##### Table of Contents



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

1



---

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



---



##### Table of Contents



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                                                          |   

2



---



##### Table of Contents






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.

3



---



##### Table of Contents






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 | 
|                                      |                                           |                                      |                                            |            |             |             |  |  |  |  

4



---



##### Table of Contents






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    |          

5



---



##### Table of Contents






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  |        
|                                                     |                                                                            |                                                                |                                           |                                                               |             |                   

6



---



##### Table of Contents






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.

7



---



##### Table of Contents



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.

8



---



##### Table of Contents



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.

9



---



##### Table of Contents



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.

10



---



##### Table of Contents



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.

11



---



##### Table of Contents



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 | 

12



---



##### Table of Contents



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 Assetswas 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 | 
|                                |                                  |                                         |                       |             |             |             

13



---



##### Table of Contents



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.

14



---



##### Table of Contents



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.

15



---



##### Table of Contents






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.

16



---



##### Table of Contents



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.

17



---



##### Table of Contents



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   | %      

18



---



##### Table of Contents



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

19



---



##### Table of Contents



$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

20



---



##### Table of Contents



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

21



---



##### Table of Contents



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

22



---



##### Table of Contents



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.

23



---



##### Table of Contents



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

24



---



##### Table of Contents



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,
2002Interest 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,
2002Interest 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.

25



---



##### Table of Contents



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

26



---



##### Table of Contents



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.

27



---



##### Table of Contents






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)                         

28



---



##### Table of Contents



|               |  |                                                                                                                                   
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------
|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.

29



---



##### Table of Contents






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          

30



---



##### Table of Contents



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

31



---



##### Table of Contents



I, Brian P. Hoggatt, 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/  Brian P. Hoggatt
Brian P. Hoggatt, Chief Financial Officer

32



---



##### Table of Contents



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