Edgar Filing: STURGIS BANCORP INC

e10vq

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20429
Form 10-Q


(Mark One) [X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
		OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003


[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d)
		OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

STURGIS BANCORP, INC.
(Exact name of registrant as specified in its charter)

MICHIGAN
(State of incorporation or organization)


	0-49613		38-3609814
(Commission File No.)		(I.R.S. Employer Identification No.)

113-125 E. Chicago Road, Sturgis, Michigan 49091
(Address of principal executive offices)

(269) 651-9345
(Issuer’s telephone number)

(Former name, former address and former fiscal year, if changed since
last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange of 1934 Act during the past 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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class	Outstanding at May 13, 2003

Common Stock, $1.00 par value		2,808,535

Transitional Small Business Disclosure Format (check one); Yes No X

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X

TABLE OF CONTENTS


Part I. Financial Information
	Item 1. Financial Statements
		Condensed Consolidated Statements of Financial Condition-March 31, 2003 and December 31, 2002.
		Condensed Consolidated Statements of Income—Three Months Ended March 31, 2003 and 2002 (Unaudited).
		Condensed Consolidated Statements of Cash Flows-Three Months Ended March 31, 2003 and 2002 (Unaudited).
		Notes To Condensed Consolidated Financial Statements.
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
	Item 3. Quantitative and Qualitative Disclosures about Market Risks.
	Item 4. Controls and Procedures
Part II. Other Information
	Item 1. Legal Proceedings
	Item 2. Changes in Securities
	Item 6. Exhibits and Reports on Form 8-K
Signatures
906 Certification of Chief Executive Officer
906 Certification of Chief Financial Officer

STURGIS BANCORP, INC. AND SUBSIDIARIES

INDEX


				Page No.
Part I. Financial Information
	Item 1. Financial Statements:
			Condensed Consolidated Statements		4
			of Financial Condition—March 31, 2003 and December 31, 2002
			Condensed Consolidated Statements of Income—		5
			Three Months Ended March 31, 2003 and 2002 (Unaudited)
			Condensed Consolidated Statements of Cash Flows—		6
			Three Months Ended March 31, 2003 and 2002 (Unaudited)
			Notes To Condensed Consolidated		7
			Financial Statements
	Item 2. Management’s Discussion and Analysis				16
			of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures				27
			about Market Risks
	Item 4. Controls and Procedures				27
Part II. Other Information
		Item 1. Legal Proceedings			28
		Item 2. Changes in Securities			28
		Item 6. Exhibits and Reports on Form 8-K			28
Signatures					30

PART I. FINANCIAL INFORMATION

Throughout this Form 10-Q, Sturgis Bancorp, Inc. will be referred to as Bancorp and Sturgis Bank and Trust Company and its subsidiaries will be referred to as the Bank. Bancorp is a financial holding company under the Bank Holding Company Act of 1956, as amended. The Bank is a wholly owned subsidiary of Bancorp.

ITEM 1. FINANCIAL STATEMENTS

STURGIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION


					March 31,		December 31,
					2003		2002
				ASSETS
Cash and due from banks					$	10,718,788	$	13,064,101
Short-term interest-bearing deposits						2,372,751		7,183

	Total cash and cash equivalents					13,091,539		13,071,284
Interest-bearing deposits in banks						15,363,541		23,018,375
Securities — Available-for-sale						9,033,989		—
Securities — Held-to-maturity						12,382,055		12,590,709
Federal Home Loan Bank stock, at cost						4,115,400		4,115,400
Loans held for sale						8,477,655		7,437,506
Loans, net						205,955,615		212,043,350
Real estate owned						1,415,988		1,358,759
Bank owned life insurance						6,411,001		6,335,429
Accrued interest receivable						1,747,611		1,731,948
Investment in limited partnership						1,194,280		161,080
Premises and equipment, net						6,806,715		6,641,980
Intangible assets
	Goodwill, net of accumulated amortization					5,109,419		5,109,419
	Originated mortgage servicing rights					1,548,006		1,501,922
	Other intangible assets					104,605		105,601
Other assets						1,371,865		1,461,695

			Total assets		$	294,129,284	$	296,684,457

		LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
	Deposit accounts:
		Noninterest-bearing			$	13,152,634	$	12,747,121
		Interest-bearing				196,652,432		189,816,675
	Borrowings from Federal Home Loan Bank					54,144,253		64,381,396
	Accrued interest payable					769,263		935,954
	Other liabilities					1,335,810		1,350,783

			Total liabilities			266,054,392		269,231,929
Stockholders’ equity:
	Common stock					2,808,535		2,799,535
	Additional paid-in capital					17,805,688		17,732,617
	Retained earnings					7,460,669		6,920,376

			Total stockholders’ equity			28,074,892		27,452,528

			Total liabilities and stockholders’ equity		$	294,129,284	$	296,684,457

STURGIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME


			Three Months Ended March 31,

			2003		2002
Interest income
	Loans		$	3,678,018	$	4,078,088
	Mortgage-backed securities			72,111		13,945
	Investments			150,444		116,660
	Interest-bearing deposits			177,345		164,684
	Overnight deposits at FHLB			12,789		32,671

		Total interest income		4,090,708		4,406,048
Interest expense
	Deposits			1,156,933		1,222,736
	FHLB advances			748,799		912,212

		Total interest expense		1,905,732		2,134,948

	Net interest income			2,184,976		2,271,100
Provision for loan losses				318,688		580,132
	Net interest income after provision for loan losses			1,866,288		1,690,968
Noninterest income:
	Service charges and other fees			351,946		369,100
	Commission income			238,963		209,996
	Mortgage banking activities			734,479		584,642
	Trust fee income			120,832		157,538
	Increase in cash surrender value of life insurance			50,699		88,767
	Other income			24,861		4,669

		Total noninterest income		1,521,780		1,414,712
Noninterest expenses:
	Salaries and employee benefits			1,170,581		1,116,247
	Office occupancy and equipment			333,108		313,450
	Deposit account expenses			50,127		48,336
	Service bureau expense			205,313		158,053
	Professional fees and services			98,079		87,124
	Other			433,069		431,588
		Total noninterest expenses		2,290,277		2,154,798

		Income before provision for federal income tax		1,097,791		950,882
Provision for federal income tax				332,815		278,884

		Net income	$	764,976	$	671,998

Basic earnings per share			$	0.27	$	0.22
Diluted earnings per share			$	0.27	$	0.22
Dividends declared per share			$	0.08	$	0.07

STURGIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS


					Three Months Ended

					March 31			March 31
					2003			2002
					(Unaudited)			(Unaudited)

Cash Flows from Operating Activities
	Net Income				$	764,976		$	671,998
	Adjustments to reconcile net income to net cash from operating activities:
				Depreciation		153,074			147,022
				Amortization of intangibles		317,852			132,902
				Provision for loan losses		318,688			580,132
				Premiums and discounts on investment securities		23,980			(12,788	)
				Gain on sale of loans		(477,520	)		(285,705	)
				Loss (gain) on sale of real estate owned		931			(2,200	)
				Proceeds from the sale of loans held for sale		35,935,942			26,221,116
				Loans originated for sale		(36,498,571	)		(22,501,205	)
				Loss of equity in limited partnership		16,800			4,500
				Increase in cash value of bank owned life insurance		(75,572	)		(88,767	)
				Changes in assets and liabilities:
				(Increase) in accrued interest and other assets		(288,772	)		(408,682	)
				(Decrease) increase in accrued interest and other liabilities		(180,593	)		1,820,002

			Net cash provided by operating activities			11,215			6,278,326
Cash Flows from Investing Activities
		Net decrease (increase) in interest -bearing deposits in banks				7,654,834			(12,243,805	)
		Proceeds from maturities of securities held-to-maturity				184,674			178,230
		Purchase of securities held-to-maturity				—			(1,400,000	)
		Proceeds (purchase) of other securities				(9,033,989	)		(1,269,253	)
		Purchase of investment in limited partnership				(1,050,000	)		—
		Net decrease in loans				5,482,378			8,175,142
		Proceeds from sale of real estate owned				228,508			116,579
		Purchases of premises and equipment				(317,809	)		(128,925	)

				Net cash provided by (used in) investing activities		3,148,596			(6,572,032	)
Cash Flows from Financing Activities
		Net increase in demand and savings account deposits				14,808,633			12,180,247
		Net decrease in certificates of deposits				(7,567,363	)		(858,133	)
		Repayment of FHLB advances				(10,237,143	)		(19,744,703	)
		Proceeds from FHLB advances				—			10,000,000
		Dividends paid				(224,683	)		(217,107	)
		Exercise of stock options				81,000			—
		Stock Redemption				—			(1,047,265	)

				Net cash (used in) provided by financing activities		(3,139,556	)		313,039

Net (decrease) increase in Cash and Cash Equivalents						20,255			19,333
Cash and Cash Equivalents — Beginning of Period						13,071,284			10,629,027

Cash and Cash Equivalents — End of Period					$	13,091,539		$	10,648,360

STURGIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note A: FINANCIAL STATEMENTS.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles for complete financial statements. In the opinion of Management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 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 the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2002.

Note B: ORGANIZATION AND ACCOUNTING POLICIES.

The following is a summary of the significant accounting policies followed in the preparation of the consolidated financial statements of Sturgis Bancorp and subsidiaries (individually and collectively referred to as “Bancorp”).

Organization

Bancorp is chartered as a financial holding company. Bancorp’s primary asset is Sturgis Bank & Trust Company (“Bank”), a Michigan savings bank. The Bank, as a state-chartered stock savings bank and as a member of the Federal Home Loan Bank System (“FHLB”), is required to maintain an investment in the capital stock of the FHLB.

The Federal Deposit Insurance Corporation (“FDIC”) insures deposit accounts within certain limitations. A premium is required by the FDIC for the insurance of such accounts.

STURGIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited), Continued.

Note B: ORGANIZATION AND ACCOUNTING POLICIES, Continued.

Principles of Consolidation

The consolidated financial statements include the accounts of Bancorp, the Bank and all wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

The allowance for loan losses is a material estimate that is particularly susceptible to change in the near term. While management uses available information to recognize losses on loans, future additions to the allowance or write-downs may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies could require Bancorp to recognize additions to the allowance or write-downs based on their judgment of information available to them at the time of their examination.

Securities

Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as “held to maturity” or “trading” are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported as other comprehensive income.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Gains and losses on the sale of securities are recorded on the trade date.

STURGIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited), Continued.

Note B: ORGANIZATION AND ACCOUNTING POLICIES, Continued.

Loans

Substantially all of Bancorp’s loan activity is with customers located in southwestern and south-central, lower Michigan with a major concentration in single-family residential lending.

Generally, loans are collateralized by real estate. Bancorp expects loans to be repaid from cash flow or proceeds from the sale of selected assets of the borrower. Bancorp’s policy for requiring collateral is dependent upon management’s credit evaluation of the borrower.

Interest on loans is accrued and credited to income based upon the principal amount outstanding. The accrual of interest income is generally discontinued when a loan becomes 90 days past due as to principal or interest or when, in the opinion of management, full collection of principal or interest is unlikely. When a loan is in non-accrual status, interest income is recognized only to the extent of cash received and when the full collection of principal is not in doubt. Management may elect to continue the accrual of interest when the estimated fair value of collateral is sufficient to cover the principal balance and accrued interest.

Loan origination fees and certain direct loan origination costs are deferred and the net amount amortized as an adjustment of the related loan yield over the contractual life of the loans. Amortization of deferred amounts is suspended when a loan becomes non-accrual.

Loans Held for Sale

The Bank sells a portion of its mortgage loan production into the secondary market. Loans held for sale are carried at the lower of cost or market until sold. Whenever loan costs exceed market value on a net aggregate basis, a valuation allowance is recorded.

Allowance For Possible Loan Losses

The allowance for possible loan losses is maintained at a level considered by management to be adequate to absorb losses inherent in existing loans and commitments. The adequacy of the allowance is based on evaluations that take into consideration such factors as prior loss experience, changes in the nature and volume of the portfolio, overall portfolio quality, loan concentrations, specific impaired or problem loans and commitments, and current economic conditions that may affect the borrower’s ability to pay.

STURGIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited), Continued.

Note B: ORGANIZATION AND ACCOUNTING POLICIES, Continued.

Office Properties and Equipment

Office properties and equipment are carried at cost, less accumulated depreciation. Depreciation is computed on the straight-line method based on the estimated useful lives of the related assets.

Real Estate Owned

Real estate owned includes properties acquired through foreclosure proceedings or by acceptance of a deed in lieu of foreclosure. Real estate owned is recorded at the lower of its cost or the estimated fair market value (as determined by recent appraisals) less estimated selling costs. Any write-down of the loan balance to estimated fair market value (less estimated selling costs) when the property is foreclosed is charged to the allowance for loan losses. Subsequent market write-downs, operating expenses and gains or losses on disposition of real estate owned are charged to current earnings.

Investment In Limited Partnership

The Bank has an investment in an Indiana limited partnership and First Michiana Development Corporation, a wholly-owned subsidiary of the Bank, has an investment in a Michigan limited partnership, which are structured to generate low-income housing tax credits. These investments are accounted for using the equity method whereby Bancorp annually records its proportionate share of partnership losses as an adjustment to the carrying value of the investment.

Goodwill

Until adoption of FAS 142 in January of 2002, goodwill was amortized using accelerated methods over fifteen years. Beginning in January of 2002, the Bank no longer amortizes goodwill in accordance with FAS 142. On an ongoing basis, management assesses the recoverability of the goodwill. If an assessment of the goodwill indicates that its recoverability is impaired, a charge to expense is recorded for the amount of the impairment.

Servicing Rights

Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Capitalized servicing rights are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost.

STURGIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited), Continued.

Note B: ORGANIZATION AND ACCOUNTING POLICIES, Continued.

Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. The Bank carried a valuation allowance associated with capitalized servicing rights of approximately $275,000 at March 31, 2003 and December 31, 2002.

Federal Income Taxes

Deferred tax assets and liabilities are recognized for temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Statement of Cash Flows

For the purposes of the consolidated statements of cash flows, Bancorp considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.


				Three Months Ended
				March 31,

				2003		2002

Supplemental cash flow information:
	Cash paid during the periods for:
			Interest	$	2,072,423	$	2,185,863
			Income taxes		—		—
Noncash investing and financing activities:
		Loans transferred to real estate owned			286,668		148,854

Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding. Accordingly, for the three month period ended March 31, 2003 the weighted average number of common shares used in the computation of basic earnings per share was 2,808,238. The weighted average number of common shares for the three month period ended March 31, 2002 was 3,066,356.

STURGIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited), Continued.

Note B: ORGANIZATION AND ACCOUNTING POLICIES, Continued.

Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding plus the dilutive effect of outstanding stock options. For the three month period ended March 31, 2003 the weighted average number of common shares used in the computation of diluted earnings per share was 2,809,318. The weighted average number of common shares for the three month period ended March 31, 2002 was 3,066,356.

Stock Options

The Corporation applies APB Opinion 25 and related Interpretations in accounting for the stock option plan. Accordingly, no compensation cost has been recognized. Had compensation cost for the Corporation’s stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method prescribed by FASB Statement No. 123, the Corporation’s net income and earnings per share would have been adjusted to the pro forma amounts indicated below:


			Three Month Periods Ended March 31,

			2003			2002

		(Unaudited)
Net income, as reported			$	764,976		$	671,998
Deduct: Total stock-based compensation expense determined under fair value methods for all awards				(3,655	)		(23,472	)

Proforma net income			$	761,321		$	648,526

Reported income per common share:
	Basic		$	0.27		$	0.22
	Diluted			0.27			0.22
Proforma income per common share:
	Basic			0.27			0.21
	Diluted			0.27			0.21

STURGIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited), Continued.

Note B: ORGANIZATION AND ACCOUNTING POLICIES, Continued.

Recent Accounting Pronouncements

In June 2001, Statement of Financial Accounting Standards No. 142 (FAS 142), Goodwill and Other Intangible Assets was issued and is effective for fiscal years beginning after December 15, 2001. Under FAS 142, identifiable intangible assets that meet certain criteria will continue to be amortized over their estimated useful lives. However, goodwill and non-identifiable intangible assets will no longer be amortized. Instead, these assets will be evaluated for impairment on an annual basis. If an asset is deemed to be impaired, the asset will be written down through an adjustment to current earnings. As a result of adopting FAS 142 for the fiscal year ended December 31, 2002, Bancorp no longer amortizes goodwill.

Note C: LOANS RECEIVABLE, NET.

A summary of the balances of loans follows:


				March 31,				December 31,
				2003				2002

				(Unaudited)
Mortgage loans on real estate:
	Residential 1-4 family				$	122,576,118		$	127,770,040
	Commercial					50,972,709			50,440,340
	Construction loans – residential					11,199,419			11,844,367

						184,748,247			190,054,747
Commercial nonmortgage loans						15,206,344			15,072,501
Consumer and installment loans:
	Consumer and installment					10,326,971			11,354,651
	Other					611,557			569,566

						10,938,528			11,924,217

		Subtotal				210,893,119			217,051,465
	Less:
		Allowance for possible loan losses				2,031,811			1,920,037
		Unearned interest				14,382			16,925
		Undisbursed portion of loans in process				3,080,182			3,167,369
		Deferred loan fees				(188,872	)		(96,216	)

			Loans receivable, net		$	205,955,615		$	212,043,350

STURGIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited), Continued.

Note D: DEPOSITS.

Interest-bearing deposits are summarized as follows:


			March 31,		December 31,
			2003		2002

			(Unaudited)
Passbook and statement savings			$	42,910,939		40,890,720
NOW accounts				63,106,972		50,724,071
Time:
	$100,000 and over			29,128,450		34,452,825
	Under $100,000			61,506,071		63,749,059

		Total interest-bearing deposits	$	196,652,432	$	189,816,675

Note E: ADVANCES FROM FEDERAL HOME LOAN BANK.

Advances from the Federal Home Loan Bank of Indianapolis (“FHLB”) are collateralized by FHLB stock and all non-employee residential mortgage loans.

Bancorp had $54.1 million and $64.4 million in advances from FHLB at March 31, 2003 and December 31, 2002, respectively. Interest rates range from 4.20% to 7.34% with maturities ranging from December 2003 to February 2012.

Annual principal payments of FHLB advances are as follows:


Twelve Months Ending					Weighted
March 31,			Amount		Rate

	2004		$	6,838,079		6.40	%
	2005			2,960,102		6.79	%
	2006			3,346,072		5.70	%
	2007			—		—
	2008			10,000,000		5.50	%
2009 and thereafter				31,000,000		4.51	%

		Total	$	54,144,253		5.13	%

Note F: CASH DIVIDENDS

Bancorp paid a cash dividend of $.08 per share on its issued and outstanding common stock on March 13, 2003 to shareholders of record February 13, 2003. Total dividends paid on March 13, 2003 were $224,683.

STURGIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Concluded.

Note G: EMPLOYEE BENEFIT PLANS

The Bank has a Defined Contribution Plan/401(k). The plan permits eligible employees to contribute a percentage of their compensation with the Bank contributing 25% of the employee’s pre-tax contribution, not to exceed 10% of the employee’s total compensation, as defined in the agreement. The plan also permits the Bank to make discretionary contributions.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Forward Looking Statements

This report contains statements that constitute forward-looking statements. These statements appear in several places in this report and include statements regarding intent, belief, outlook, objectives, efforts, estimates or expectations of Bancorp, primarily with respect to future events and the future financial performance of the Bancorp. Any such forward-looking statements are not guarantees of future events or performance and involve risks and uncertainties, and actual results may differ materially from those in the forward-looking statement. Factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement include, but are not limited to, changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking laws and regulations; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; government and regulatory policy changes; the outcome of any pending and future litigation and contingencies; trends in consumer behavior and ability to repay loans; and changes of the world, national and local economies. Bancorp undertakes no obligation to update, amend or clarify forward-looking statements as a result of new information, future events, or otherwise.

Financial Condition

Assets. Bancorp’s total assets at March 31, 2003 were $294.1 million compared to $296.7 million at December 31, 2002, a decrease of $2.6 million or 0.9%. Decreases in interest-bearing deposits and loans were redeployed into securities available for sale.

Loans. The Bank’s net loans decreased to $206.0 million at March 31, 2003 from $212.0 million at December 31, 2002. This decrease was primarily due to residential loans refinanced with the decrease in market rates. Adjustable-rate mortgage loans were refinanced into fixed rate mortgages to lock in low rates. The Bank sells long-term, fixed rate, residential mortgages in the secondary market, so the residential mortgages decreased to $122.6 million at March 31, 2003 from $127.8 million at December 31, 2002. Commercial mortgage loans increased to $51.0 million, or 23.8% of gross loans, at March 31, 2003 from $50.4 million, or 23.2% of gross loans at December 31, 2002. The demand for fixed-rate mortgage loans in 2003 was strong due to lower average interest rates during the period. The mortgage loans originated for sale were primarily funded by the secondary mortgage market sales. At March 31, 2003, outstanding loan commitments were $29.7 million, which included $17.1 million of home equity lines of credit. These loan commitments will be funded by interest-bearing deposits, maturing assets, and additional FHLB borrowings, if needed. The decision to sell fixed-rate mortgages with original maturities of 10 years or greater protects the Bank from the interest rate risks inherent in holding these longer fixed-rate loans and provides a source of liquidity to fund loan demand. Bank Management does not view the decrease in loan balances as a continuing trend. An increase in market interest rates will decelerate the pace of refinance in the residential loan portfolio and the Bank is continuing its growth in commercial loans.

Loans serviced for others increased by $10.1 million to $188.6 million at March 31, 2003 from $178.5 million at December 31, 2002. This servicing portfolio consists of loans originated by the Bank and sold in the secondary mortgage market with servicing retained by the Bank. Bancorp has no purchased mortgage servicing portfolio. The originated mortgage servicing rights asset had a valuation allowance at March 31, 2003 and December 31, 2002 of approximately $275,000. This allowance was established to recognize the measured impairment of the asset. The Bank will continue to monitor the valuation of the servicing rights asset. If subsequent analysis shows reductions in the impairment, the valuation allowance will be reduced.

Allowance for loan losses. The Bank makes provisions for loan losses in accordance with the changes in the credit risk of the loan portfolio. The provisions are based on the historic loss experience of the Bank, adjusted for the increasing credit risk inherent in the growing commercial loan portfolio. The Bank makes general provisions by loan category; residential mortgages, nonresidential mortgages, commercial loans, home equity loans, second mortgages, consumer loans and deposit account loans. Commercial loans and nonresidential mortgages are graded on an 8-point scale, based on the credit quality. Loan grades are reviewed at least annually. The grade of the loan determines the allowance for losses. Loans graded 6 or higher are reviewed for specific reserves, determined by management’s assessment of risk.

The following table provides an analysis of the allowance for loan losses:


			Three Months Ended										Year Ended

			March 31,									December, 31,

			2003			2002			2002				2001			2000

Balance at the beginning of the period			$	1,920,037		$	1,300,000		$	1,300,000			$	803,744		$	730,000
Charge-offs:
	Residential mortgages			58,602			275,729			448,217				226,230			117,403
	Commercial mortgages			91,507			—			121,053				42,900			—
	Construction loans – residential			—			—			—				—			—
	Construction loans – commercial			—			—			—				—			—
	Commercial nonmortgage loans			33,121			106,141			130,718				175,675			25,061
	Loans secured by deposits			—			—			—				—			—
	Other consumer and installment loans			40,472			11,034			250,118				162,412			188,219

		Total charge-offs		223,702			392,904			950,106				607,217			330,683
Recoveries
	Residential mortgages			—			—			—				21,344			54,261
	Commercial mortgages			483			—			2,966				—			—
	Construction loans – residential			—			—			—				—			—
	Construction loans – commercial			—			—			—				—			—
	Commercial nonmortgage loans			—			7,016			16,548				3,021			2,044
	Loans secured by deposits			—			—			—				—			—
	Other consumer and installment loans			16,305			13,461			55,713				22,914			39,122

		Total recoveries		16,788			20,477			75,227				47,279			95,427
Net charge-offs				206,914			372,427			874,879				559,938			235,256
Provision for loan losses				318,688			580,132			1,494,916				1,056,194			309,000

Balance at the end of the period			$	2,031,811		$	1,507,705		$	1,920,037			$	1,300,000		$	803,744

Ratio of net charge-offs during the period to average loans outstanding during the period				0.10	%		0.17	%		0.40	%			0.25	%		0.11	%
Allowance for loan losses to total loans				0.96	%		0.71	%		0.88	%			0.58	%		0.36	%
Nonperforming assets to total assets				1.55	%		1.98	%		1.76	%			1.55	%		0.86	%
Allowance for loan losses to nonperforming assets				44.56	%		26.98	%		36.82	%			29.91	%		34.50	%

The following table shows the allocation of the allowance for loan losses at the dates indicated by loan type:


		March 31, 2003					December 31, 2002					December 31, 2001					December 31, 2000

				Percent of					Percent of					Percent of					Percent of
				Loans in					Loans in					Loans in					Loans in
				Each					Each					Each					Each
				Category to					Category to					Category to					Category to
		Amount		Total Loans			Amount		Total Loans			Amount		Total Loans			Amount		Total Loans

Residential mortgages		$	366,381		58.12	%	$	491,171		58.87	%	$	304,503		67.13	%	$	391,768		71.96	%
Commercial mortgages			1,185,706		24.17	%		956,217		23.24	%		470,459		15.92	%		189,927		11.73	%
Construction loans – residential			11,264		3.49	%		8,651		3.70	%		35,014		3.62	%		23,871		2.14	%
Construction loans – commercial			34,118		1.82	%		16,914		1.75	%		—		0.20	%		—		0.14	%
Commercial nonmortgage loans			315,778		7.21	%		314,963		6.94	%		165,188		5.89	%		92,594		5.72	%
Loans secured by deposits			—		0.29	%		—		0.26	%		—		0.26	%		—		0.19	%
Other consumer and installment			118,564		4.90	%		132,121		5.23	%		324,836		6.98	%		105,584		8.14	%

	Total allowance for loan losses	$	2,031,811		100.00	%	$	1,920,037		100.00	%	$	1,300,000		100.00	%	$	803,744		100.00	%

Loans in nonaccrual status at March 31, 2003 consisted primarily of residential and commercial real estate loans, for which foreclosure has begun or full collection of the loan is questionable. The following table presents the aggregate amount of troubled asset categories as of the dates indicated:


								December 31,
		March 31, 2003			2002			2001			2000

Past due - 90 days or greater		$	918,896		$	899,975		$	1,073,625		$	1,314,288
Nonaccrual loans			2,224,968			2,955,666			2,821,965			911,610
Real estate owned			1,415,988			1,358,759			451,173			103,500

	Total nonperforming assets		4,559,852			5,214,400			4,346,763			2,329,398
Restructured assets			633,023			626,882			1,381,920			1,030,858

	Total troubled assets	$	5,192,875		$	5,841,282		$	5,728,683		$	3,360,256

Ratio of troubled assets to total loans			2.52	%		2.75	%		2.56	%		1.50	%

Ratio of troubled assets to total assets			1.76	%		1.97	%		2.05	%		1.24	%

Interest-bearing Deposits in Banks. Interest-bearing deposits in banks were $17.5 million at March 31, 2003, compared to 23.0 million at December 31, 2002, a decrease of $5.5 million, due to maturity.

Securities – Available for sale. Investment securities available for sale of $9.2 million at March 31, 2003 consisted primarily of shares in a mutual fund that invests in mortgage-related securities.

Securities – Held-to-maturity. Investment securities held-to-maturity consisting of municipal obligations, trust preferred and mortgage-backed securities were $12.4 million at March 31, 2003, compared to $12.6 million at December 31, 2002 a decrease of

$0.2 million. The decrease was primarily due to principal payments on mortgage-backed securities.

Investments in Limited Partnerships. Investments in limited partnerships increased to $1.2 million at March 31, 2003 from $161,080 at December 31, 2002. This increase is due to an investment in North Lake Apartments in Elkhart, IN. North Lake Apartments is a 192-unit apartment community which utilizes tax exempt financing along with federal tax credits to provide affordable housing to residents with less than 60% of the area’s median income. Bancorp’s investment of $1.1 million in the quarter ended March 31, 2003 fully fund’s Bancorp’s 25% partnership position.

Deposits and Borrowed Funds. Deposits were $209.8 million at March 31, 2003, compared to $202.6 million at December 31, 2002, an increase of $7.2 million or 3.6%. The increase is primarily in NOW accounts, which includes municipal checking accounts.

The Bank has an available line of credit with the Federal Home Loan Bank of Indianapolis (“FHLB”) which provides for advances up to $10.0 million and matures in March 2004. All borrowings from FHLB are collateralized by FHLB stock and non-employee mortgage loans.

Long-term advances were $54.1 million at March 31, 2003 compared to $57.7 million at December 31, 2002. There were no short-term advances at March 31, 2003 compared to $6.7 million at December 31, 2002.

Capital

The stockholders’ equity of Bancorp was $28.1 million at March 31, 2003 compared to $27.5 million at December 31, 2002, an increase of $622,364 or 2.27%. The primary component of this increase was net income. Cash dividends during the first quarter of 2003 of $0.08 per share reduced retained earnings by $224,683. The stockholders’ equity was 9.55% of total assets at March 31, 2003.

The Federal Reserve Board (“FRB”) has adopted risk-based capital guidelines applicable to Bancorp. These guidelines require that financial holding companies, such as Bancorp, maintain capital commensurate with both on and off balance sheet credit risks of their operations. Under the guidelines, a financial holding company must have a minimum ratio of total capital to risk-weighted assets of 8.0%.

In addition, a financial holding company must maintain a minimum ratio of Tier 1 capital equal to 4.0% of risk-weighted assets. Tier 1 capital includes common stockholders equity, qualifying perpetual preferred stock and minority interest in equity accounts of consolidated subsidiaries less goodwill.

As a supplement to the risk-based capital requirements, the FRB has also adopted leverage capital ratio requirements. The leverage ratio requirements establish a minimum ratio of Tier 1 capital to total assets, less goodwill, of 3% for the most highly rated financial holding companies. All other financial holding companies are required to

maintain additional Tier 1 capital yielding a leverage ratio of 4%-5%, depending on the particular circumstances and risk profile of the institution.

The following table summarizes the capital ratios of Bancorp at March 31, 2003 and December 31, 2002:


		March 31, 2003			December 31, 2002

Equity to assets			9.6	%		9.2	%
Tier I leverage			7.8	%		7.5	%
Risk-based:	Tier I capital		11.4	%		11.1	%
	Total capital		12.4	%		12.0	%

Asset/Liability Management

A significant component of the Bank’s earnings is net interest income. The Bank’s asset/liability management strategy is to maximize net interest income over time by reducing the impact of fluctuating interest rates. This is accomplished by matching the mix and maturities of its assets and liabilities. At the same time the Bank’s asset/liability strategies for managing interest rate risk must also accommodate customer demands for particular types of deposit and loan products. The Bank uses various asset/liability management techniques in an attempt to maintain a profitable mix of financial assets and liabilities, provide deposit and loan products that meet the needs of its market area, and maintain control over interest rate risk resulting from changes in interest rates.

Net interest income is derived from the difference or “spread” between the yield on interest-earning assets and the cost of interest-bearing liabilities. The Bank has sought to reduce its exposure to changes in interest rates by matching more closely the effective maturities and repricings of its interest-sensitive assets and liabilities. At the same time, the Bank’s asset/liability management strategies must also accommodate customer demands for particular types of deposit and loan products.

While much of the Bank’s asset/liability management efforts involve strategies that increase the rate sensitivity of its loans and investments, such as the sale of long-term fixed rate loans, originations of adjustable rate loans and purchases of adjustable rate mortgage-backed securities or relatively short average life fixed-rate investments, it also uses certain techniques to reduce the rate sensitivity of its deposits and borrowed money. Those techniques include attracting longer-term certificates of deposit when the market will permit, emphasizing core deposits, which are less sensitive to changes in interest rates, and borrowing through long-term FHLB advances. The Bank’s asset/liability management strategy will appropriately change when market rates change.

The Bank measures its exposure to interest rate fluctuations primarily by using a computer modeling system designed for savings institutions such as the Bank. The model uses assumptions which management believes are reasonable for the analysis. These assumptions include (but are not limited to) prepayment and decay rates based on nine interest rate scenarios. It allows the Bank to adjust its asset-liability mix based on the interest rate risk identified. The analysis estimates the changes in the market value of the Bank’s equity using interest rate change scenarios ranging from +4% to –4%, in 1% increments from current market rates. At March 31, 2003, the following table illustrates

the interest rate sensitivity of Bancorp’s equity to changes in market interest rates.


(in Thousands of Dollars)
Book value of stockholders’ equity	$	28,075
4% increase in market rates		45,006
3% increase in market rates		44,830
2% increase in market rates		46,232
1% increase in market rates		45,118
No change (current market value of equity)		43,649
1% decrease in market rates		40,720
2% decrease in market rates		37,762
3% decrease in market rates		34,108
4% decrease in market rates		29,566

As the table shows, the Bank’s book value of equity is less than estimated market value in all of the scenarios. That indicates that the Bank is able to withstand fluctuations in market interest rates without posting a significant threat to either the Bank’s stockholders’ equity or the federal deposit insurance system and, therefore, the Bank can be deliberate in its actions to adjust the asset-liability mix. The Bank would meet the regulatory minimum capital requirements in all of the interest-rate scenarios.

The Bank has an Asset-Liability Management Committee (ALCO) that meets as needed. The purpose of this Committee is to communicate, coordinate, and monitor asset-liability management procedures. The Committee establishes and monitors the volume and mix of both assets and funding sources. The objective is to manage assets and funding sources to produce results consistent with the Bank’s liquidity requirements, capital adequacy, growth, and profitability goals. To accomplish this objective, the ALCO uses internal budget variance reports, forecasts for changes in interest rates and consumer deposit activity, as well as forecasts of loan demand in each of the Bank’s loan types, investment maturities and new investment alternatives, and various other internal and external reports.

Simulation: The Bank uses a computer-based earnings simulation model to estimate the effects of various interest rate environments on the balance sheet structure and net interest income. These simulation techniques involve changes in interest rate relationships, asset and liability mixes, and prepayment options inherent in financial instruments, as well as interest rate levels in order to quantify risk. The Bank’s sensitivity is estimated by first forecasting the next twelve months of net interest income under an assumed environment of constant market interest rates. Next, immediate parallel interest rate shocks are constructed in the model. The rate shocks reflect changes of equal magnitude to all market interest forecast under each of the rate shock scenarios. The resulting change in net interest income is an indication of the sensitivity change in net earnings to directional changes in market interest rates. This model is based solely on parallel changes in market rates and does not reflect the levels of interest rate risk that may

arise from other factors such as changes in the spreads between key market rates or in the shape of the Treasury yield curve. The net interest income simulation model includes on-balance sheet loan, investment, deposit, and debt instruments.

The Bank’s Board of Directors compares net interest income sensitivity and has established tolerance limits for fluctuation. At March 31, 2003, the forecasted exposure was within the Bank’s established policy limits, except in falling rate change scenarios. The Bank’s Board of Directors and Management consider further significant rate decreases from March 31, 2003 as unlikely.

Net Interest Income Sensitivity: Change in Projected Results vs. Constant Rates

12 Month Projection – April 2003 through March 2004


				Rate Shock Amount
	(2.00%)			(1.00%)			0.00%			1.00%			2.00%

Percent Change in net interest income vs constant rates		(15.84	%)		(8.19	%)		0.00	%		6.61	%		16.02	%
ALCO Policy		(6.00	%)		(3.00	%)		0.00	%		(4.00	%)		(8.00	%)

Effect of Interest Rate Fluctuations

Bancorp’s consolidated results of operations depend to a large extent on the Bank’s level of net interest income, which is the difference between interest income earned on its loan and investment portfolios versus the interest paid on deposits and borrowed funds. If the cost of funds increases faster than the yield on its interest-earning assets, net interest income will be reduced.

The Bank measures its interest rate risk primarily using simulation analysis. This analysis is prepared by the Chief Financial Officer and reviewed by the Asset/Liability Management Committee. The ALCO is comprised of the Chief Executive Officer, Chief Financial Officer and other representatives from operations, branch administration, lending, trust, private banking, and marketing. The Bank’s Board of Directors reviews quarterly reports that estimate the Bank’s sensitivity to changes in interest rates. Sensitivity is estimated for net interest income and market value of portfolio equity.

While the Bank uses various tools to monitor interest rate risk, it is unable to predict future fluctuations in interest rates or the specific impact thereof. The market value of most of the Bank’s financial assets is sensitive to fluctuations in market interest rates. Fixed-rate investments including mortgage loans and mortgage-backed securities decline in value as interest rates rise. Adjustable-rate loans and securities generally have less market value volatility than do fixed-rate products.

Liquidity

The Bank maintains certain levels of liquid assets (the most liquid of which are cash and cash equivalents and investment securities) in order to meet demands from loan commitments, savings withdrawals and other obligations. The Bank manages liquidity by maintaining a portion of its liquid assets in overnight accounts and by keeping various maturities in its portfolio of investment securities. The primary sources of liquidity are loan repayments and sales, maturing investments, deposit accounts, and FHLB borrowings.

Two factors contributed to the increased liquidity at March 31, 2003; low interest rates for residential mortgages and decreased confidence in equity markets. The residential mortgages that have refinanced into low fixed-rate terms have been sold to the secondary mortgage market, providing funds for the Bank to redeploy. The Bank originated commercial mortgage and commercial nonmortgage loans, so the percentage of commercial loans to total loans increased slightly. Decreased investor confidence in equity markets has increased bank deposits nationally, including deposits at the Bank. This increase in deposits provided additional funds the Bank invested in securities and interest-bearing deposits in other banks. Either an increase in loan rates or investor confidence in equity markets could significantly reduce the Bank’s liquidity position.

Cash Flows

Operating. Cash flows from operating activities are most significantly affected by net income and mortgage banking activities. Net income was $764,976 and $671,998 for the three months ended March 31, 2003 and 2002, respectively. The increase in the gain on sale of loans to $477,520 in the three months ended March 31, 2003 from $285,705 in the three months ended March 31, 2002 is significantly offset by the increase in amortization of intangibles (originated mortgage servicing rights). Loans originated for sale and proceeds from the sale of loans also increased with the historically low mortgage loan rates. Loans originated for sale were $36.5 million and $22.5 million for the three months ended March 31, 2003 and 2002, respectively. This increase in loans originated for sale is primarily due to low residential mortgage rates. Proceeds from the sales of loans were $35.9 million and $26.2 million for the three months ended March 31, 2003 and 2002, respectively. Because the Bank generally has a policy of selling long-term fixed rate mortgage loans, the volume of loan sales varies with customer demand for these loans.

Investing. Cash flows from investing activities are most significantly affected by loans made to customers net of principal payments, changes in the Bank’s investment portfolio, and increases in interest-bearing deposits in banks. For the three months ended March 31 2003 and 2002 there were decreases in loans of $5.5 million and $8.2 million, respectively, primarily due to refinanced loans. Investment purchases and maturities also affect cash flows from investing activities. The Bank’s management maintains investments at levels that provide the Bank with optimal return, risk and liquidity. In the three months ended March 31, 2003, the Bank decreased its holdings in interest-bearing deposits in banks by $7.7 million to $15.4 million. The Bank also purchased $9.0 million

and $1.1 million of other securities and an investment in a limited partnership, respectively, during the three months ended March 31, 2003.

Financing. Cash flows from financing activities are mostly affected by changes in deposits and FHLB advances. Deposits increased $7.2 million and $11.3 million in the three months ended March 31, 2003 and 2002, respectively. The Bank also used FHLB advances for financing its operating and investing activities. The FHLB advances decreased $10.2 million and $9.7 million during the three months ended March 31, 2003 and 2002, respectively.

Contractual Obligations


			Payments Due by Period

			Less than		1 – 3		4 - 5		After 5
	Total		1 year		years		years		years

Certificates of deposit	$	90,634,521	$	39,669,392	$	23,559,114	$	18,304,205	$	9,101,810
FHLB advances		54,144,253		6,838,079		6,306,174		10,000,000		31,000,000

Total contractual cash obligations	$	144,778,774	$	46,507,471	$	29,865,288	$	28,304,205	$	40,101,810

The long-term debt obligations consist of certificates of deposit and advances from the Federal Home Loan Bank. The above schedule represents principal payments only and does not include interest.

Results of Operations

Bancorp reported net income of $764,976 or $0.27 per share for the three months ended March 31, 2003 compared to net income of $671,998 or $0.22 per share for the three months ended March 31, 2002. The increase in net income was primarily due to a reduction in the provision for loan losses.

Interest Income

Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002 Interest income decreased $0.3 million to $4.1 million from $4.4 million. This decrease is primarily due to decreases in the average interest rates earned to 6.43% in 2003 from 7.24% in 2002. The decrease in interest income is likely to reverse when interest rates increase. The Bank increased investment securities and interest-bearing deposits as loans refinanced and were subsequently sold.

Interest Expense

Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002 Interest expense decreased $0.2 million to $1.9 million from $2.1 million. This was primarily due to the decrease in rates paid on average interest-bearing deposits and FHLB advances. The rate paid on average interest-bearing liabilities decreased to 3.04% from 3.61%. The shift from FHLB borrowings to lower rate deposit accounts also contributed to the decrease in interest expense.

Net Interest Income

Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002. Net interest income decreased $86,124 to $2.2 million from $2.3 million. This decrease was primarily caused by a decrease in net interest-earning assets to $3.6 million from $6.9 million and a decrease in the net interest margin to 3.43% from 3.73%. The decrease in market interest rates to historically low levels significantly contributed to the decrease in net interest income, as the portfolio has a positive gap (assets reprice more quickly than liabilities).

Provision for Loan Losses

Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002. The provision for loan losses was $318,688 for the quarter ended March 31, 2003 and $580,132 for the quarter ended March 31, 2002. The provision for loan losses was based upon management’s assessment of relevant factors, including types and amounts of non-performing loans, historical and anticipated loss experience on such types of loans, and current and projected economic conditions.

Noninterest Income

Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002. Noninterest income was $1.5 million for the three months ended March 31, 2003 compared to $1.4 million for the three months ended March 31, 2002, an increase of $107,068 or 7.57%. The primary component of noninterest income was mortgage banking activities, which increased to $734,479 in 2003 from $584,642 in 2002. This increase is due to the increase in loan sales during the first quarter of 2003 compared to the first quarter of 2002. Management does not expect refinance activity to continue at the current pace, unless interest rates decrease further. Commission income was $238,963 for the three months ended March 31, 2003 compared to $209,996 for the three months ended March 31, 2002. This increase is due to growth in account relationships at Oakleaf Financial Services, Inc., the Bank’s wholly owned investment subsidiary. During the three months ended March 31, 2003, Bancorp recognized $50,699 increase in cash surrender value of life insurance compared to $88,767 for the same period in the prior year related to insurance policies on key Bank personnel.

Noninterest Expense

Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002. Noninterest expense was $2.3 million for the three months ended March 31, 2003 compared to $2.2 million for the three months ended March 31, 2002, an increase of $135,479. Salaries and employee benefits increased by $54,334 due to staffing changes, salary adjustments and cost of living increases that took effect January 2003. Service bureau expense increased to $205,313 from $158,053 for the three months ended March 31, 2003 and 2002, respectively, in preparation for conversion to a different service

bureau scheduled for April 2003. The conversion to a new service bureau enhances the technological capability and efficiency of the Bank. Real estate owned expense was $94,395 for the three months ended March 31, 2003 compared to $43,190 for the three months ended March 31, 2002, due to an increase in expenses on multi-family real estate owned.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information concerning quantitative and qualitative disclosures about market risk contained under the captions “Asset/Liability Management” and “Effect of Interest Rate Fluctuations” on pages 13 through 18 (inclusive) of the Bancorp’s Annual Report to Stockholders for the year ended December 31, 2002 is incorporated herein by reference. Such Annual Report was previously filed as Exhibit 13.1 to Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2002.

Copies of the Bank’s filings with the FDIC under the Securities Exchange Act of 1934 can be obtained from Sturgis Bank & Trust Company by contacting Eric L. Eishen at Sturgis Bank & Trust Company, 113-125 E. Chicago Road, Sturgis, Michigan 49091, telephone number (269) 651-9345 or, for a nominal fee, from the FDIC, telephone number (202) 898-8913 or fax number (202) 898-3909. Filings of Bancorp can be obtained from Bancorp by contacting Eric L. Eishen at Sturgis Bancorp, Inc., 113-125 E. Chicago Road, Sturgis, Michigan 49091, telephone number (269) 651-9345 or through the Securities and Exchange Commission EDGAR System at www.sec.gov. The Bank also maintains a website at www.sturgisbank.com, at which Bancorp’s electronic filings with the SEC are freely available.

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Bancorp’s chief executive officer and chief financial officer have concluded that Bancorp’s disclosure controls (as defined in Exchange Act Rule 13a-14(c)) are sufficiently effective to ensure that the information required to be disclosed by Bancorp in the reports it files under the Exchange Act is gathered, analyzed and disclosed with adequate timeliness, accuracy and completeness, based on an evaluation of such controls and procedures conducted within 90 days prior to the date hereof.

CHANGES IN INTERNAL CONTROLS

There have been no significant changes in Bancorp’s internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referred to above.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There are no material legal proceedings other than the ordinary routine proceedings of Bancorp.

ITEM 2. CHANGES IN SECURITIES

The information contained in the section captioned “Market Information” in the 2002 Annual Report to Stockholders is incorporated herein by reference. Such Annual Report was previously filed as Exhibit 13.1 to Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2002. In addition to the information incorporated by reference, the following table shows sales of unregistered securities by Bancorp since December 31, 2002.


Date of Sale	Number of Shares		Exercise Price		Name

01/03/2003		9,000	$	9.00	Leonard L. Eishen

ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Exhibit Listing


Exhibit Number		Description

2.1		Plan of Reorganization and Merger Agreement (1)
2.2		Consolidation Agreement (1)
3.1		Articles of Incorporation of Sturgis Bancorp, Inc. (1)
3.2		Bylaws of Sturgis Bancorp, Inc. (1)
10.1		Sturgis Federal Savings Bank Non-Employee Director Stock Option Plan (2)
10.2		Sturgis Federal Savings Bank Director Stock Option Plan (2)
10.3		Sturgis Federal Savings Bank Employee Stock Option Plan (3)
10.4		Employment Agreement with Eric L. Eishen (4)
10.5		Employment Agreement with Brian P. Hoggatt (4)
10.6		Employment Agreement with David E. Watters (4)
10.7		Employment Agreement with Ronald W. Scheske (4)


Exhibit Number		Description

10.8		Employment Agreement with Steven L. Gage (5)
13.1		Annual Report to Stockholders (6)
21		Subsidiaries of Registrant (6)
99.1		Certification of the CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2		Certification of the CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     (1) Incorporated by reference to the Proxy Statement dated November 21, 2001 of Sturgis Bank & Trust Company.
     (2) Incorporated by reference to 1994 Form 10-KSB of Sturgis Federal Savings Bank, the predecessor of Sturgis Bank & Trust Company.
     (3) Incorporated by reference to 1995 Form 10-KSB of Sturgis Federal Savings Bank, the predecessor of Sturgis Bank & Trust Company.
     (4) Incorporated by reference to Form 10-Q for Sturgis Bancorp, Inc. for the quarter ended June 30, 2002.
     (5) Incorporated by reference to Form 10-Q for Sturgis Bancorp, Inc. for the quarter ended September 30, 2002.
     (6) Incorporated by reference to Form 10-K for Sturgis Bancorp, Inc. for the year ended December 31, 2002.

(b) Reports on Form 8-K

On January 16, 2003, Bancorp filed one report on Form 8-K, announcing the resignation of Gary Malloy as a director of Bancorp.

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.


		STURGIS BANCORP, INC. (Registrant)

Date	May 13, 2003	/s/ Eric L. Eishen Eric L. Eishen, President and Chief Executive Officer

Date	May 13, 2003	/s/ Brian P. Hoggatt Brian P. Hoggatt, Chief Financial Officer

I, Eric L. Eishen, certify that:

1. I have reviewed this report on Form 10-Q of Sturgis Bancorp, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the “Evaluation Date”); and

c) presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date		May 13, 2003		/s/ Eric L. Eishen Eric L. Eishen, President, Chief Executive Officer

I, Brian P. Hoggatt, certify that:

1. I have reviewed this report on Form 10-Q of Sturgis Bancorp, Inc.

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the “Evaluation Date”); and

c) presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


Date		May 13, 2003		/s/ Brian P. Hoggatt Brian P. Hoggatt, Chief Financial Officer

10-Q EXHIBIT INDEX


EXHIBIT NO.		DESCRIPTION

EX-99.1		Certification of the CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-99.2		Certification of the CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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