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, 2004
 
 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 200Brookfield, Wisconsin 53045(Address of principal executive office) 
 (262) 790-2120Registrant'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).
 
 YesXNo
 As of August 1, 2004, 3,335,930 shares of Common Stock were outstanding.
  MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
 
 FORM 10-Q
 
 INDEX
 
 
 **Part I. Financial Information**

**Page Number**Item 1. Financial StatementsUnaudited Consolidated Statements of Financial Condition as of June 30, 2004, December 31, 2003, and June 30, 2003

3Unaudited Consolidated Statements of Income for the Three Months and Six Months ended June 30, 2004 and 2003

4Unaudited Consolidated Statements of Cash Flows for the Six Months ended June 30, 2004 and 2003

5Notes to Unaudited Consolidated Financial Statements

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

11Item 3. Quantitative and Qualitative Disclosure About Market Risk

25Item 4. Controls and Procedures

25Part II. Other InformationItems 1-6

26Signatures

29 2 
 Part I. Financial InformationMerchants and Manufacturers Bancorporation, Inc.Unaudited Consolidated Statements of Financial Condition 
 June 30,
December 31,
June 30,2004
2003
2003(Amounts In Thousands, ExceptShare and Per Share Amounts)ASSETSCash and due from banks

$
25,040

$
29,376

$
28,298Interest bearing deposits in banks


1,578


2,647


5,577Federal funds sold


1,181


15,632


6,380Cash and cash equivalents


27,799


47,655


40,255Available-for-sale securities


157,434


156,597


125,537Loans, less allowance for loan losses of $9,716 atJune 30, 2004, $9,136 at December 31, 2003and $8,009 at June 30, 2003


894,686


847,938


708,013Accrued interest receivable


4,639


4,421


4,090FHLB stock


16,928


16,245


15,245Premises and equipment


22,063


20,591


15,288Goodwill and intangible assets


29,975


30,502


11,876Other assets


22,358


21,658


16,874Total assets

$
1,175,882

$
1,145,607

$
937,178LIABILITIES AND STOCKHOLDERS' EQUITYLiabilities:Deposits:Non-interest bearing

$
115,187

$
109,755

$
103,556Interest bearing


803,622


802,193


639,471Total deposits


918,809


911,948


743,027Short-term borrowings


34,065


34,007


21,000Long-term borrowings


96,728


72,346


68,500Subordinated debentures


36,084


36,084


20,620Accrued interest payable


1,575


1,417


1,274Other liabilities


8,647


9,831


10,173Total liabilities


1,095,908


1,065,633


864,594Stockholders' equityPreferred stock, $1.00 par value; 250,000 shares authorized,shares issued and shares outstanding  none


--


--


--Common stock $1.00 par value; 25,000,000 shares authorizedat June 30, 2004, 6,000,000 shares authorized at December 31,2003 and June 30, 2003; Shares issued: 3,436,036 atJune 30, 2004 and December 31, 2003, 2,977,231 atJune 30, 2003; shares outstanding: 3,335,930 at June 30, 20043,326,089 at December 31, 2003 and 2,875,555 at June 30, 2003


3,436


3,436


2,977Additional paid-in capital


43,615


43,691


26,302Retained earnings


36,685


35,007


44,444Accumulated other comprehensive income (loss)


(1,211
)

663


1,741Treasury stock, at cost (100,106 shares at June 30, 2004,109,947 shares at December 31, 2003 and 101,676 sharesat June 30, 2003)


(2,551
)

(2,823
)

(2,880
)Total stockholders' equity


79,974


79,974


72,584Total liabilities and stockholders' equity

$
1,175,882

$
1,145,607

$
937,178*See Notes to Unaudited Consolidated Financial Statements.* 
 3 
 Merchants and Manufacturers Bancorporation, Inc.Unaudited Consolidated Statements of Income  Three Months Ended
Six Months EndedJune 30,


June 30,2004

2003

2004

2003(In Thousands, except per share data)Interest income:Interest and fees on loans

$
12,937

$
11,032

$
25,756

$
22,030Interest and dividends on securities:Taxable


436


495


904


1,084Tax-exempt


390


325


771


678Interest on mortgage-backed securities


769


395


1,415


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


44


31


98


119Total interest income


14,576


12,278


28,944


24,976Interest expense:Interest on deposits


3,016


2,910


6,116


5,981Interest on short-term borrowings


145


173


296


321Interest on long-term borrowings


787


634


1,521


1,290Interest on subordinated debentures


555


188


1,112


307Total interest expense


4,503


3,905


9,045


7,899Net interest income


10,073


8,373


19,899


17,077Provision for loan losses


451


340


901


642Net interest income after provision forloan losses


9,622


8,033


18,998


16,435Non-interest income:Service charges on deposit accounts


784


663


1,509


1,235Service charges on loans


354


790


781


1,349Securities gains, (losses), net


6


(72
)

183


1Gain on sale of loans, net


150


763


294


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


158


(4
)

158


2Other


1,202


971


2,424


1,570Total noninterest income


2,654


3,111


5,349


5,333Noninterest expenses:Salaries and employee benefits


5,767


4,626


11,627


8,891Premises and equipment


1,352


1,247


2,828


2,465Data processing fees


400


279


761


589Marketing and business development


574


410


908


768Federal deposit insurance premiums


41


33


82


66Other


2,007


1,410


4,017


2,825Total noninterest expense


10,141


8,005


20,223


15,604Income before income taxes


2,135


3,139


4,124


6,164Income taxes


663


1,088


1,245


2,117Net income

$
1,472

$
2,051

$
2,879

$
4,047Basic earnings per share

$
0.44

$
0.65

$
0.86

$
1.28Diluted earnings per share

$
0.44

$
0.65

$
0.86

$
1.27Dividends per share

$
0.18

$
0.17

$
0.36

$
0.35See notes to unaudited consolidated financial statements. 4 
 Merchants and Manufacturers Bancorporation, Inc. and SubsidiariesUnaudited Consolidated Statements of Cash Flows 
 Six Months Ended June 30,2004

2003(In Thousands)Cash Flows From Operating ActivitiesNet income

$
2,879

$
4,047Adjustments to reconcile net income to cash
Provided by operating activities:Provision for loan losses


901


642Depreciation


929


796Amortization and accretion of premiums and discounts, net


492


391Securities gains, net


(183
)

(1
)Gain on sale of loans, net


(294
)

(1,176
)Decrease (increase) in accrued interest receivable


(218
)

158Increase (decrease) in accrued interest payable


158


(129
)Other


196


(1,437
)Net cash provided by operations before loan originations and sales


4,860


3,291Loans originated for sale


(40,942
)

(112,543
)Proceeds from sales of loans


39,547


109,359Net cash provided by operating activities


3,465


107Cash Flows From Investing ActivitiesPurchase of available-for-sale securities


(63,838
)

(31,165
)Proceeds from sales of available-for-sale securities


10,032


7,353Proceeds from redemptions and maturities of available-for-sale securities


49,786


28,635Net increase in loans


(46,514
)

(46,722
)Purchase of premises and equipment


(2,401
)

(678
)Purchase of Federal Home Loan Bank stock


(683
)

(605
)Net cash used in investing activities


(53,618
)

(43,182
)Cash Flows From Financing ActivitiesNet increase in deposits


6,861


13,571Net increase in short-term borrowings


58


2,912Dividends paid


(1,200
)

(1,092
)Proceeds from long-term borrowings


42,941


11,000Repayment of long-term borrowings


(18,559
)

(14,823
)Issuance of subordinated debentures


--


10,000Proceeds from sale of treasury stock


196


7Net cash provided by financing activities


30,297


21,575Decrease in cash and cash equivalents


(19,856
)

(21,500
)Cash and cash equivalents at beginning of period


47,655


61,755Cash and cash equivalents at end of period

$
27,799

$
40,255Supplemental Cash Flow Information and Noncash Transactions:Interest paid

$
8,887

$
8,028Income taxes paid


2,149


2,501Loans transferred to other real estate owned


554


202Supplemental Schedules of Noncash Investing Activities,change in accumulated other comprehensive income, unrealizedgains on available-for-sale securities, net

$
(1,874
)
$
293See notes to unaudited consolidated financial statements 
 5 Merchants and Manufacturers Bancorporation, Inc.
 Notes to Unaudited Consolidated Financial Statements
 June 30, 2004
 
 NOTE A -- Basis of Presentation
 
 The accompanying unaudited consolidated financial statements include the accounts of Merchants and Manufacturers Bancorporation, Inc. and its wholly owned subsidiaries: Lincoln State Bank, Franklin State Bank, Grafton State Bank, Community Bank Financial, Reedsburg Bank, Fortress Bank of Westby, Fortress Bank of Cresco, Fortress Bank, N.A. (collectively, the Banks), Merchants Merger Corp., CBG Financial Services, Inc., Merchants New Merger Corp., CBG Mortgage, Inc. and Lincoln Neighborhood Redevelopment Corporation. Lincoln State Bank also includes the accounts of its wholly owned subsidiary, M&M Lincoln Investment Corporation. Grafton State Bank also includes the accounts of its wholly owned subsidiary, GSB Investments, Inc. and Community Bank Financial also includes the accounts of its wholly owned subsidiary, CBOC Investments, Inc. The Reedsburg Bank also includes the accounts of its wholly owned subsidiary, Reedsburg Investments, Inc. Fortress Bank 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 (KCW). All significant intercompany balances and transactions have been eliminated.
 
 The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six-month periods ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the consolidated financial statements and footnotes thereto included in our Form 10-K for the year ended December 31, 2003.
 
 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:
2004
2003
2004
2003  (In Thousands, except per share data)Net income
$ 1,472
$ 2,051
$ 2,879
$ 4,047Weighted average shares outstanding
3,336
3,163
3,334
3,162Basic earnings per share
$ 0.44
$ 0.65
$ 0.86
$ 1.28Diluted: 
 *(In Thousands, except per share data)*Net income
$ 1,472
$ 2,051
$ 2,879
$ 4,047Weighted average shares outstanding
3,336
3,163
3,334
3,162Effect of dilutive stock options outstanding
23
13
30
11Diluted weighted average shares outstanding
3,359
3,176
3,364
3,173Diluted earnings per share
$ 0.44
$ 0.65
$ 0.86
$ 1.27 NOTE C -- Comprehensive Income
 
 The following table presents our comprehensive income.
  Three Months Ended
Six Months EndedJune 30,
June 30,2004
2003
2004
2003  *(In Thousands)*Net income
$1,472
$2,051
$2,879
$4,047Other comprehensive incomeChange in unrealized securities gains (losses)
(2,930)
497
(3,084)
419Reclassification adjustment for gains (losses)
included in net income
6
(72)
183
1Income tax effect
1,025
(160)
1,027
(127)Total comprehensive income (loss)
($427)
$2,316
$1,005
$4,340  7 NOTE D -- Loans Receivable
 
 In 2004, the Corporation performed an evaluation of the purpose and collateral of each loan. This evaluation resulted in a reallocation of loan dollars between primarily commercial real estate and commercial loans. The following table shows the composition of our loan portfolio on the dates indicated. (dollars in thousands):
 
 June 30,
2004
December 31, 2003
June 30,
2003First Mortgage:Conventional single-family residential

$
114,011

$
113,479

$
94,503Commercial and multifamily residential


387,459


283,433


212,279Construction


58,722


47,894


44,947Farmland


49,120


43,676


25,101609,312


488,482


376,830Commercial business loans


225,680


294,645


278,636Consumer and installment loans


46,737


51,886


44,419Home equity loans


17,656


14,664


12,506Other


5,017


7,397


3,631295,090


368,592


339,192Total loans


904,402


857,074


716,022Less allowance for loan losses


9,716


9,136


8,009Loans, net

$
894,686

$
847,938

$
708,013
 
 NOTE E -- Stock-Based Compensation Plan
 
 At June 30, 2004 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 30,2004

2003

2004

2003(Amounts In Thousands, Except Per Share Data)Net income, as reported

$
1,472

$
2,051

$
2,879

$
4,047Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects


0


0


334


0Pro forma net income

$
1,472

$
2,051

$
2,545

$
4,047Earnings per share:Basic:As reported

$
0.44

$
0.65

$
0.86

$
1.28Pro forma

$
0.44

$
0.65

$
0.76

$
1.28Diluted:As reported

$
0.44

$
0.65

$
0.86

$
1.27Pro forma

$
0.44

$
0.65

$
0.76

$
1.27
 
 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, 2004: dividend yield of 1.60%; expected price volatility of 19.74%; blended risk-free interest rates of 3.76%; and expected life of 10 years.
 
 NOTE F -- Recent Acquisition
 
 On November 1, 2003, we acquired Reedsburg Bancorporation, Inc. (Reedsburg) and its wholly-owned subsidiary, the Reedsburg Bank. The purchase price for Reedsburg was $36.0 million including $17.8 million in cash, $12.8 million in promissory notes and 146,800 shares of common stock valued at $5.4 million based on the average price over the contractual pricing period. At the date of the acquisition Reedsburg had assets of $141.8 million, loans of $97.2 million and deposits of $120.6 million. The quarter-to-quarter and year-to-year comparisons are impacted by our completion of the acquisition of Reedsburg. The acquisition was accounted for using the purchase method of accounting, and accordingly, the assets and liabilities of Reedsburg were recorded at their respective fair values on November 1, 2003 and account balances acquired are included in our financial results.
 
 NOTE G -- Pending Acquisition
 
 On April 24, 2003, we announced the signing of a definitive merger agreement to acquire Random Lake Bancorp Limited (Random Lake). This original merger agreement provided for the renegotiation of the merger consideration if the daily average of the bid and asked prices for our common stock over the 20 trading days preceding the fifth day prior to the effective time of the merger was less than $25.00 or greater than $35.00. Such prices did exceed $35.00 per share, and the Corporation and Random Lake later renegotiated the merger consideration and other terms of the original agreement, resulting in the execution of an amended and restated agreement on June 11, 2004. The amended and restated merger agreement changed the merger consideration from 90 shares of our common stock and $300 in cash for each share of Random Lake common stock to 78.34 shares or our common stock and $304.66 in cash for each share of Random Lake common stock. Random Lake serves as a one-bank holding company for Wisconsin State Bank. As of June 30, 2004, Random Lake has total assets of $94.8 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.
 
 NOTE H -- Recent Accounting Pronouncements
 
 FIN No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (Revised December 2003): 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 entity 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, VIE's 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. However, subsequent revisions to the interpretation deferred the implementation date of FIN 46 until the first period ending after March 15, 2004.
 9 The Corporation adopted FIN 46, as revised, in connection with its consolidated financial statements for the quarter ended March 31, 2004. The Corporation has previously formed four statutory trusts (the "Trusts") to issue an aggregate of $35,000,000 of trust preferred securities. The implementation of FIN 46 required the Corporation to de-consolidate its investment in the Trusts because the Corporation is not the primary beneficiary. There was no impact on stockholders' equity or net income upon adoption of the standard.
 
 The trust preferred securities issued by the Trusts are currently included in the Tier 1 capital of the Corporation for regulatory capital purposes. However, because the financial statements of the Trusts will no longer be included in the Corporations consolidated financial statements, the Federal Reserve Board may in the future disallow inclusion of the trust preferred securities in Tier 1 capital for regulatory capital purposes. In July 2003, the Federal Reserve Board issued a supervisory letter instructing bank holding companies to continue to include the trust preferred securities in their Tier 1 capital for regulatory capital purposes until notice is given to the contrary. The Federal Reserve Board intends to review the regulatory implications of the change in accounting treatment of subsidiary trusts that issue trust preferred securities and, if necessary or warranted, provide further appropriate guidance. There can be no assurance that the Federal Reserve Board will continue to permit institutions to include trust preferred securities in Tier I capital for regulatory capital purposes.
 
 On May 6, 2004, the Board of Governors of the Federal Reserve System (the Board) issued a Notice of Proposed Rulemaking in which it proposed to allow the continued inclusion of trust preferred securities in the tier 1 capital of bank holding companies, subject to stricter standards. The Board is proposing to limit the aggregate amount of a bank holding companys cumulative perpetual preferred stock, trust preferred securities and other minority interests to 25% of the companys core capital elements, net of goodwill. Current regulations do not require the deduction of goodwill. The proposal also provides that amounts of qualifying trust preferred securities and certain minority interests in excess of the 25% limit may be included in tier 2 capital but would be limited, together with subordinated debt and limited-life preferred stock, to 50% of tier 1 capital. The proposal provides a three-year transition period for bank holding companies to meet these quantitative limitations. At this time, it is not possible to predict the impact that this proposal would have on the Company.
 
 The Accounting Standards Executive Committee has issued Statement of Position (SOP) 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer. This Statement applies to all loans acquired in a transfer, including those acquired in the acquisition of a bank or a branch, and provides that such loans be accounted for at fair value with no allowance for loan losses, or other valuation allowance, permitted at the time of acquisition. The difference between cash flows expected at the acquisition date and the investment in the loan should be recognized as interest income over the life of the loan. If contractually required payments for principal and interest are less than expected cash flows, this amount should not be recognized as a yield adjustment, a loss accrual, or a valuation allowance. For the Corporation this Statement is effective for calendar year 2005, and early adoption, although permitted, is not planned. No significant impact is expected on the consolidated financial statements at the time of adoption.
 
 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.
 10 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 they do for on-balance-sheet instruments.
 
 Off-balance-sheet financial instruments whose contracts represented credit and/or interest rate risk at June 30, 2004, December 31, 2003 and June 30, 2003, are as follows:
  June 30,
2004
December 31,
2003
June 30,
2003(Amounts In Thousands)Commitments to originate mortgage loans

$
45,513

$
29,248

$
26,144Unused lines of credit:Commercial business


105,559


108,163


88,700Home equity


15,570


13,957


12,983Credit cards


16,861


17,146


11,086Standby letters of credit


11,025


10,275


11,814
 
 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, 2004 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
 
 Overview
 
 The Corporation had net income of $1.5 million, or $0.44 per diluted share, for the three months ended June 30, 2004 compared to $2.1 million, or $0.65 per diluted share, for the three months ended June 30, 2003, representing a 28.2% decrease in net income and a 32.3% decrease in diluted earnings per share and net income of $2.9 million, or $0.86 per diluted share, for the six months ended June 30, 2004 compared to $4.0 million, or $1.27 per diluted share, for the six months ended June 30, 2003, representing a 28.9% decrease in net income and a 32.3% decrease in diluted earnings per share. The decrease in net income for the current quarter and year-to-date compared to the prior year periods is attributed to a lower net interest margin, a decrease in loan fee revenue due primarily to the industry wide slow down in residential loan refinances, significant costs incurred complying with the Sarbanes Oxley Act of 2002 and expenses associated with our company-wide vision unlimited project.
 11 The quarter-to-quarter and year-to-year comparisons are impacted by the Corporation's completion of the Reedsburg acquisition on November 1, 2003. The acquisition was accounted for using the purchase method of accounting, and accordingly, the assets and liabilities of Reedsburg were recorded at their respective fair values on November 1, 2003. The Corporation acquired approximately $141.8 million in assets, $97.2 million in loans, $120.6 million in deposits and recognized goodwill and intangible assets of approximately $19.1 million related to the transaction. The quarter-to-quarter and year-to-year comparisons are also impacted by the Corporation's May 1, 2003 acquisitions of Keith C. Winters & Associates, LTD. ("KCW"), a tax preparation and tax consulting firm with offices located in Franklin, Brookfield and Milwaukee, Wisconsin, and Integrated Financial Services ("IFS"), an insurance agency. The KCW and IFS acquisitions were accounted for using the purchase method of accounting.
 
 2004 is going to be a year of transition for the Corporation. Through a company-wide project called "Vision Unlimited", the Corporation is in the process of standardizing policies and procedures across the organization and centralizing many operational functions. In addition, the Corporation is converting all of the Banks to a single data processing platform. The Corporation expects these changes will allow it to better manage risk, operate more efficiently and serve customers better. Each of the Banks will continue to keep its name, charter, board of directors and management teams but will transition its human resources from the Bank's operational activities to customer related activities. Bank employees will have the tools and resources they need to effectively focus on customer service, customer retention and customer prospecting. While the Corporation expects these changes to enhance shareholder value in the long run, a transition of this magnitude will involve short-term costs which the Corporation expects will range between $850,000 and $1.0 million before tax in 2004. Through June 30, 2004 we have expended approximately $475,000 relating to this project.
 
 The Corporation is also facing two other significant challenges in 2004. Like all public companies, the Corporation is working towards compliance with the Sarbanes-Oxley Act of 2002. While the Corporation is utilizing an outside third party at a significant cost, compliance with Sarbanes-Oxley is largely being accomplished internally through the Vision Unlimited project. The Corporation expects its Sarbanes-Oxley compliance costs will range from $300,000 to $400,000 in 2004. Through June 30, 2004 we have expended approximately $75,000 relating to this project. In addition, like hundreds of other Wisconsin banking organizations, the Corporation is in discussion with the Wisconsin Department of Revenue ("WDR") regarding the tax treatment of its Nevada investment subsidiaries. Nevada does not have an income tax and historically the earnings of these Nevada investment subsidiaries have not been subject to taxation in Wisconsin. The Corporation believes that it has complied with private letter rulings the WDR previously issued in connection with the formation and operation of its Nevada investment subsidiaries. However, the effect and intent of these rulings is in question and the WDR may take the position that some or all of the income of the Corporation's Nevada investment subsidiaries is allocable to their Wisconsin corporate parents and taxable in Wisconsin. The WDR may also take the position that such a reallocation should apply to prior open tax years. The result of these discussions with the WDR could materially increase the Corporation's future income tax expense and could also result in a significant current year tax charge.
  Financial Condition
 
 Total Assets
 
 Total assets increased $30.3 million, or 2.6%, to $1.2 billion at June 30, 2004 compared to $1.1 billion at December 31, 2003. The growth in loans caused the majority of the increase.
 12 Investment Securities
 
 Available-for-sale investment securities increased $837,000, or 0.5%, from $156.6 million at December 31, 2003, to $157.4 million at June 30, 2004. The purchases of investment securities offset the sales, redemptions and maturities of securities during the period.
 
 Loans Receivable
 
 Loans receivable, net of allowance for loan losses, increased $46.7 million from $847.9 million at December 31, 2003 compared to $894.7 million at June 30, 2004. The growth in loans can be attributed to the growth in commercial real estate loans that were partially offset by the decrease in commercial business loans and consumer and installment loans. Currently, loans receivable consists mainly of commercial loans secured by business assets, real estate and guarantees as well as mortgages secured by residential properties located in our primary market areas. At June 30, 2004 we designated $1.8 million of loans as held for sale.
 
 Total Deposits and Borrowings
 
 Total deposits increased $6.9 million, or 0.7%, from $911.9 million on December 31, 2003 to $918.8 million on June 30, 2004. The increase in deposits can be attributed to the growth in retail money market accounts and commercial checking accounts currently offered by our subsidiary banks. Short-term borrowings totaled $34.0 million at June 30, 2004, unchanged from December 31, 2003 . Short-term borrowings consist of federal funds borrowed from correspondent banks and repurchase agreements. Long-term debt increased by $24.4 million, or 33.7%, from $72.3 million on December 31, 2003 to $96.7 million on June 30, 2004. Long-term debt consists of Federal Home Loan Bank advances and acquisition notes associated with the Reedsburg transaction.
 
 Subordinated Debentures totaled $36.1 million at June 30, 2004, unchanged from December 31, 2003. We had obligations represented by subordinated debentures at June 30, 2004 totaling $35.0 million with our wholly-owned trusts that were created for the purpose of issuing trust preferred securities. The subordinated debentures were the sole assets of the trusts at June 30, 2004. In accordance with FIN 46, we began deconsolidating the wholly-owned trusts that issued the trust preferred securities in 2004. As a result, these securities no longer are consolidated on our balance sheet. Instead, the subordinated debentures held by the trusts are disclosed on the balance sheet as other subordinated debentures.
 
 Capital Resources
 
 Stockholders' equity totaled $80.0 million at June 30, 2004, unchanged from December 31, 2003. The component changes in stockholders' equity consists of net income of $2.9 million, a $1.9 million net decrease in accumulated other comprehensive income, $272,000 decrease in treasury stock less payments of dividends to shareholders of $1.2 million. We and our banks continue to exceed our regulatory capital requirements.
 
 Under the Federal Reserve Boards risk-based guidelines, capital is measured against our subsidiary banks risk-weighted assets. Our tier 1 capital (common stockholders equity less goodwill) to risk-weighted assets was 8.17% at June 30, 2004, above the 4.0% minimum required. Total capital to risk-adjusted assets was 10.01%; also above the 8.0% minimum requirement. The leverage ratio was at 6.86% compared to the 4.0% minimum requirement. According to FDIC capital guidelines, our subsidiary banks are considered to be well capitalized as well.
 13 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,
2004
December 31,
2003
June 30,
2003Non-accrual loans:Conventional single-family residential

$
642

$
456

$
742Commercial and multifamily residential


2,302


2,344


1,747Commercial business loans


588


1,484


1,755Consumer and installment loans


1,167


998


656Total non-accrual loans


4,699


5,282


4,900Other real estate owned


1,907


1,945


2,085Total nonperforming assets

$
6,606

$
7,227

$
6,985Ratios:Non-accrual loans to total loans


0.52
%

0.62
%

0.68
%Nonperforming assets to total assets


0.56


0.63


0.75Loan loss allowance to non-accrual loans


206.77


172.96


163.45Loan loss allowance to total loans


1.07


1.07


1.12 
 Nonperforming assets decreased by $621,000 from $7.2 million at December 31, 2003 to $6.6 million at June 30, 2004, a decrease of 8.6%. Payments received on past due loans led to the decline. 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.
 
 The following table presents changes in the allowance for loan losses (dollars in thousands):
  Three Months Ended
Six Months EndedJune 30, 2004
June 30, 2003
June 30, 2004
June 30, 2003Balance at beginning of period

$
9,462

$
7,939

$
9,136

$
7,663Provision for loan losses


451


340


901


642Charge-offs:Commercial and multifamily residential


37


1


95


29Commercial business loans


109


28


197


35Consumer and installment loans


129


289


183


314Total charge-offs


275


318


475


378Recoveries:Commercial and multifamily residential


2


28


2


28Commercial business loans


31


5


69


20Consumer and installment loans


45


15


83


34Total recoveries


78


48


154


82Net charge-offs


197


270


321


296Balance at June 30,

$
9,716

$
8,009

$
9,716

$
8,009 
 14 We believe the allowance for loan losses accounting policy is critical to the portrayal and understanding of our financial condition and results of operations. As such, selection and application of this critical accounting policy involves judgments, estimates, and uncertainties that are susceptible to change. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition or results of operations is a reasonable likelihood.
 
 We maintain our allowance for loan losses at a level that management believes will be adequate to absorb probable losses on existing loans based on an evaluation of the collectibility of loans and prior loss experience. We also use a risk rating system to evaluate the adequacy of the allowance for loan losses. With this system, each loan is risk rated between one and 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 first six months of 2004 is consistent with prior periods.
 
 Potential Problem Loans
 
 We utilize an internal asset classification system as a means of reporting problem and potential problem assets. At least quarterly, a watch list is presented to each subsidiary banks Board of Directors (except one, which is presented upon request of the Board of Directors) showing all loans listed as Management Attention (or equivalent designation at the various subsidiary banks), 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 (or equivalent designation at the various subsidiary banks). As of June 30, 2004 the loans classified as Substandard, Doubtful, or Management Attention, totaled $63.2 million compared to $51.7 million as of December 31, 2003, and increase of $11.5 million or 22.2%.
 15 Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the Banks primary regulators, which can order the establishment of additional general or specific loss allowances. The FDIC, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that (i) institutions have effective systems and controls to identify, monitor and address asset quality problems; (ii) management has analyzed all significant factors that affect the collectibility of the portfolio in a reasonable manner; and (iii) management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. We have established an adequate allowance for probable loan losses. We analyze the process regularly, with modifications made if needed, and report those results four times per year to each subsidiary banks Board of Directors. However, there can be no assurance that regulators, in reviewing our loan portfolio, will not request us to materially increase our allowance for loan losses at the time. Although management believes that adequate specific and general loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loan loss allowances may become necessary.
 
 Comparison of Three and Six Months Ended June 30, 2004 and 2003
 
 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, 2004 was $10.1 million, an increase of 17.9% from the $8.6 million reported for the same period in 2003, and for six months ended June 30, 2004 was $20.0 million, an increase of 14.2% from the $17.5 million reported for the same period in 2003. The increase is due partly from revenue resulting from the acquisition of Reedsburg as well as the increase in loan and investment volume funded by an increase in deposits and long-term borrowings. Our net interest margin on a fully taxable-equivalent basis was 3.78% and 3.98% for the second quarters of 2004 and 2003, respectively. The continued low interest rate environment, the incremental effect of the acquisitions as well as the increased amortization of purchase accounting premiums associated with our acquisitions resulted in lower margins. The reduction in market interest rates and increased premium amortization during the second quarter caused the average rate on a fully taxable-equivalent basis earned on interest earning assets to decrease from 5.79% for the three months ended June 30, 2003 to 5.46% for the three month period ended June 30, 2004, and from 6.00% for the six months ended June 30, 2003, to 5.48% for the six month period ended June 30, 2004.
 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,**2004
2003Average Balance
Interest
Average Rate
Average Balance
Interest
Average RateAssetsLoans, net (1)(2)

$886,342
$12,883
5.85%
$701,357
$10,986
6.28%Loans exempt from federal income taxes (3)

4,418
82
7.46%
3,433
70
8.14%Taxable investment securities (4)

40,475
436
4.33%
38,397
495
5.17%Mortgage-related securities (4)

92,360
769
3.35%
69,032
395
2.30%Investment securities exempt from
federal income taxes (3)(4)

42,760
390
3.67%
34,419
492
5.74%Other securities

9,087
44
1.95%
16,945
31
0.73%Interest earning assets

1,075,442
14,604
5.46%
863,583
12,469
5.79%Non interest earning assets

94,594


63,012Average assets

$1,170,036


$926,595Liabilities and Stockholders' EquityNOW deposits

$87,049
101
0.47%
$61,714
114
0.74%Money market deposits

255,746
671
1.06%
215,502
849
1.58%Savings deposits

124,592
261
0.84%
85,498
147
0.69%Time deposits

336,471
1,983
2.37%
273,154
1,800
2.64%Short-term borrowings

35,039
145
1.66%
32,707
173
2.12%Long-term borrowings

88,850
787
3.56%
68,519
634
3.71%Subordinated debentures

36,084
555
6.19%
13,548
188
5.57%Interest bearing liabilities

963,831
4,503
1.88%
750,642
3,905
2.09%Demand deposits and other non interest
bearing liabilities

124,853


104,683Stockholders' equity

81,352


71,270Average liabilities and stockholders' equity

$1,170,036


$926,595Net interest spread (5)


$10,101
3.58%

$8,564
3.70%Net interest earning assets

$111,611


$112,941Net interest margin on a fully tax equivalent
basis (6)



3.78%


3.98%Net interest margin (6)



3.77%


3.89%Ratio of average interest-earning assets to
average interest-bearing liabilities



1.12


1.15 _________________________
 
 (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 YIELDSFor the Six Months Ended June 30,2004
2003Average Balance
Interest
Average Rate
Average Balance
Interest
Average RateAssetsLoans, net (1)(2)

$873,615
$25,653
5.91%
$685,018
$21,935
6.46%Loans exempt from federal income taxes (3)

4,184
156
7.50%
3,525
144
8.24%Taxable investment securities (4)

43,361
904
4.19%
37,522
1,084
5.83%Mortgage-related securities (4)

86,162
1,415
3.30%
71,263
1,065
3.01%Investment securities exempt from federal
income taxes (3)(4)

43,333
771
3.58%
34,231
1,027
6.05%Other securities

13,130
98
1.50%
21,282
119
1.13%Interest earning assets

1,063,785
28,997
5.48%
852,841
25,374
6.00%Non interest earning assets

93,919


61,473Average assets

$1,157,704


$914,314Liabilities and Stockholders' EquityNOW deposits

$86,344
206
0.48%
$59,767
221
0.75%Money market deposits

259,231
1,403
1.09%
208,116
1,668
1.62%Savings deposits

120,190
495
0.83%
85,047
292
0.69%Time deposits

334,958
4,012
2.41%
279,625
3,800
2.74%Short-term borrowings

35,964
296
1.66%
29,990
321
2.16%Long-term borrowings

83,541
1,521
3.66%
69,369
1,290
3.75%Subordinated debentures

36,084
1,112
6.20%
11,774
307
5.26%Interest bearing liabilities

956,312
9,045
1.90%
743,688
7,899
2.14%Demand deposits and other non interest
bearing liabilities

120,173


100,276Stockholders' equity

81,219


70,350Average liabilities and stockholders' equity

$1,157,704


$914,314Net interest spread (5)


$19,952
3.58%

$17,475
3.86%Net interest earning assets

$ 107,473


$ 109,153Net interest margin on a fully tax equivalent
basis (6)



3.77%


4.13%Net interest margin (6)



3.76%


4.04%Ratio of average interest-earning assets to
average interest-bearing liabilities



1.11


1.15 _________________________
 
 (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) and (iii) net change. The net change attributable to the combined impact of volume and rate has been allocated proportionately to the change due to volume and the change due to rate. (dollars in thousands):
 
 VOLUME, RATE AND MIX ANALYSIS OF NET INTEREST INCOME  Three Months Ended June 30, 2004
Compared to June 30, 2003
Six Months Ended June 30, 2004
Compared to June 30, 2003Change Due to Volume
Change Due to Rate
Total Change
Change Due to Volume
Change Due to Rate
Total ChangeInterest-Earning Assets:Loans, net (1)

$
2,576

$
(679
)
$
1,897

$
5,393

$
(1,675
)
$
3,718Loans exempt from federal income taxes (2)


17


(5
)

12


23


(11
)

12Taxable investment securities


30


(89
)

(59
)

225


(405
)

(180
)Mortgage-related securities


159


215


374


240


110


350Investment securities exempt from
federal income taxes (2)


210


(312
)

(102
)

477


(733
)

(256
)Other securities


(5
)

18


13


(155
)

134


(21
)Total interest-earning assets

$
2,987

$
(852
)
$
2,135

$
6,203

$
(2,580
)
$
3,623Interest-Bearing Liabilities:NOW deposits

$
(132
)
$
119

$
(13
)
$
(76
)
$
61

$
(15
)Money market deposits


229


(407
)

(178
)

804


(1,069
)

(265
)Savings deposits


77


37


114


138


65


203Time deposits


330


(147
)

183


546


(334
)

212Short-term borrowings


14


(42
)

(28
)

147


(172
)

(25
)Long-term borrowings


177


(24
)

153


261


(30
)

231Subordinated debentures


344


23


367


741


64


805Total interest-bearing liabilities

$
1,039

$
(441
)
$
598

$
2,561

$
(1,415
)
$
1,146Net change in net interest income







$
1,537







$
2,477
 ______________________________
 
 (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, 2004, the provision for loan losses was $451,000 compared to $340,000 for the same period in 2003. For the six months ended June 30, 2004, the provision for loan losses was $901,000 compared to $642,000 for the same period in 2003. 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, 2004, was $2.7 million compared to $3.1 million for the three months ended June 30, 2003, a decrease of $457,000, or 14.7%. Non-interest income for the six months ended June 30, 2004 was $5.3 million, unchanged from the $5.3 million for the six months ended June 30, 2003. The composition of non-interest income is shown in the following table (dollars in thousands).
  Three Months Ended
June 30,
Six Months Ended
June 30,2004
2003
2004
2003Service charges on deposit accounts

$
784

$
663

$
1,509

$
1,235Service charges on loans


354


790


781


1,349Securities gains, net


6


(72
)

183


1Gain on sale of loans, net


150


763


294


1,176Net gain on sale of premises


158


(4
)

158


2Other


1,202


971


2,424


1,570Total non-interest income

$
2,654

$
3,111

$
5,349

$
5,333
 
 Service charges on deposit accounts for the three months ended June 30, 2004 was $784,000 compared to $663,000 for the three months ended June 30, 2003, an increase of $121,000, or 18.3%. Service charges on deposit accounts for the six months ended June 30, 2004 was $1.5 million compared to $1.2 million for the six months ended June 30, 2003, an increase of $274,000, or 22.2%. The increase in 2004 is the result of growth in deposit accounts, both internal and through acquisition, and fee structure modifications company wide.
 
 Service charges on loans for the three months ended June 30, 2004 was $354,000 compared to $790,000 for the three months ended June 30, 2003, a decrease of $436,000, or 55.2%. Service charges on loans for the six months ended June 30, 2004 was $781,000 compared to $1.3 million for the six months ended June 30, 2003, a decrease of $568,000, or 42.1%. The decrease is due directly to the reduction in mortgage and commercial loans refinanced in 2004 when compared to 2003.
 
 We recorded a net gain of $6,000 on the sale of $2.8 million of securities in the second quarter of 2004 compared to a loss of $72,000 on the sale of $3.0 million of securities during the same period in 2003. We recorded a net gain of $183,000 on the sale of $10.0 million of securities in the first six months of 2004 compared to a gain of $1,000 on the sale of $7.3 million of securities during the same period in 2003. The proceeds from the sale of the investments were used to fund loan demand or reduce debt.
 
 Gains on the sale of loans were $150,000 for the three months ended June 30, 2004 compared to $763,000 for the three months ended June 30, 2003. Gains on the sale of loans were $294,000 for the six months ended June 30, 2004 compared to $1.2 million for the six months ended June 30, 2003. All-time low market interest rates led to higher secondary market sales volume of 15 and 30 year residential mortgage loans in 2003 compared to 2004.
 
 Other fee income for the three and six-month period ending June 30, 2004 included commissions on tax, investment and insurance products generated from the acquisitions of IFS in April 2003 and KCW in May 2003.
 20 Non-Interest Expense
 
 Non-interest expense for the three months ended June 30, 2004 was $10.1 million compared to $8.0 million for the three months ended June 30, 2003, an increase of $2.1 million, or 26.7%. Non-interest expense for the six months ended June 30, 2004 was $20.2 million compared to $15.6 million for the six months ended June 30, 2003, an increase of $4.6 million, or 29.6%. The increase in 2004 expenses are in part the result of implementing our Vision Unlimited program. Vision Unlimited is the company-wide project of standardizing policies and procedures across the organization and as well as centralizing many operational functions. The increase in non-interest expense is also due in part to expenses related to the inclusion of the Reedsburg Banks non-interest expenses in our 2004 operating results. Additionally, non-interest expense increased during the first quarter of 2004 compared to 2003 from expenses associated with the activities of KCW and IFS. The major components of non-interest expense are shown in the following table (dollars in thousands).
  Three Months Ended
June 30,
Six Months Ended
June 30,2004
2003
2004
2003Salaries and employee benefits

$
5,767

$
4,626

$
11,627

$
8,891Premises and equipment


1,352


1,247


2,828


2,465Data processing fees


400


279


761


589Marketing and business development


574


410


908


768Federal deposit insurance premiums


41


33


82


66Other


2,007


1,410


4,017


2,825Total noninterest expense

$
10,141

$
8,005

$
20,223

$
15,604
 
 Salaries and employee benefits for the three months ended June 30, 2004 was $5.8 million compared to $4.6 million for the three months ended June 30, 2003, an increase of $1.1 million, or 24.7%. Salaries and employee benefits for the six months ended June 30, 2004 was $11.6 million compared to $8.9 million for the six months ended June 30, 2003, an increase of $2.7 million, or 30.8%. The increase in salaries and benefits is due in part to including Reedsburg Banks and KCWs expenses in our 2004 operating results. Also impacting salaries and employee benefits in the 2004 were additional staff hires particularly in the holding company management area and acquisition support staff areas, higher benefit costs, changes in personnel and normal pay raises.
 
 Premises and equipment expense for the three months ended June 30, 2004 was $1.4 million compared to $1.2 million for the three months ended June 30, 2003, an increase of $105,000, or 8.4%. Premises and equipment expense for the six months ended June 30, 2004 was $2.8 million compared to $2.5 million for the six months ended June 30, 2003, an increase of $363,000, or 14.7%. Higher utility costs, building lease payments, depreciation, maintenance of our facilities and acquisitions contributed to the increase.
 
 Data processing fees for the three months ended June 30, 2004 was $400,000 compared to $279,000 for the three months ended June 30, 2003, an increase of $121,000, or 43.4%. Data processing fees for the six months ended June 30, 2004 was $761,000 compared to $589,000 for the six months ended June 30, 2003, an increase of $172,000, or 29.2%. The increase was due to the increased reliance on outside consultants for information technology issues as well as equipment and software upgrades and system conversions.
 
 Marketing and business development expense for the three months ended June 30, 2004 was $574,000 compared to $410,000 for the three months ended June 30, 2003, an increase of $164,000, or 40.0%. Marketing and business development expense for the six months ended June 30, 2004 was $908,000 compared to $768,000 for the six months ended June 30, 2003, an increase of $140,000, or 18.2%. The increase was due to introduction of a corporate branding campaign, increased donations and contributions and the inclusion of Reedsburgs marketing and development expenses.
 
 21 Other expenses for the three months ended June 30, 2004 was $2.0 million compared to $1.4 million for the three months ended June 30, 2003, an increase of $597,000, or 42.3%. Other expenses for the six months ended June 30, 2004 was $4.0 million compared to $2.8 million for the six months ended June 30, 2003, an increase of $1.2 million, or 42.2%. The increase in 2004 other expenses are in part the result of implementing our Vision Unlimited program. Vision Unlimited is the company-wide project of standardizing policies and procedures across the organization and as well as centralizing many operational functions. Additionally, the increase in other expense is due in part to expenses related to the inclusion of the Reedsburg Banks other expenses in our 2004 operating results as well as expenses associated with the activities of KCW and IFS.
 
 Income Taxes
 
 Income taxes for the three-month period ended June 30, 2004 was $663,000 compared to $1.1 million for the three months ended June 30, 2003, a decrease of $425,000, or 39.1%. Income taxes for the six-month period ended June 30, 2004 was $1.2 million compared to $2.1 million for the six months ended June 30, 2003, a decrease of $872,000, or 41.2%. The effective tax rate for the three months ended June 30, 2004 was 31.1% compared to 34.7% for the same period in 2003. The effective tax rate for the six months ended June 30, 2004 was 30.2% compared to 34.3% for the same period in 2003. The reduced tax rate is due to the decrease in fully taxed income at CBG Mortgage and the inclusion of Reedsburgs operation in our 2004 results.
 
 Net Income
 
 On an after tax basis, for the three month period ended June 30, 2004, we reported net income of $1.5 million compared to $2.1 million for the same period in 2003, a decrease of 28.2%. While for the six month period ended June 30, 2004, we reported net income of $2.9 million compared to $4.0 million for the same period in 2003, a decrease of $1.2 million, or 28.9%.
 
 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 $3.5 million for the six months ended June 30, 2004, compared to $107,000 provided by operating activities in 2003, an increase of $3.4 million. Net cash used in investing activities increased by $10.4 million, to $53.6 million for the six months ended June 30, 2004, from $43.2 million used in the same period in 2003. Net cash provided by financing activities was $30.3 million for the six months ended June 30, 2004 compared to $21.6 million provided by financing activities during the six month period in 2003 The $8.7 million increase in net cash provided by financing activities was primarily due to a $24.4 million net increase in long term borrowings in the 2004 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.
 22 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, 2004. 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, 2004Within
Six to Twelve
One to Five
OverSix Months
Months
Years
Five Years
Total(Dollars in Thousands)Interest-earning assets:Fixed-rate mortgage loans

$
54,361

$
87,448

$
286,732

$
18,332

$
446,873Adjustable-rate mortgage loans


133,683


16,288


12,452


16


162,439Total mortgage loans


188,044


103,736


299,184


18,348


609,312Commercial business loans


122,156


33,313


66,486


3,725


225,680Consumer loans


11,848


4,908


28,280


1,701


46,737Home equity loans


17,463


73


21


99


17,656Other loans


1,776


217


1,551


1,473


5,017Mortgage-related securities


16,499


25,869


47,305


5,418


95,091Fixed rate investment securities and other


6,646


2,474


17,575


35,649


62,344Variable rate investment securities and other


21,515


0


25


0


21,540Total interest-earning assets

$
385,947

$
170,590

$
460,427

$
66,413

$
1,083,377Interest-bearing liabilities:DepositsTime deposits

$
140,820

$
105,695

$
83,110

$
5,670

$
335,295NOW accounts


5,024


5,024


50,245


23,447


83,740Savings accounts


8,003


7,578


75,780


35,364


126,725Money market accounts


30,979


14,482


144,819


67,582


257,862Short-term borrowings


34,065


0


0


0


34,065Long-term borrowings


7,382


13,612


71,083


4,651


96,728Subordinated debentures


18,042


0


0


18,042


36,084Total interest-bearing liabilities

$
244,315

$
146,391

$
425,037

$
154,756

$
970,499Interest-earning assets less interest-bearing
liabilities

$
141,632

$
24,199

$
35,390

$
(88,343
)
$
112,878Cumulative interest rate sensitivity gap

$
141,632

$
165,831

$
201,221

$
112,878Cumulative interest rate sensitivity gap as apercentage of total assets


12.04
%

14.10
%

17.11
%

9.60
% 
 23 At June 30, 2004, the Corporation's cumulative interest-rate sensitive gap as a percentage of total assets was a positive 12.04% for six months and a positive 14.10% 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 result of the Corporation's discussions with WDR; and (12) 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.
 24 Item 3. Quantitative and Qualitative Disclosure About Market Risk
 
   Item 4. Controls and Procedures
 
  
  
 25 Part II. Other Information
 
 Item 1.
Legal ProceedingsAs of June 30, 2004 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, Use of Proceeds and Issuer Purchases of Equity Securities  NONEItem 3.
Defaults upon Senior Securities  NONEItem 4
Submission of Matters to Vote of Security Holders 
 
 ANNUAL MEETING OF SHAREHOLDERS. On May 24, 2004, at the Annual Meeting of the shareholders of the Corporation, the Corporations shareholders reelected Michael Murry, Conrad Kaminski, Nicholas Logarakis, Keith Winters, and Duane Cherek as directors for three-year terms expiring on the date of the annual shareholders meeting to be held in 2007.
 
 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. Michael Murry, Conrad Kaminski, Nicholas Logarakis, Keith Winters, and Duane Cherek were standing for reelection. The vote with respect to the reelection of each was as follows:
  26 
 MICHAEL MURRY
 3,335,356  Total votes were eligible to be cast
 2,662,179  Votes were represented in person or by proxy at the Annual Meeting
 2,620,739  Votes were cast FOR the reelection of Mr. Murry
 41,440  Votes were cast AGAINST the reelection of Mr. Murry
   CONRAD KAMINSKI
 3,335,356  Total votes were eligible to be cast
 2,662,179  Votes were represented in person or by proxy at the Annual Meeting
 2,622,250  Votes were cast FOR the reelection of Mr. Kaminski
 39,929  Votes were cast AGAINST the reelection of Mr. Kaminski
   NICHOLAS LOGARAKIS
 3,335,356  Total votes were eligible to be cast
 2,662,179  Votes were represented in person or by proxy at the Annual Meeting
 2,617,711  Votes were cast FOR the reelection of Mr. Logarakis
 44,468  Votes were cast AGAINST the reelection of Mr. Logarakis
   KEITH WINTERS
 3,335,356  Total votes were eligible to be cast
 2,662,179  Votes were represented in person or by proxy at the Annual Meeting
 2,587,720  Votes were cast FOR the reelection of Mr. Winters
 74,459  Votes were cast AGAINST the reelection of Mr. Winters
   DUANE CHEREK
 3,335,356  Total votes were eligible to be cast
 2,662,179  Votes were represented in person or by proxy at the Annual Meeting
 2,650,251  Votes were cast FOR the reelection of Mr. Cherek
 11,928  Votes were cast AGAINST the reelection of Mr. Cherek
 
 ADOPTION TO AMEND THE ARTICLES OF INCORPORATION FOR THE PURPOSE OF INCREASING THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK TO TWENTY-FIVE MILLION (25,000,000) SHARES. 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 increasing the number of authorized shares of common stock to 25,000,000 shares are as follows:
 
 3,335,356  Total votes were eligible to be cast
 
 2,662,179  Votes were represented in person or by proxy at the Annual Meeting
 
  27 2,542,991 Votes were cast FOR the adoption of the resolution to amend the Corporations Articles of Incorporation for the purpose of increasing the number of authorized shares of common stock to 25,000,000 shares
 103,430  Votes were cast AGAINST the adoption of the resolution to amend the Corporations Articles of Incorporation for the purpose of increasing the number of authorized shares of common stock to 25,000,000 shares
 
 15,758  Votes abstained or were broker non-votes
 Item 5.
Other Information  NONEItem 6.
Exhibits and Reports on Form 8-K
 
 
  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* ertification 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.
 
 (b)  The Corporation furnished a report Form 8-K on May 3, 2004 pursuant to Items 9 and 12 regarding its press release of its March 31, 2004 earnings report.
 28  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 9, 2004.
By:
/s/ Michael J. MurryMichael J. MurryChairman of the Board of Directorsand Principal Executive Officer ****Date: August 9, 2004.
By:
/s/ James C. MroczkowskiJames C. MroczkowskiExecutive Vice President & Chief
Financial OfficerPrincipal Financial Officer
 29
  10-Q EXHIBIT LIST
              ______________
 
 *     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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