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 June 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 August 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 June 30, 2003, December 31, 2002, and June 30, 2002

3Unaudited Consolidated Statements of Income for the Three Months and Six Months ended June 30, 2003 and 2002

4Unaudited Consolidated Statements of Cash Flows for the Six Months ended June 30, 2003 and 2002

5Notes to Unaudited Consolidated Financial Statements

6Item 2. Management's Discussion and Analysis of Financial Condition
and Results ofOperations

11Item 3. Quantitative and Qualitative Disclosure About Market Risk

23Item 4. Controls and Procedures

24Part II. Other InformationItems 1-6

25Signatures

28 2 
 Part I. Financial InformationMerchants and Manufacturers Bancorporation, Inc.Unaudited Consolidated Statements of Financial ConditionJune 30,
December 31,
June 30,2003
2002
2002(Amounts In Thousands, ExceptShare and Per Share Amounts)ASSETSCash and due from banks

$
28,298

$
31,539

$
17,508Interest bearing deposits in banks


5,577


3,825


13,008Federal funds sold


6,380


26,391


9,399Cash and cash equivalents


40,255


61,755


39,915Available-for-sale securities


125,537


130,125


68,531Loans, less allowance for loan losses of $8,009 atJune 30, 2003, $7,663 at December 31, 2002and $5,927 at June 30, 2002


708,013


657,775


491,893Accrued interest receivable


4,090


4,248


2,794FHLB stock


15,245


14,935


3,690Premises and equipment


15,288


15,406


10,470Intangible assets


11,876


9,681


559Other assets


16,254


15,170


10,972Total assets

$
936,558

$
909,095

$
628,824LIABILITIES AND STOCKHOLDERS' EQUITYLiabilities:Deposits:Non-interest bearing

$
103,556

$
97,288

$
70,139Interest bearing


639,471


632,168


421,426Total deposits


743,027


729,456


491,565Short-term borrowings


21,000


18,088


22,431Long-term borrowings


68,500


72,322


54,300Accrued interest payable


1,274


1,403


861Company Obligated Manadatorily Redeemable Preferred Securities


20,000


10,000


--Other liabilities


10,173


8,497


5,435Total liabilities


863,974


839,766


574,592Stockholders' 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 June 30, 2003 and December 31,2002, 2,587,509 at June 30, 2002; shares outstanding:2,875,555 at June 30, 2003, 2,875,155 at December 31, 2002and 2,485,433 at June 30, 2002


2,977


2,977


2,588Additional paid-in capital


26,302


26,308


14,952Retained earnings


44,444


41,489


38,950Accumulated other comprehensive income


1,741


1,448


635Treasury stock, at cost (101,676 shares at June 30, 2003,102,076 shares at December 31, 2002 and June 30, 2002


(2,880
)

(2,893
)

(2,893
)Total stockholders' equity


72,584


69,329


54,232Total liabilities and stockholders' equity

$
936,558

$
909,095

$
628,824See Notes to Unaudited Consolidated Financial Statements. 3   Merchants and Manufacturers Bancorporation, Inc.Unaudited Consolidated Statements of Income**Three Months Ended**

**Six Months Ended****June 30,**

**June 30,**2003
2002

2003
2002*(In Thousands, except per share data)*Interest income:Interest and fees on loans
$11,032
$8,656

$22,030
$17,260Interest and dividends on securities:Taxable
495
136

1,084
336Tax-exempt
325
224

678
461Interest on mortgage-backed securities
395
487

1,065
943Interest on interest bearing deposits in
banks and federal funds sold
31
126

119
211Total interest income
12,278
9,629

24,976
19,211Interest expense:Interest on deposits
2,910
2,441

5,981
5,056Interest on short-term borrowings
173
169

321
328Interest on long-term borrowings
634
530

1,290
1,140Interest on Company Obligated Manadatorily Redeemable Preferred Securities
188
--

307
--Total interest expense
3,905
3,140

7,899
6,524Net interest income
8,373
6,489

17,077
12,687Provision for loan losses
340
282

642
562Net interest income after provision forloan losses
8,033
6,207

16,435
12,125Non-interest income:Service charges on deposit accounts
663
367

1,235
706Service charges on loans
790
234

1,349
445Securities gains, (losses) net
(72)
210

1
210Gain on sale of loans, net
763
76

1,176
133Net gain (loss) on sale of premises
(4)
89

2
178Other
971
479

1,570
962Total noninterest income
3,111
1,455

5,333
2,634Noninterest expenses:Salaries and employee benefits
4,626
3,025

8,891
6,262Premises and equipment
1,247
814

2,465
1,633Data processing fees
279
409

589
672Marketing and business development
410
227

768
441Federal deposit insurance premiums
33
25

66
51Other
1,410
644

2,825
1,373Total noninterest expense
8,005
5,144

15,604
10,432Income before income taxes
3,139
2,518

6,164
4,327Income taxes
1,088
844

2,117
1,425Net income
$ 2,051
$ 1,674

$ 4,047
$ 2,902Basic earnings per share
$ 0.71
$ 0.67

$ 1.41
$ 1.16Diluted earnings per share
$ 0.71
$ 0.67

$ 1.40
$ 1.16Dividends per share
$ 0.19
$ 0.17

$ 0.38
$ 0.34See notes to unaudited consolidated financial statements.
 4 
 Merchants and Manufacturers Bancorporation, Inc. and SubsidiariesUnaudited Consolidated Statements of Cash FlowsSix Months Ended June 30,2003
2002(In Thousands)Cash Flows From Operating ActivitiesNet income

$
4,047

$
2,902Adjustments to reconcile net income to cash
Provided by operating activities:Provision for loan losses


642


562Depreciation


796


476Amortization and accretion of premiums and discounts, net


391


44Securities gains, net


(1
)

(210
)Gain on sale of loans, net


(1,176
)

(133
)Gain on sale of premises and equipment, net


--


(178
)Decrease in accrued interest receivable


158


156Decrease in accrued interest payable


(129
)

(167
)Other


(1,437
)

1,792Net cash provided by operations before loan originations and sales


3,291


5,244Loans originated for sale


(112,543
)

(26,136
)Proceeds from sales of loans


109,359


27,249Net cash provided by operating activities


107


6,357Cash Flows From Investing ActivitiesPurchase of available-for-sale securities


(31,165
)

(20,667
)Proceeds from sales of available-for-sale securities


7,353


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


28,635


11,904Net increase in loans


(46,722
)

(17,132
)Purchase of premises and equipment


(678
)

(668
)Purchase of Federal Home Loan Bank stock


(605
)

(116
)Net cash used in investing activities


(43,182
)

(19,671
)Cash Flows From Financing ActivitiesNet increase in deposits


13,571


13,779Net increase in short-term borrowings


2,912


5,385Dividends paid


(1,092
)

(845
)Proceeds from long-term borrowings


11,000


6,500Repayment of long-term borrowings


(14,823
)

(8,000
)Issuance of Company-obligated mandatorily redeemable preferred securities


10,000


--Purchase of treasury stock


--


(1,072
)Proceeds from sale of treasury stock


7


14Net cash provided by financing activities


21,575


15,761Increase (decrease) in cash and cash equivalents


(21,500
)

2,447Cash and cash equivalents at beginning of period


61,755


37,468Cash and cash equivalents at end of period

$
40,255

$
39,915Supplemental Cash Flow Information and Noncash Transactions:Interest paid

$
8,028

$
6,706Income taxes paid


2,501


1,327Loans transferred to other real estate owned


202


1,168Supplemental Schedules of Noncash Investing Activities,change in accumulated other comprehensive income, unrealizedgains on available-for-sale securities, net

$
293

$
305See notes to unaudited consolidated financial statements 
 5 Merchants and Manufacturers Bancorporation, Inc.
 Notes to Unaudited Consolidated Financial Statements
 June 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 six-month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ended 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 Ended
Six Months EndedJune 30,
June 30,Basic

2003
2002
2003
2002(In Thousands, except per share data)Net income

$
2,051

$
1,674

$
4,047

$        2,902Weighted average shares outstanding


2,876


2,486


2,875

2,493Basic earnings per share

$
0.71

$
0.67

$
1.41

$          1.16Diluted:(In Thousands, except per share data)Net income

$
2,051

$
1,674

$
4,047

$        2,902Weighted average shares outstanding


2,876


2,486


2,875

2,493Effect of dilutive stock options outstanding


13


0


11

0Diluted weighted average shares outstanding


2,889


2,486


2,886

2,493Diluted earnings per share

$
0.71

$
0.67

$
1.40

$          1.16
 
 
 NOTE C -- Comprehensive Income
 
 The following table presents our comprehensive income.
 Three Months Ended
Six Months EndedJune 30,
June 30,2003
2002
2003
2002*(In Thousands)*Net income
$2,051
$ 1,674
$4,047
$ 2,902Other comprehensive incomeChange in unrealized securities gains
497
449
419
317Reclassification adjustment for gains (losses)
included in net income
(72)
210
1
210Income tax effect
(160)
(272)
(127)
(222)Total comprehensive income
$2,316
$ 2,061
$4,340
$ 3,207 
 7 NOTE D -- Loans Receivable
 
 Loans are comprised of the following categories (dollars in thousands):
 
 June 30, 2003
December31,
2002
June 30, 2002First Mortgage:Conventional single-family residential

$
94,503

$
98,075

$
75,247Commercial and multifamily residential


212,279


198,250


183,245Construction


44,947


32,995


34,252Farmland


25,101


20,847


8,609376,830


350,167


301,353Commercial business loans


278,636


246,787


158,723Consumer and installment loans


44,419


51,883


29,561Home equity loans


12,506


9,492


7,194Other


3,631


7,109


989339,192


315,271


196,467Total loans


716,022


665,438


497,820Less allowance for loan losses


8,009


7,663


5,927Loans, net

$
708,013

$
657,775

$
491,893
 
 NOTE E -- Stock-Based Compensation Plan
 
 At June 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 income, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of the Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation , to stock-based employee compensation.
 
 Three Months Ended
Six Months EndedJune 30,
June 30,2003
2002
2003
2002(Amounts In Thousands, Except Per Share Data)Net income, as reported
$ 2,051
$ 1,674
$ 4,047
$ 2,902Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
156
62
228
129Pro forma net income
$ 1,895
$ 1,612
$ 3,819
$ 2,773Earnings per share:Basic:As reported
$ 0.71
$ 0.67
$ 1.41
$ 1.16Pro forma
$ 0.66
$ 0.65
$ 1.33
$ 1.11Diluted:As reported
$ 0.71
$ 0.67
$ 1.40
$ 1.16Pro forma
$ 0.66
$ 0.65
$ 1.32
$ 1.11 
 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 June 30, 2003 and June 30, 2002, respectively: dividend yield of 2.17% and 2.16%; expected price volatility of 14.89% and 14.92%; blended risk-free interest rates of 3.81% and 5.28%; 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.
 
 NOTE G -- Pending Acquisitions
 
 On April 24, 2003, we announced the signing of Definitive Agreements to acquire Reedsburg Bancorporation, Inc. (Reedsburg) and Random Lake Bancorp, Limited (Random Lake). Reedsburg serves as a one-bank holding company for The Reedsburg Bank. The Reedsburg Bank has total assets of $137.0 million with four locations in central Wisconsin. Random Lake serves as a one-bank holding company for Wisconsin State Bank. Wisconsin State Bank has total assets of $93.9 million with four locations in Wisconsin. The transactions are expected to close in the 4th quarter of 2003, subject to shareholder and regulatory approvals and other customary closing conditions.
 
 NOTE H -- Recent Accounting Pronouncements
 
 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 June 30, 2003 and for hedging relationships designated after June 30, 2003. Implementation of the Statement is not expected to have a material impact on the financial statements.
 9 
 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 is effective July 1, 2003 and implementation is not expected to 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.
 
 The Corporations exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Corporation uses the same credit policies in making commitments and issuing letters of credit as it does for on-balance-sheet instruments.
 
 Off-balance-sheet financial instruments whose contracts represented credit and/or interest rate risk at June 30, 2003, December 31, 2002 and June 30, 2002, are as follows:
 June 30, 2003
December 31,
2002
June 30, 2002(Amounts in Thousands)Commitments to originate mortgage loans
$26,144
$23,845
$23,074Unused lines of credit:Commercial business
88,700
71,074
55,310Home equity
12,983
11,088
6,976Credit cards
11,086
10,832
7,679Other
--
97
--Standby letters of credit
11,814
9,346
6,923
 10 
 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 the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds collateral, which may include accounts receivable, inventory, property, equipment, and income-producing properties, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Bank would be required to fund the commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount shown in the summary above. If the commitment is funded the Bank would be entitled to seek recovery from the customer. Credit card commitments are unsecured. At June 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.
 
 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 Financial Condition
 
 Total Assets
 
 Total assets increased $27.5 million, or 3.0% to $936.6 million at June 30, 2003 compared to $909.1 million at December 31, 2002. The growth in loans caused the majority of the increase.
 
 Investment Securities
 
 Investment securities available-for-sale decreased $4.6 million, or 3.5%, from $130.1 million at December 31, 2002, to $125.5 million at June 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 $50.2 million from $657.8 million at December 31, 2002 compared to $708.0 million at June 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 June 30, 2003 we designated $5.8 million of loans as held for sale.
 11 
 Total Deposits and Borrowings
 
 Total deposits increased $13.6 million, or 1.9%, from $729.5 million on December 31, 2002 to $743.0 million on June 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 16.1% from $18.1 million on December 31, 2002 to $21.0 million on June 30, 2003. Short-term borrowings consist of federal funds borrowed from correspondent banks and repurchase agreements. Long-term debt decreased by $3.8 million, or 5.3%, from $72.3 million on December 31, 2002 to $68.5 million on June 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 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.
 
 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 debentures 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 June 30, 2003.
 
 Capital Resources
 
 Stockholders' equity at June 30, 2003 was $72.6 million compared to $69.3 million at December 31, 2002, an increase of $3.3 million. The change in stockholders' equity consists of net income of $4.0 million, less payments of dividends to shareholders of $1.1 million and a $293,000 net increase in accumulated other comprehensive income. We and our banks continue to exceed our regulatory capital requirements.
 12 
 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 June 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 8.5% compared to the 4.0% minimum requirement. According to FDIC capital guidelines, our subsidiary banks are considered to be well capitalized as well.
 
 In light of our pending acquisitions, we will be required to add to our capital via a trust preferred securities offering, a preferred stock offering or other equity financing in order to maintain our well capitalized classification. 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.
 
 Nonperforming assets are summarized, for the dates indicated, as follows (dollars in thousands):
 
 June 30, 2003
December 31, 2002
June 30, 2002Non-accrual loans:Conventional single-family residential

$
742

$
613

$
701Commercial and multifamily residential


1,747


820


2,283Commercial business loans


1,755


1,246


499Consumer and installment loans


656


524


363Total non-accrual loans


4,900


3,203


3,846Other real estate owned


2,085


2,382


1,168Total nonperforming assets

$
6,985

$
5,585

$
5,014Ratios:Non-accrual loans to total loans


0.68
%

0.48
%

0.77
%Nonperforming assets to total assets


0.75


0.61


0.80Loan loss allowance to non-accrual loans


163.45


239.24


154.11Loan loss allowance to total loans


1.12


1.15


1.16 
 Nonperforming assets increased by $1.4 million from $5.6 million at December 31, 2002 to $7.0 million at June 30, 2003, an increase of 25.1%. 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 charge offs may occur upon sale of the other real estate.
 13 
 The following table presents changes in the allowance for loan losses (dollars in thousands):
  Three Months Ended
Six Months EndedJune 30, 2003
June 30, 2002
June 30, 2003
June 30, 2002Balance at beginning of period

$
7,939

$
5,667

$
7,663

$
5,563Provision for loan losses


340


282


642


562Charge-offs:Commercial and multifamily residential


1


0


29


0Commercial business loans


28


21


35


91Consumer and installment loans


289


37


314


187Total charge-offs


318


58


378


278Recoveries:Commercial and multifamily residential


28


0


28


17Commercial business loans


5


3


20


7Consumer and installment loans


15


33


34


56Total recoveries


48


36


82


80Net charge-offs


270


22


296


198Balance at June 30,

$
8,009

$
5,927

$
8,009

$
5,927 
 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.
 
 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 second quarter 2003 is consistent with prior periods.
 14 
 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 June 30, 2003 the loans classified as Management Attention were $23.9 million compared to $22.3 million as of December 31, 2002, an increase of $1.6 million or 7.2%. The increase can be attributed to the economic downturn currently being experienced by our commercial loan customers.
 
 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.
 15 
 Comparison of Three and Six Months Ended June 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 June 30, 2003 was $8.6 million, an increase of 29.5% from the $6.6 million reported for the same period in 2002, and for six months ended June 30, 2003 was $17.5 million, an increase of 35.02% from the $12.9 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 six months ended June 30, 2003 included $4.0 million from the Fortress Banks. Our net interest margin on a fully taxable-equivalent basis was 3.98% and 4.55% for the second 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 6.71% for the three months ended June 30, 2002, to 5.79% for the three month period ended June 30, 2003, and from 6.79% for the six months ended June 30, 2002, to 6.00% for the six month period ended June 30, 2003.
 16 
 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 June 30,2003
2002Average Balance
Interest
Average  Rate
Average Balance
Interest
Average RateAssetsLoans, net (1)(2)

$
701,357

$
10,986


6.28
%
$
492,832

$
8,638


7.03
%Loans exempt from federal income taxes (3)


3,433


70


8.14
%

1,418


27


7.64
%Taxable investment securities (4)


38,397


495


5.17
%

14,727


136


3.70
%Mortgage-related securities (4)


69,032


395


2.30
%

37,719


487


5.18
%Investment securities exempt from federal income taxes (3)(4)


34,419


492


5.74
%

20,239


339


6.72
%Other securities


16,945


31


0.73
%

16,088


126


3.14
%Interest earning assets


863,583


12,469


5.79
%

583,023


9,753


6.71
%Non interest earning assets


63,012








35,042Average assets

$
926,595







$
618,065Liabilities and Stockholders' EquityNOW deposits

$
61,714


114


0.74
%
$
35,963


85


0.95
%Money market deposits


215,502


849


1.58
%

88,280


344


1.56
%Savings deposits


85,498


147


0.69
%

78,991


221


1.12
%Time deposits


273,154


1,800


2.64
%

207,406


1,791


3.46
%Short-term borrowings


32,707


173


2.12
%

29,493


169


2.30
%Long-term borrowings


68,519


634


3.71
%

54,300


530


3.91
%Company-obligated mandatorily redeemable preferred securities


13,548


188


5.57
%

--


--


--
%Interest bearing liabilities


750,642


3,905


2.09
%

494,433


3,140


2.55
%Demand deposits and other non interest bearing liabilities


104,683








70,425Stockholders' equity


71,270








53,207Average liabilities and stockholders' equity

$
926,595







$
618,065Net interest spread (5)




$
8,564


3.70
%



$
6,613


4.16
%Net interest earning assets

$
112,941







$
88,590Net interest margin on a fully tax equivalent basis (6)








3.98
%







4.55
%Net interest margin (6)








3.89
%







4.46
%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.
 
 
 17 
 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 Six Months Ended June 30,2003
2002Average Balance
Interest
Average Rate
Average Balance
Interest
Average RateAssetsLoans, net (1)(2)

$ 685,018
$21,935
6.46%
$ 486,569
$17,224
7.14%Loans exempt from federal income taxes (3)

3,525
144
8.24%
1,467
55
7.56%Taxable investment securities (4)

37,522
1,084
5.83%
15,438
336
4.39%Mortgage-related securities (4)

71,263
1,065
3.01%
35,218
943
5.40%Investment securities exempt from federal income taxes (3)(4)

34,231
1,027
6.05%
20,760
698
6.78%Other securities

21,282
119
1.13%
18,717
211
2.27%Interest earning assets

852,841
25,374
6.00%
578,169
19,467
6.79%Non interest earning assets

61,473


35,340Average assets

$ 914,314


$613,509Liabilities and Stockholders' EquityNOW deposits

$ 59,767
221
0.75%
$ 35,625
170
0.96%Money market deposits

208,116
1,668
1.62%
87,614
701
1.61%Savings deposits

85,047
292
0.69%
76,464
424
1.12%Time deposits

279,625
3,800
2.74%
206,958
3,761
3.66%Short-term borrowings

29,990
321
2.16%
28,789
328
2.30%Long-term borrowings

69,369
1,290
3.75%
54,587
1,140
4.21%Company-obligated mandatorily redeemable preferred securities

11,774
307
5.26%
--
--
--%Interest bearing liabilities

743,688
7,899
2.14%
490,037
6,524
2.68%Demand deposits and other non interest bearing liabilities

100,276


70,539Stockholders' equity

70,350


52,933Average liabilities and stockholders' equity

$ 914,314


$ 613,509Net interest spread (5)


$ 17,475
3.86%

$ 12,943
4.11%Net interest earning assets

$ 109,153


$ 88,132Net interest margin on a fully tax equivalent basis (6)



4.13%


4.51%Net interest margin (6)



4.04%


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.
 
 
 18 
 
 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 INCOMEThree Months Ended June 30, 2003
Compared to June 30, 2002
Six Months Ended June 30, 2003
Compared to June 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)

$3,655
($918)
($389)
$2,348
$7,025
($1,644)
($670)
$4,711Loans exempt from federal income taxes (2)

38
2
3
43
77
5
7
89Taxable investment securities

218
54
87
359
481
110
157
748Mortgage-related securities

404
(271)
(225)
(92)
965
(417)
(426)
122Investment securities exempt from federal income taxes (2)

237
(49)
(35)
153
453
(75)
(49)
329Other securities

7
(97)
(5)
(95)
29
(106)
(15)
(92)Total interest-earning assets

$ 4,559
($1,279)
($564)
$2,716
$9,030
($2,127)
($996)
$5,907Interest-Bearing Liabilities:NOW deposits

$61
($19)
($13)
$29
$115
($38)
($26)
$51Money market deposits

496
4
5
505
964
1
2
967Savings deposits

18
(85)
(7)
(74)
48
(162)
(18)
(132)Time deposits

567
(424)
(134)
9
1,321
(949)
(333)
39Short-term borrowings

18
(13)
(1)
4
14
(20)
(1)
(7)Long-term borrowings

139
(28)
(7)
104
309
(125)
(34)
150Company-obligated mandatorily redeemable preferred securities

0
0
188
188
0
0
307
307Total interest-bearing liabilities

$1,299
($565)
$ 31
$ 765
$2,771
($1,293)
($103)
$1,375Net change in net interest income




$ 1,951



$4,532 ______________________________
 
 (1)  Interest earned on loans includes loan fees (which are not material in amount) and interest income which has been received from borrowers whose loans were removed from non-accrual during the period indicated.
 (2)  Taxable-equivalent adjustments were made using a 34% corporate tax rate for  all years presented in calculating interest income and yields.
 
 Provision for Loan Losses
 
 For the three months ended June 30, 2003, the provision for loan losses was $340,000 compared to $282,000 for the same period in 2002. For the six months ended June 30, 2003, the provision for loan losses was $642,000 compared to $562,000 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.
 19 
 Non-Interest Income
 
 Non-interest income for the three months ended June 30, 2003, was $3.1 million compared to $1.5 million for the three months ended June 30, 2002, an increase of $1.6 million, or 113.8%. Non-interest income for the six months ended June 30, 2003 was $5.3 million compared to $2.6 million for the six months ended June 30, 2002, an increase of $2.7 million, or 102.5% 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 $574,000 of additional non-interest income during the three month period, and $1.2 million for the six month period ended June 30, 2003.
 
 Non-Interest Expense
 
 Non-interest expense for the three months ended June 30, 2003, was $8.0 million compared to $5.1 million for the three months ended June 30, 2002, an increase of $2.9 million, or 55.6%. Non-interest expense for the six months ended June 30, 2003, was $15.6 million compared to $10.4 million for the six months ended June 30, 2002, an increase of $5.2 million, or 49.6%. The increase in non-interest expense included $1.7 million for three months ended June 30, 2003, and $3.4 million for six months ended June 30, 2003 in expenses related to the inclusion of the Fortress Banks non-interest expenses in our 2003 second quarter and year to date operating results. Salaries and employee benefits increased $1.6 million or 52.9% from $3.0 million for the three-month period ended June 30, 2002 to $4.6 million for the 2003 three-month period. Salaries and employee benefit expenses increased $2.6 million or 42.0% from $6.2 million for the six month period of June 30, 2002, to $8.9 million for the 2003 six month period. Exclusive of the Fortress Banks, salaries and employee benefits increased $646,000 or 21.4% for the three month period and $724,000 or 11.6% for the six-month period. Occupancy expense for the three months ended June 30, 2003 was $1.2 million compared to $814,000 for the three months ended June 30, 2002, an increase of $433,000, or 53.2%. Occupancy expense for the six months ended June 30, 2003 was $2.5 million compared to $1.6 million for the six months ended June 30, 2002, an increase of $832,000, or 51.0%. Exclusive of the Fortress Banks, occupancy expense increased $185,000 or 22.7% for the three months ended June 30, 2003 and $326,000, or 20.0% for the six months ended June 30, 2003. Marketing and business development expenses increased $183,000 or 80.6% from $227,000 for the three months ended June 30, 2002 to $410,000 for the 2003 three-month period, and increased $327,000, or 74.1% from $441,000 for six months ended June 30, 2002 to $768,000 for the 2003 six 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 $766,000 or 118.9% from $644,000 for the three months ended June 30, 2002 to $1.4 million for the 2003 three-month period, and increased $1.5 million, or 105.8% from $1.4 million for the six months ended June 30, 2002 to $2.8 million for the 2003 period. Exclusive of the Fortress Banks, other operating expenses increased $374,000 or 58.1% for the three months ended June 30, 2003, compared to the same period in 2002, and increased $721,000 or 52.5% when comparing the 2003 six month period versus the same period in 2002.
 
 Income Taxes
 
 Income taxes for the three-month period ended June 30, 2003 was $1.1 million compared to $844,000 for the three months ended June 30, 2002, an increase of $244,000, or 28.9%. Income taxes for the six month period ended June 30, 2003 was $2.1 million compared to $1.4 million for the six months ended June 30, 2002, an increase of $692,000, or 48.6%. The effective tax rate for the three months ended June 30, 2003 was 34.7% compared to 33.5% for the three months ended June 30, 2002. The effective tax rate for the six months ended June 30, 2003 was 34.3% compared to 32.9% for the six months ended June 30, 2002.
 20 
 Net Income
 
 On an after tax basis, for the three month period ended June 30, 2003, we reported net income of $2.1 million compared to $1.7 million for the same period in 2002, an increase of 22.5%. While for the six month period ended June 30, 2003, we reported net income of $4.0 million compared to $2.9 million for the same period in 2002, an increase of $1.1 million, or 39.5%.
 
 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 $107,000 for the six months ended June 30, 2003, compared to $6.4 million provided by operating activities in 2002, a decrease of $6.3 million, due primarily to the increase in mortgage loan originations and sales. Net cash used in investing activities increased by $23.5 million, to $43.2 million for the six months ended June 30, 2003, from $19.7 million used in the same period in 2002. Our lending activities for the first six months of 2003 compared to 2002 used additional cash flows of $46.7 million due primarily to an increase in loans, net of principal collections in the 2003 period, compared to using $17.1 million in the 2002 period. Net cash provided by financing activities was $21.6 million for the six months ended June 30, 2003 compared to $15.8 million provided by financing activities during the six month period in 2002 The $5.8 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 six-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.
 21 
 Asset/Liability Management
 
 Financial institutions are subject to interest rate risk to the extent their interest-bearing liabilities (primarily deposits) mature or reprice at different times and on a different basis than their interest-earning assets (consisting primarily of loans and securities). Interest rate sensitivity management seeks to match maturities on assets and liabilities and avoid fluctuating net interest margins while enhancing net interest income during periods of changing interest rates. The difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within the same time period is referred to as an interest rate gap. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During periods of falling interest rates, a negative gap tends to positively affect net interest income while a positive gap tends to result in a decrease in net interest income. During a period of rising interest rates, a positive gap tends to result in an increase in net interest income while a negative gap tends to adversely affect net interest income.
 
 The following table shows the interest rate sensitivity gap for four different time intervals as of June 30, 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 June 30, 2003Within
Six to Twelve
One to Five
OverSix Months
Months
Years
Five Years
Total(Dollars in Thousands)Interest-earning assets:Fixed-rate mortgage loans

$
34,424

$
33,058

$
186,040

$
12,169

$
265,691Adjustable-rate mortgage loans


71,907


10,078


9,606


138


91,729Total mortgage loans


106,331


43,136


195,646


12,307


357,420Commercial business loans


130,825


36,004


120,274


8,897


296,000Consumer loans


9,259


228


78


135


9,700Home equity loans


10,970


4,692


27,541


3,430


46,633Tax-exempt loans


3,767


150


762


1,590


6,269Mortgage-related securities


16,246


11,875


33,409


5,335


66,865Fixed rate investment securities and other


1,525


3,864


21,278


31,280


57,947Variable rate investment securities and other


27,877


0


50


0


27,927Total interest-earning assets

$
306,800

$
99,949

$
399,038

$
62,974

$
868,761Interest-bearing liabilities:DepositsTime deposits

$
97,151

$
75,966

$
90,563

$
3,925

$
267,605NOW accounts


3,590


3,590


35,904


16,755


59,839Savings accounts


6,367


5,099


50,989


22,841


85,296Money market accounts


33,948


12,305


123,053


57,425


226,731Borrowings


42,400


21,000


26,943


19,157


109,500Total interest-bearing liabilities

$
183,456

$
117,960

$
327,452

$
120,103

$
748,971Interest-earning assets less interest-bearing liabilities


$123,344


($18,011
)

$71,586


($57,129
)

$119,790Cumulative interest rate sensitivity gap

$
123,344

$
105,333

$
176,919

$
119,790Cumulative interest rate sensitivity gap as a percentage of total assets


13.17
%

11.25
%

18.89
%

12.79
% 
 22 At June 30, 2003, the Corporation's cumulative interest-rate sensitive gap as a percentage of total assets was a positive 13.17% for six months and a positive 11.25% 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; and (11) the acquisitions of Reedsburg Bancorporation, Inc. and Random Lake Bancorp, Limited are each subject to a number of conditions, including shareholder and regulatory approvals and customary closing conditions, and no assurance can be given that either acquisition will be completed or, if completed, that the terms of either acquisition will be as presently contemplated.
 
 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.
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 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.
 
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 Part II. Other Information
 
 Item 1.
Legal ProceedingsAs of June 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(c) 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. The Corporation believes it has satisfied the exemption from the securities registration requirement provided by section 4(2) of the Securities Act of 1933 and Regulation D promulgated thereunder in this offering since the securities were sold in a private placement to an accredited investor, who provided representations which Merchants deemed necessary to satisfy itself that it was an accredited investor and was purchasing for investment and not with a view to resale in connection with a public offering.Item 3.
Defaults upon Senior Securities  NONE 
 Item 4.  Submission of Matters to Vote of Security Holders
 
 ANNUAL MEETING OF SHAREHOLDERS. On June 10, 2003, at the Annual Meeting of the shareholders of the Corporation, the Corporations shareholders reelected James Bomberg, Casimir Janiszewski, Donald Zellmer, Duane Bluemke and Jerome Sarnowski as directors for three-year terms expiring on the date of the annual shareholders meeting to be held in 2006.
 
 SHAREHOLDER VOTE WITH RESPECT TO MATTERS ACTED UPON AT THE ANNUAL MEETING
 
 ELECTION OF DIRECTORS. Under Wisconsin law, the number of persons corresponding to the number of director positions to be filled at the Annual Meeting who received the highest number of votes would be elected as directors. James Bomberg, Casimir Janiszewski, Donald Zellmer, Duane Bluemke and Jerome Sarnowski were standing for reelection. The vote with respect to the reelection of each was as follows:
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 JAMES BOMBERG2,875,496
Total votes were eligible to be cast2,208,605
Votes were represented in person or by proxy at the Annual Meeting2,188,004
Votes were cast FOR the reelection of Mr. Bomberg20,600
Votes were cast AGAINST the reelection of Mr. BombergCASIMIR JANISZEWSKI2,875,496
Total votes were eligible to be cast2,208,605
Votes were represented in person or by proxy at the Annual Meeting2,185,438
Votes were cast FOR the reelection of Mr. Janiszewski23,165
Votes were cast AGAINST the reelection of Mr. JaniszewskiDONALD ZELLMER2,875,496
Total votes were eligible to be cast2,208,605
Votes were represented in person or by proxy at the Annual Meeting2,161,128
Votes were cast FOR the reelection of Mr. Zellmer47,475
Votes were cast AGAINST the reelection of Mr. ZellmerDUANE BLUEMKE2,875,496
Total votes were eligible to be cast2,208,605
Votes were represented in person or by proxy at the Annual Meeting2,170,539
Votes were cast FOR the reelection of Mr. Bluemke38,065
Votes were cast AGAINST the reelection of Mr. BluemkeJEROME SARNOWSKI2,875,496
Total votes were eligible to be cast2,208,605
Votes were represented in person or by proxy at the Annual Meeting2,184,447
Votes were cast FOR the reelection of Mr. Sarnowski24,156
Votes were cast AGAINST the reelection of Mr. Sarnowski
 
 
 ADOPTION TO AMEND THE ARTICLES OF INCORPORATION FOR THE PURPOSE OF AUTHORIZING THE ISSUANCE OF 250,000 SHARES OF PREFERRED STOCK. Under Wisconsin law, the resolution would be approved if, at the Annual Meeting, a majority of the outstanding shares eligible to be cast were cast "FOR" the proposal. The vote on the resolution to amend the Corporations Articles of Incorporation for the purpose of authorizing the issuance of 250,000 shares of preferred stock are as follows:
  2,875,496
Total votes were eligible to be cast2,208,605
Votes were represented in person or by proxy at the Annual Meeting1,644,523
Votes were cast FOR the adoption of the resolution to amend the Corporations Articles of Incorporation for the purpose of authorizing the issuance of 250,000 shares of preferred stock119,130
Votes were cast AGAINST the adoption of the resolution to amend the Corporations Articles of Incorporation for the purpose of authorizing the issuance of 250,000 shares of preferred stock444,632
Votes abstained or were broker non-votes
 
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 Item 5. Other Information  NONE
  Item 6. Exhibits and Reports on Form 8-K
 
 (a)  Exhibits  The following exhibits are filed as part of this report:
 
 EXHIBIT 31.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Executive OfficerEXHIBIT 31.2
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial OfficerEXHIBIT 32.1*
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Principal Executive OfficerEXHIBIT 32.2*
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer
 _____________
 
 *These certifications are not "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
 
 Reports on Form 8-K:
 
 (b)  The Corporation furnished a report Form 8-K on April 30, 2003 pursuant to Items 9 and 12
 regarding its press release of its March 31, 2003 earnings report.
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 SIGNATURES
 
 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
  (Registrant)
 
 
 Date:   August 13, 2003
By:
/s/  Michael J. MurryMichael J. Murry, Chairman of the Board of Directors and Principal Executive Officer ****Date:   August 13, 2003
By:
/s/   James C. MroczkowskiJames C. Mroczkowski, Executive Vice President and Chief Financial Officer/Principal Financial Officer
 
 
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    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.
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