Interest
Average
RateAssetsLoans, net (1)(2)
$721,591
$11,185
6.15%
$500,561
$8,783
6.96%Loans exempt from federal income taxes (3)
3,278
65
7.89%
1,362
24
6.99%Taxable investment securities (4)
37,693
465
4.89%
13,701
138
4.00%Mortgage-related securities (4)
64,412
406
2.50%
42,223
484
4.55%Investment securities exempt from federal income taxes (3)(4)
35,058
506
5.73%
19,295
318
6.54%Other securities
14,730
30
0.81%
18,141
102
2.23%Interest earning assets
876,762
12,657
5.73%
595,283
9,849
6.56%Non interest earning assets
70,036


35,841Average assets
$946,798


$631,124Liabilities and Stockholders' EquityNOW deposits
$61,154
83
0.54%
$36,150
76
0.83%Money market deposits
240,884
850
1.40%
108,842
470
1.71%Savings deposits
87,129
127
0.58%
79,095
228
1.14%Time deposits
267,917
1,687
2.50%
206,865
1,701
3.26%Short-term borrowings
16,221
83
2.03%
15,212
96
2.50%Long-term borrowings
67,489
615
3.62%
54,141
523
3.83%Company-obligated mandatorily redeemable preferred securities
20,000
325
6.45%
--
--
--%Interest bearing liabilities
760,794
3,770
1.97%
500,305
3,094
2.45%Demand deposits and other non interest bearing liabilities
113,028


75,948Stockholders' equity
72,976


54,871Average liabilities and stockholders' equity
$946,798


$631,124Net interest spread (5)

$8,887
3.76%

$6,755
4.11%Net interest earning assets
$115,968


$94,978Net interest margin on a fully tax equivalent basis (6)


4.02%


4.50%Net interest margin (6)


3.93%


4.42%Ratio of average interest-earning assets to average interest-bearing liabilities


1.15


1.19
 _________________________
 
 (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.
 
 19 
 The following table presents, for the periods indicated, the total dollar amount of interest income from average interest earning assets and the resultant yields, as well as the interest expense on average interest bearing liabilities, and the resultant costs, expressed both in dollars and rates (dollars in thousands):
  AVERAGE BALANCES, INTEREST RATES AND YIELDS
 For the Nine Months Ended September 30,2003
2002Average Balance
Interest
Average
Rate
Average
Balance
Interest
Average
RateAssetsLoans, net (1)(2)
$
696,826

$
33,120

6.35
%
$
491,233

$
26,008


7.08
%Loans exempt from federal income taxes (3)

3,443


209

8.12
%

1,432


79


7.38
%Taxable investment securities (4)

37,577


1,549

5.51
%

14,859


474


4.26
%Mortgage-related securities (4)

68,979


1,471

2.85
%

37,553


1,427


5.08
%Investment securities exempt from federal income taxes (3)(4)

34,506


1,533

5.94
%

20,272


1,017


6.71
%Other securities

19,281


149

1.03
%

18,524


313


2.26
%Interest earning assets

860,612


38,031

5.91
%

583,873


29,318


6.71
%Non interest earning assets

65,472







35,507Average assets
$
926,084






$
619,380Liabilities and Stockholders' EquityNOW deposits
$
60,229


303

0.67
%
$
35,801


247


0.92
%Money market deposits

219,039


2,518

1.54
%

94,689


1,172


1.65
%Savings deposits

85,741


417

0.69
%

77,340


654


1.13
%Time deposits

275,721


5,490

2.66
%

206,927


5,458


3.53
%Short-term borrowings

25,587


404

2.11
%

24,265


424


2.34
%Long-term borrowings

68,742


1,905

3.71
%

54,439


1,663


4.08
%Company-obligated mandatorily redeemable preferred securities

14,516


632

5.82
%

--


--


--
%Interest bearing liabilities

749,575


11,669

2.08
%

493,461


9,618


2.61
%Demand deposits and other non interest bearing liabilities

105,281







72,340Stockholders' equity

71,228







53,579Average liabilities and stockholders' equity
$
926,084






$
619,380Net interest spread (5)



$
26,362

3.83
%



$
19,700


4.11
%Net interest earning assets
$
111,037






$
90,412Net interest margin on a fully tax equivalent basis (6)






4.10
%







4.51
%Net interest margin (6)






4.00
%







4.43
%Ratio of average interest-earning assets to average interest-bearing liabilities






1.15








1.18
 _________________________
 
 (1) For the purpose of these computations, nonaccrual loans are included in the daily average loan amounts outstanding.
 (2) Interest earned on loans includes loan fees (which are not material in amount) and interest income which has been received from borrowers whose loans were removed from nonaccrual status during the period indicated.
 (3) Taxable-equivalent adjustments were made using a 34% corporate tax rate for all years presented in calculating interest income and yields.
 (4) Average balances of securities available-for-sale are based on amortized cost.
 (5) Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is represented on a fully tax equivalent basis.
 (6) Net interest margin represents net interest income as a percentage of average interest earning assets.
 
 20 
 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), (iii) changes attributable to changes in mix (changes in rate multiplied by changes in volume), and (iv) net change (dollars in thousands):
  VOLUME, RATE AND MIX ANALYSIS OF NET INTEREST INCOME
 Three Months Ended September 30, 2003
Compared to September 30, 2002
Nine Months Ended September 30, 2003
Compared to September 30, 2002Change Due to Volume
Change Due to Rate
Change Due to Mix
Total Change
Change Due to Volume
Change Due to Rate
Change Due to Mix
Total ChangeInterest-Earning Assets:Loans, net (1)

$3,878
$(1,024)
$(452)
$2,402
$10,885
$(2,660)
$(1,113)
$7,112Loans exempt from federal income taxes (2)

34
3
4
41
111
8
11
130Taxable investment securities

242
31
54
327
724
139
212
1,075Mortgage-related securities

254
(218)
(114)
(78)
1,194
(626)
(524)
44Investment securities exempt from federal income taxes (2)

259
(39)
(32)
188
714
(116)
(82)
516Other securities

(19)
(65)
12
(72)
13
(170)
(7)
(164)Total interest-earning assets

$4,648
$(1,312)
$(528)
$2,808
$13,641
$(3,425)
$(1,503)
$8,713Interest-Bearing Liabilities:NOW deposits

$53
$(27)
$(19)
$7
$169
$(67)
$(46)
$56Money market deposits

570
(86)
(104)
380
1,539
(83)
(110)
1,346Savings deposits

23
(113)
(11)
(101)
71
(278)
(30)
(237)Time deposits

502
(398)
(118)
(14)
1,815
(1,338)
(445)
32Short-term borrowings

6
(18)
(1)
(13)
23
(41)
(2)
(20)Long-term borrowings

129
(30)
(7)
92
437
(154)
(41)
242Company-obligated mandatorily redeemable preferred securities

0
0
325
325
0
0
632
632Total interest-bearing liabilities

$1,283
$(672)
$ 65
$ 676
$4,054
$(1,961)
$(42)
$2,051Net change in net interest income




$ 2,132



$6,662
 ______________________________
 
 (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 September 30, 2003, the provision for loan losses was $372,000 compared to $282,000 for the same period in 2002. For the nine months ended September 30, 2003, the provision for loan losses was $1,014,000 compared to $844,000 for the same period in 2002. The increase is due to the inclusion of Fortress in our consolidated operating results as well as to support the growth in the loan portfolio. 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.
 21 
 Non-Interest Income
 
 Non-interest income for the three months ended September 30, 2003, was $3.0 million compared to $1.4 million for the three months ended September 30, 2002, an increase of $1.6 million, or 117.2%. Non-interest income for the nine months ended September 30, 2003 was $8.4 million compared to $4.0 million for the nine months ended September 30, 2002, an increase of $4.3 million, or 107.6% The increase was due to the inclusion of Fortress results, increased service charges collected on deposit accounts and gains on the sale of loans. The Fortress Banks added $658,000 of additional non-interest income during the three month period, and $1.9 million for the nine month period ended September 30, 2003.
 
 Non-Interest Expense
 
 Non-interest expense for the three months ended September 30, 2003, was $8.2 million compared to $5.2 million for the three months ended September 30, 2002, an increase of $3.0 million, or 58.6%. Non-interest expense for the nine months ended September 30, 2003, was $23.8 million compared to $15.6 million for the nine months ended September 30, 2002, an increase of $8.2 million, or 52.6%. The increase in non-interest expense included $1.7 million for three months ended September 30, 2003, and $5.1 million for nine months ended September 30, 2003 in expenses related to the inclusion of the Fortress Banks non-interest expenses in our 2003 third quarter and year to date operating results. Salaries and employee benefits increased $1.8 million or 61.3% from $2.9 million for the three-month period ended September 30, 2002 to $4.7 million for the 2003 three-month period. Salaries and employee benefit expenses increased $4.8 million or 54.7% from $8.8 million for the nine month period of September 30, 2002, to $13.6 million for the 2003 nine month period. The Fortress Banks added $956,000 of additional salaries and employee benefits expense for the three month period and $2.9 million for the nine-month period. Occupancy expense for the three months ended September 30, 2003 was $1.3 million compared to $842,000 for the three months ended September 30, 2002, an increase of $418,000, or 49.6%. Occupancy expense for the nine months ended September 30, 2003 was $3.7 million compared to $2.5 million for the nine months ended September 30, 2002, an increase of $1.3 million, or 51.1%. The Fortress Banks added $249,000 of additional occupancy expense for the three months ended September 30, 2003 and $749,000 for the nine months ended September 30, 2003. Marketing and business development expenses increased $113,000 or 41.2% from $270,000 for the three months ended September 30, 2002 to $383,000 for the 2003 three-month period, and increased $440,000, or 61.9% from $711,000 for nine months ended September 30, 2002 to $1.2 million for the 2003 nine month period. The inclusion of the Fortress expenses as well as the marketing campaign announcing the Fortress acquisition and the promotion of new products and services caused the increase. Other operating expenses increased $695,000 or 85.5% from $813,000 for the three months ended September 30, 2002 to $1.5 million for the 2003 three-month period, and increased $1.7 million, or 67.5% from $2.6 million for the nine months ended September 30, 2002 to $4.3 million for the 2003 period. The Fortress Banks added $359,000 of additional other operating expenses for the three months ended September 30, 2003 and $1.1 million for the nine months ended September 30, 2003.
 22 
 Income Taxes
 
 Income taxes for the three-month period ended September 30, 2003 was $1.1 million compared to $863,000 for the three months ended September 30, 2002, an increase of $220,000, or 25.5%. Income taxes for the nine month period ended September 30, 2003 was $3.2 million compared to $2.3 million for the nine months ended September 30, 2002, an increase of $912,000, or 39.9%. The effective tax rate for the three months ended September 30, 2003 was 34.0% compared to 33.2% for the three months ended September 30, 2002. The effective tax rate for the nine months ended September 30, 2003 was 34.2% compared to 33.0% for the nine months ended September 30, 2002.
 
 Net Income
 
 On an after tax basis, for the three month period ended September 30, 2003, we reported net income of $2.1 million compared to $1.7 million for the same period in 2002, an increase of 21.0%. For the nine month period ended September 30, 2003, we reported net income of $6.2 million compared to $4.6 million for the same period in 2002, an increase of $1.5 million, or 32.5%.
 
 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 $8.6 million for the nine months ended September 30, 2003, compared to $7.4 million provided by operating activities in 2002, an increase of $1.2 million, due primarily to the increase in mortgage loan originations and sales. Net cash used in investing activities increased by $35.4 million, to $67.5 million for the nine months ended September 30, 2003, from $32.0 million used in the same period in 2002. Our lending activities for the first nine months of 2003 compared to 2002 used cash flows of $71.4 million due primarily to an increase in loans, net of principal collections in the 2003 period, compared to using $23.7 million in the 2002 period. Net cash provided by financing activities was $32.7 million for the nine months ended September 30, 2003 compared to $28.0 million provided by financing activities during the nine month period in 2002 The $4.7 million increase in net cash provided by financing activities was primarily due to a $10.0 million increase in trust preferred securities in the 2003 nine-month period.
  
 The Corporation expects to have available cash to meet its liquidity needs. Liquidity management is monitored by the Asset/Liability Management committee, which takes into account the marketability of assets, the sources and stability of funding and the level of unfunded commitments. In the event that additional short-term liquidity is needed, the Banks have established relationships with our correspondent banks to provide short-term borrowings in the form of federal funds purchased. While there are no firm lending commitments in place, we believe that the Banks could borrow $96.2 million for a short time from these banks on a collective basis. The Banks are members of the Federal Home Loan Bank (FHLB) and each has the ability to borrow from the FHLB. As a contingency plan for significant funding needs, the Asset/Liability Management committee may also consider the sale of investment securities, selling securities under agreement to repurchase or the temporary curtailment of lending activities.
 23 
 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 September 30, 2003. 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 September 30, 2003WithinSix Months
Six to TwelveMonths
One toFive Years
OverFive Years
Total(Dollars in Thousands)Interest-earning assets:Fixed-rate mortgage loans

$
35,895

$
58,683

$
178,232

$
10,581

$
283,391Adjustable-rate mortgage loans


83,049


10,343


12,550


17


105,959Total mortgage loans


118,944


69,026


190,782


10,598


389,350Commercial business loans


130,316


30,393


120,483


2,961


284,153Consumer loans


11,786


318


31


105


12,240Home equity loans


11,970


4,443


27,069


1,753


45,235Tax-exempt loans


2,295


156


508


1,538


4,497Mortgage-related securities


17,909


15,323


29,081


2,701


65,014Fixed rate investment securities and other


1,146


5,069


20,308


30,511


57,034Variable rate investment securities and other


28,275


0


50


0


28,325Total interest-earning assets

$
322,641

$
124,728

$
388,312

$
50,167

$
885,848Interest-bearing liabilities:DepositsTime deposits

$
81,809

$
93,197

$
89,200

$
2,583

$
266,789NOW accounts


3,824


3,824


38,241


17,846


63,735Savings accounts


5,602


5,177


51,774


24,161


86,714Money market accounts


40,569


13,229


132,292


61,736


247,826Borrowings


36,181


21,000


31,249


15,655


104,085Total interest-bearing liabilities

$
167,985

$
136,427

$
342,756

$
121,981

$
769,149Interest-earning assets less interest-bearing liabilities


$154,656

$
(11,699
)
$
45,556

$
(71,814
)
$
116,699Cumulative interest rate sensitivity gap

$
154,656

$
142,957

$
188,513

$
116,699Cumulative interest rate sensitivity gap as apercentage of total assets


16.29
%

15.06
%

19.86
%

12.29
% 
 24 At September 30, 2003, the Corporation's cumulative interest-rate sensitive gap as a percentage of total assets was a positive 16.29% for six months and a positive 15.06% 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; (10) changes in accounting principles, policies or guidelines; (11) the acquisition of Random Lake Bancorp Limited is subject to a number of conditions, and no assurance can be given that the acquisition will be completed or, if completed, that the terms of the acquisition will be as presently contemplated; and (12) the Corporation may experience difficulties in integrating its acquisition of Reedsburg Bancorporation, Inc.
  
 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 Disclosure About Market Risk
 
 The Corporation has not experienced any material changes to its market risk position since December 31, 2002, from that disclosed in the Corporations 2002 Form 10-K Annual Report.
 25 
 Item 4. Controls and Procedures
 
 As of the end of the period covered by this report, the Corporation's Chairman of the Board and Principal Executive Officer and 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 Principal Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures are effective, in all material respects, in timely alerting them to material information relating to the Corporation (and its consolidated subsidiaries) required to be included in the periodic reports the Corporation is required to file and submit to the SEC under the Exchange Act. It should be noted that in designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Corporation has designed its disclosure controls and procedures to reach a level of reasonable assurance of achieving the desired control objectives and, based on the evaluation described above, the Corporation's Chairman of the Board and Principal Executive Officer and 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.
 
 26 
 Part II. Other Information
 
 Item 1.
Legal ProceedingsAs of September 30, 2003 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.
Changes in Securities - NONEItem 3.
Defaults upon Senior Securities  NONEItem 4.
Submission of Matters to Vote of Security Holders - NONEItem 5.
Other Information  NONEItem 6.
Exhibits and Reports on Form 8-K(a) Exhibits  The following exhibits are filed as part of this report:EXHIBIT 31.1Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Executive Officer

EXHIBIT 31.2Certification 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 Principal 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.Reports on Form 8-K:

(b) The Corporation furnished a report Form 8-K on July 27, 2003 pursuant to Items 9 and 12 regarding its press release of its June 30, 2003 earnings report. 
 
 27
  
 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.
 _______________________________________
 
   ****Date:  November 13, 2003
By:
/s/  Michael J. MurryMichael J. MurryChairman of the Board of Directors
 and Principal Executive Officer****Date:  November 13, 2003
By:
/s/  James C. MroczkowskiJames C. MroczkowskiExecutive Vice President & Chief Financial OfficerPrincipal Financial Officer
   28
  10-Q EXHIBIT LIST
 
 EXHIBIT NO. DESCRIPTION
 
 
 EXHIBIT 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal 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 Principal 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.
  29