Edgar Filing: STURGIS BANCORP INC

e10vq

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20429

Form 10-Q


	(Mark One)

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

For the quarterly period ended September 30, 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 November 12, 2003

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

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

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

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
		CONDENSED CONSOLIDATED STATEMENT OF INCOME
		CONDENSED CONSOLIDATED STATEMENT OF INCOME
		CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
		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 RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 2. CHANGES IN SECURITIES
	ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
SIGNATURES
10-Q EXHIBIT INDEX
Employment Agreement with Eric L Eishen
Employment Agreement with Brian P. Hoggatt
Employment Agreement with Ronald W. Scheske
Employment Agreement with Steven L. Gage
Employment Agreement with Tracey L. Parker
Employment Agreement with David E. Watters
Excerpt from Annual Report to Stockholders
Excerpt from Annual Report to Stockholders
302 Certification of Chief Executive Officer
302 Certification of Chief Financial Officer
906 Certification of Chief Executive Officer
906 Certification of Chief Financial Officer

STURGIS BANCORP, INC. AND SUBSIDIARIES

INDEX


			Page No.

Part I. Financial Information
	Item 1. Financial Statements:
		Condensed Consolidated Statements of Financial Condition—September 30, 2003 and December 31, 2002.		2
		Condensed Consolidated Statements of Income—Three Months Ended September 30, 2003 and 2002 (Unaudited).		3
		Condensed Consolidated Statements of Income—Nine Months Ended September 30, 2003 and 2002 (Unaudited).		4
		Condensed Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2003 and 2002 (Unaudited).		5
		Notes To Condensed Consolidated Financial Statements.		6
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.			16
	Item 3. Quantitative and Qualitative Disclosures about Market Risks.			29
	Item 4. Controls and Procedures			29
Part II. Other Information
	Item 1. Legal Proceedings			32
	Item 2. Changes in Securities			32
	Item 4. Submission of Matters to a Vote of Security Holders			32
	Item 6. Exhibits and Reports on Form 8-K			32
Signatures				33

PART I. FINANCIAL INFORMATION

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

ITEM 1. FINANCIAL STATEMENTS

STURGIS BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION


				September 30,		December 31,
				2003		2002
ASSETS
Cash and due from banks				$	12,699,231	$	13,064,101
Short-term interest-bearing deposits					305,482		7,183

	Total cash and cash equivalents				13,004,713		13,071,284
Interest-bearing deposits in banks					10,608,825		23,018,375
Securities - Available-for-sale					9,075,367		—
Securities - Held-to-maturity					11,332,009		12,590,709
Federal Home Loan Bank stock, at cost					4,221,700		4,115,400
Loans held for sale					5,017,562		7,437,506
Loans, net					209,554,727		212,043,350
Real estate owned					763,928		1,358,759
Bank owned life insurance					6,558,150		6,335,429
Accrued interest receivable					1,711,828		1,731,948
Investment in limited partnership					1,187,680		161,080
Premises and equipment, net					6,780,758		6,641,980
Intangible assets
	Goodwill, net of accumulated amortization				5,109,419		5,109,419
	Originated mortgage servicing rights				1,816,886		1,501,922
	Other intangible assets				102,613		105,601
Other assets					1,805,378		1,461,695

			Total assets	$	288,651,543	$	296,684,457

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
	Deposit accounts:
		Noninterest-bearing		$	14,207,139	$	12,747,121
		Interest-bearing			184,681,783		189,816,675
	Borrowings from Federal Home Loan Bank				58,375,883		64,381,396
	Accrued interest payable				617,557		935,954
	Other liabilities				1,924,966		1,350,783

			Total liabilities		259,807,328		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				8,229,992		6,920,376

			Total stockholders’ equity		28,884,215		27,452,528

			Total liabilities and stockholders’ equity	$	288,651,543	$	296,684,457

STURGIS BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF INCOME


			Three Months Ended September 30,
			2003		2002
Interest income
	Loans		$	3,386,875	$	3,947,896
	Mortgage-backed securities			59,798		88,145
	Investments			77,062		119,263
	Interest-bearing deposits			123,419		258,553
	Overnight deposits at FHLB			1,537		2,811

		Total interest income		3,648,691		4,416,668
Interest expense
	Deposits			975,867		1,324,880
	FHLB advances			712,902		830,449

		Total interest expense		1,688,769		2,155,329

	Net interest income			1,959,922		2,261,339
Provision for loan losses				53,600		248,635

	Net interest income after provision for loan losses			1,906,322		2,012,704
Noninterest income:
	Service charges and other fees			359,298		393,715
	Commission income			371,317		222,853
	Mortgage banking activities			526,411		425,633
	Trust fee income			119,443		113,337
	Increase in cash surrender value of life insurance			70,663		84,089
	Other income			9,735		28,326

		Total noninterest income		1,456,867		1,267,953
Noninterest expenses:
	Salaries and employee benefits			1,262,459		1,158,543
	Office occupancy and equipment			348,424		336,581
	Deposit account expenses			51,008		52,559
	Service bureau expense			150,709		156,348
	Professional fees and services			55,607		74,221
	Other			487,882		448,577

		Total noninterest expenses		2,356,089		2,226,829

		Income before provision for federal income tax		1,007,100		1,053,828
Provision for federal income tax				290,299		336,141

		Net income	$	716,801	$	717,687

Basic earnings per share			$	0.26	$	0.24
Diluted earnings per share			$	0.25	$	0.24
Dividends declared per share			$	0.09	$	0.07

STURGIS BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF INCOME


			Nine Months Ended September 30,
			2003		2002
Interest income
	Loans		$	10,561,047	$	11,885,050
	Mortgage-backed securities			199,664		152,655
	Investments			418,165		375,381
	Interest-bearing deposits			460,461		659,112
	Overnight deposits at FHLB			22,565		43,942

		Total interest income		11,661,902		13,116,140
Interest expense
	Deposits			3,220,757		3,770,415
	FHLB advances			2,166,497		2,558,437

		Total interest expense		5,387,254		6,328,852

	Net interest income			6,274,648		6,787,288
Provision for loan losses				1,083,075		1,063,892

	Net interest income after provision for loan losses			5,191,573		5,723,396
Noninterest income:
	Service charges and other fees			1,073,941		1,135,094
	Commission income			913,459		715,504
	Mortgage banking activities			2,027,662		1,284,935
	Trust fee income			367,224		364,114
	Increase in cash surrender value of life insurance			222,721		248,087
	Other income			256,232		51,952

		Total noninterest income		4,861,239		3,799,686
Noninterest expenses:
	Salaries and employee benefits			3,780,283		3,458,164
	Office occupancy and equipment			1,024,313		963,859
	Deposit account expenses			149,730		147,162
	Service bureau expense			594,821		471,608
	Professional fees and services			241,558		274,358
	Other			1,381,763		1,357,548

		Total noninterest expenses		7,172,468		6,672,699

		Income before provision for federal income tax		2,880,344		2,850,383
Provision for federal income tax				840,508		854,411

		Net income	$	2,039,836	$	1,995,972

Basic earnings per share			$	0.73	$	0.67
Diluted earnings per share			$	0.73	$	0.67
Dividends declared per share			$	0.26	$	0.21

STURGIS BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS


					Nine Months Ended September 30,
					2003			2002

					(Unaudited)			(Unaudited)
Cash Flows from Operating Activities
	Net Income				$	2,039,836		$	1,995,972
	Adjustments to reconcile net income to net cash from operating activities:
				Depreciation		478,662			445,152
				Amortization of intangibles		825,541			527,186
				Provision for loan losses		1,083,075			1,063,892
				Loss on sale of fixed assets		4,785			—
				Premiums and discounts on investment securities		71,562			37,508
				Gain on sale of loans		(1,358,252	)		(721,197	)
				Gain on sale of real estate owned		(9,122	)		(44,283	)
				Proceeds from the sale of loans held for sale		110,911,535			61,498,898
				Loans originated for sale		(107,133,339	)		(59,917,326	)
				Loss of equity in limited partnership		23,400			13,500
				Increase in cash value of bank owned life insurance		(222,721	)		(248,087	)
				Changes in assets and liabilities:
				Increase in accrued interest and other assets		(1,461,080	)		(165,169	)
				Decrease (increase) in accrued interest and other liabilities		256,857			(148,845	)

			Net cash provided by operating activities			5,510,739			4,337,201
Cash Flows from Investing Activities
		Net decrease (increase) in interest-bearing deposits in banks				12,409,550			(11,564,025	)
		Proceeds from maturities of securities held-to-maturity				1,187,138			1,381,735
		Purchase of securities held-to-maturity				—			(10,213,698	)
		Purchase of other securities				(9,075,367	)		(1,044,096	)
		Purchase of FHLB stock				(106,300	)		—
		Purchase of investment in limited partnership				(1,050,000	)		—
		Net decrease (increase) in loans				984,937			(5,099,931	)
		Proceeds from sale of real estate owned				1,024,564			653,311
		Purchases of premises and equipment				(622,225	)		(392,151	)

				Net cash provided by (used in) investing activities		4,752,297			(26,278,855	)
Cash Flows from Financing Activities
		Net increase in demand and savings account deposits				8,294,519			7,831,776
		Net (decrease) increase in certificates of deposits				(11,969,393	)		20,692,450
		Repayment of FHLB advances				(10,349,373	)		(26,401,560	)
		Proceeds from FHLB advances				4,343,860			23,375,887
		Dividends paid				(730,220	)		(631,139	)
		Exercise of stock options				81,000			—
		Stock Redemption				—			(2,235,074	)

				Net cash (used in) provided by financing activities		(10,329,607	)		22,632,340

Net (decrease) increase in Cash and Cash Equivalents						(66,571	)		690,686
Cash and Cash Equivalents - Beginning of Period						13,071,284			10,629,027

Cash and Cash Equivalents - End of Period					$	13,004,713		$	11,319,713

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 and nine-month periods ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2002.

Note B: ORGANIZATION AND ACCOUNTING POLICIES.

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

Organization

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

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

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

Note B: ORGANIZATION AND ACCOUNTING POLICIES, Continued.

Principles of Consolidation

The consolidated financial statements include the accounts of Bancorp, the Bank and all wholly-owned subsidiaries. All significant inter-company 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 and are determined using the specific identification method.

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.

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 Loan Losses

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

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

Note B: ORGANIZATION AND ACCOUNTING POLICIES, Continued.

Office Properties and Equipment

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

Real Estate Owned

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

Investment In Limited Partnership

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

Goodwill

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

Servicing Rights

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

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

Note B: ORGANIZATION AND ACCOUNTING POLICIES, Continued.

Fair value is determined by stratifying rights by predominant characteristics, such as interest rates and terms, as well as 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 $170,000 at September 30, 2003 and $275,000 at 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.


			Nine Months Ended
			September 30,
			2003		2002

Supplemental cash flow information:
	Cash paid during the periods for:
		Interest	$	5,705,651	$	6,445,432
		Income taxes		1,015,000		791,071
Noncash investing and financing activities:
	Loans transferred to real estate owned			420,611		1,108,949

Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding. For the three and nine month periods ended September 30, 2003 the weighted average number of common shares used in the computation of basic earnings per share was 2,808,535 and 2,808,408, respectively. The weighted average number of common shares for the three and nine month periods ended September 30, 2002 was 2,929,611 and 2,987,758, respectively.

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 and nine month periods ended September 30, 2003 the weighted average number of common shares used in the computation of diluted earnings per share was 2,811,640 and 2,810,587, respectively. The weighted average number of common shares for the three and nine month periods ended September 30, 2002 was 2,932,999 and 2,989,773, respectively.

Stock Options

Bancorp 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 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, Bancorp’s net income and earnings per share would have been adjusted to the pro forma amounts indicated below:


		Three Month Periods Ended September 30,

		2003			2002

		(Unaudited)
Net income, as reported		$	716,801		$	717,687
Add: Total stock-based compensation recorded			—			—
Deduct: Total stock-based compensation expense determined under fair value methods for all awards			(3,655	)		(23,472	)

Proforma net income		$	713,146		$	694,215

Reported income per common share:
	Basic	$	0.26		$	0.24
	Diluted		0.26			0.24
Proforma income per common share:
	Basic		0.25			0.24
	Diluted		0.25			0.24

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

Note B: ORGANIZATION AND ACCOUNTING POLICIES, Continued.


		Nine Month Periods Ended September 30,

		2003			2002

		(Unaudited)
Net income, as reported		$	2,039,836		$	1,995,972
Deduct: Total stock-based compensation expense determined under fair value methods for all awards			(10,965	)		(70,416	)

Proforma net income		$	2,028,871		$	1,925,557

Reported income per common share:
	Basic	$	0.73		$	0.67
	Diluted		0.73			0.67
Proforma income per common share:
	Basic		0.72			0.64
	Diluted		0.72			0.64

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

Note C: LOANS RECEIVABLE, NET.

A summary of the balances of loans follows:


				September 30,			December 31,
				2003			2002

				(Unaudited)
Mortgage loans on real estate:
	Residential 1-4 family			$	118,778,052		$	127,770,040
	Commercial				60,382,918			50,440,340
	Construction loans – residential				10,626,451			8,038,367
	Construction loans – commercial				2,731,400			3,806,000

					192,518,821			190,054,747
Commercial nonmortgage loans					14,576,759			15,072,501
Consumer and installment loans:
	Consumer and installment				8,645,494			11,354,651
	Other				987,986			569,566

					9,633,480			11,924,217

		Subtotal			216,729,060			217,051,465
	Less:
		Allowance for possible loan losses			2,713,108			1,920,037
		Unearned interest			10,365			16,925
		Undisbursed portion of loans in process			4,719,386			3,167,369
		Deferred loan fees			(268,526	)		(96,216	)

			Loans receivable, net	$	209,554,727		$	212,043,350

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

Note D: DEPOSITS.

Interest-bearing deposits are summarized as follows:


			September 30		December 31,
			2003		2002

			(Unaudited)
Statement savings			$	42,408,042		40,890,720
NOW accounts				56,041,251		50,724,071
Time:
	$100,000 and over			28,314,989		34,452,825
	Under $100,000			57,917,502		63,749,059

		Total interest-bearing deposits	$	184,681,784	$	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 $58.4 million and $64.4 million in advances from FHLB at September 30, 2003 and December 31, 2002, respectively. Interest rates range from 1.37% 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
September 30,			Amount		Rate

	2004		$	11,472,600		4.51	%
	2005			2,557,211		6.73	%
	2006			3,346,072		5.70	%
	2007			—		—
	2008			10,000,000		5.50	%
2009 and thereafter				31,000,000		4.51	%

		Total	$	58,375,883		4.85	%

Note F: CASH DIVIDENDS

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

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

Bancorp paid a cash dividend of $.09 per share on its issued and outstanding common stock on June 16, 2003 to shareholders of record May 15, 2003. Total dividends paid on June 16, 2003 were $252,768.

Bancorp paid a cash dividend of $.09 per share on its issued and outstanding common stock on September 15, 2003 to shareholders of record August 15, 2003. Total dividends paid on September 15, 2003 were $252,768.

Note G: EMPLOYEE BENEFIT PLANS

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

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

Forward Looking Statements

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

Financial Condition

Assets. Bancorp’s total assets at September 30, 2003 were $288.7 million compared to $296.7 million at December 31, 2002, a decrease of $8.0 million or 2.7%. The decrease in total assets is primarily due to decreases in net loans and loans held for sale. The $12.4 million decrease in interest-bearing deposits in banks provided funds that were reinvested into securities available for sale, to increase liquidity in preparation for future increases in rates.

Loans. The Bank’s net loans decreased to $209.6 million at September 30, 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 $118.8 million at September 30, 2003 from $127.8 million 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 September 30, 2003, outstanding loan commitments were $42.1 million, which included $19.8 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.

Commercial mortgage loans increased to $60.4 million, or 27.9% of gross loans, at September 30, 2003 from $50.4 million, or 23.2% of gross loans at December 31, 2002. The Bank has expanded the commercial loan department to service the growth in commercial loans. Management expects this expansion will continue the growth of commercial loan balances.

Loans serviced for others increased by $33.6 million to $212.1 million at September 30, 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 September 30, 2003 and December 31, 2002 of approximately $170,000 and $275,000, respectively. This reduction in the valuation allowance contributed $105,000 to noninterest income during the nine months ended September 30, 2003. 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.

During the nine months ended September 30, 2003, the Bank’s nonperforming assets and total loans decreased. However the Bank increased the allowance for loan losses during the period as a result of analysis related to a specific commercial relationship.

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


			Nine Months Ended						Year Ended
			September 30,						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			102,923			324,769			448,217			226,230			117,403
	Commercial mortgages			91,507			9,942			121,053			42,900			—
	Construction loans - residential			—			—			—			—			—
	Construction loans - commercial			—			—			—			—			—
	Commercial nonmortgage loans			67,921			180,718			130,718			175,675			25,061
	Loans secured by deposits			—			—			—			—			—
	Other consumer and installment loans			84,386			89,642			250,118			162,412			188,219

		Total charge-offs		346,737			605,071			950,106			607,217			330,683
Recoveries
	Residential mortgages			8,136			—			—			21,344			54,261
	Commercial mortgages			2,998			—			2,966			—			—
	Construction loans - residential			—			—			—			—			—
	Construction loans - commercial			—			—			—			—			—
	Commercial nonmortgage loans			—			16,548			16,548			3,021			2,044
	Loans secured by deposits			—			—			—			—			—
	Other consumer and installment loans			45,598			28,065			55,713			22,914			39,122

		Total recoveries		56,732			44,613			75,227			47,279			95,427
Net charge-offs				290,004			560,458			874,879			559,938			235,256
Provision for loan losses				1,083,075			1,063,892			1,494,916			1,056,194			309,000

Balance at the end of the period			$	2,713,108		$	1,803,434		$	1,920,037		$	1,300,000		$	803,744

Ratio of net charge-offs during the period to Average loans outstanding during the period				0.14	%		0.26	%		0.40	%		0.25	%		0.11	%
Allowance for loan losses to total loans				1.25	%		0.79	%		0.88	%		0.58	%		0.36	%
Nonperforming assets to total assets				1.53	%		1.63	%		1.76	%		1.55	%		0.86	%
Allowance for loan losses to nonperforming assets				61.25	%		36.47	%		36.82	%		29.91	%		34.50	%

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


		September 30, 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		$	472,852		51.95	%	$	491,171		58.87	%	$	304,503		67.13	%	$	391,768		71.96	%
Commercial mortgages			1,782,265		30.12	%		956,217		23.24	%		470,459		15.92	%		189,927		11.73	%
Construction loans – residential			24,455		5.07	%		8,651		3.70	%		35,014		3.62	%		23,871		2.14	%
Construction loans – commercial			34,143		1.30	%		16,914		1.75	%		—		0.20	%		—		0.14	%
Commercial nonmortgage loans			289,501		6.96	%		314,963		6.94	%		165,188		5.89	%		92,594		5.72	%
Loans secured by deposits			—		0.47	%		—		0.26	%		—		0.26	%		—		0.19	%
Other consumer and installment			109,892		4.13	%		132,121		5.23	%		324,836		6.98	%		105,584		8.14	%

	Total allowance for loan losses	$	2,713,108		100.00	%	$	1,920,037		100.00	%	$	1,300,000		100.00	%	$	803,744		100.00	%

Loans in nonaccrual status at September 30, 2003 of $2.6 million 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,
		Sept. 30, 2003			2002			2001			2000

Past due - 90 days or greater		$	1,104,278		$	899,975		$	1,073,625		$	1,314,288
Nonaccrual loans			2,561,345			2,955,666			2,821,965			911,610
Real estate owned			763,928			1,358,759			451,173			103,500

	Total nonperforming assets		4,429,550			5,214,400			4,346,763			2,329,398
Restructured assets			201,317			626,882			1,381,920			1,030,858

	Total troubled assets	$	4,630,868		$	5,841,282		$	5,728,683		$	3,360,256

Ratio of troubled assets to total loans			2.21	%		2.75	%		2.56	%		1.50	%

Ratio of troubled assets to total assets			1.60	%		1.97	%		2.05	%		1.24	%

Interest-bearing Deposits in Banks. Interest-bearing deposits in banks were $10.6 million at September 30, 2003, compared to $23.0 million at December 31, 2002, a decrease of $12.4 million, due to maturity. Matured interest-bearing deposits have been redeployed into securities available-for-sale to enhance net interest income..

Securities – Available for sale. Investment securities available for sale of $9.1 million at September 30, 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 $11.3 million at September 30, 2003, compared to $12.6 million at December 31, 2002 a decrease of $1.3 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 September 30, 2003 from $161,080 at December 31, 2002. This increase is due to an investment in North Lake Apartments in Elkhart, Indiana. North Lake Apartments is a 192-unit apartment community that 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. The Bank’s investment of $1.1 million in the nine months ended September 30, 2003 fully fund’s its 25% partnership position.

Deposits and Borrowed Funds. Deposits were $198.9 million at September 30, 2003, compared to $202.6 million at December 31, 2002, a decrease of $3.7 million or 1.8%. The decrease is primarily in certificates of deposit. The relatively low interest rates paid on new and renewing certificates of deposit have shifted funds from certificates of deposit to savings and NOW accounts, which are immediately repricing and impose no penalty for withdrawal.

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. Short-term advances were $8.0 million at September 30, 2003 compared to $6.7 million at December 31, 2002.

Long-term advances were $50.4 million at September 30, 2003 compared to $57.7 million at December 31, 2002.

Capital

The stockholders’ equity of Bancorp was $28.9 million at September 30, 2003 compared to $27.5 million at December 31, 2002, an increase of $1.4 million or 5.1%. The primary component of this increase was net income. Cash dividends during the first nine months of 2003 of $0.26 per share reduced retained earnings by $730,220. The stockholders’ equity was 10.0% of total assets at September 30, 2003.

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

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

As a supplement to the risk-based capital requirements, the FRB has also adopted leverage capital ratio requirements. The leverage ratio requirements establish a minimum ratio of Tier 1 capital to total assets, less goodwill, of 3% for the most highly rated financial holding companies. All other financial holding companies are required to maintain additional Tier 1 capital yielding a leverage ratio of 4%-5%, depending on the particular circumstances and risk profile of the institution. Management deems the current capitalization level adequate for current and anticipated strategies.

The following table summarizes the capital ratios of Bancorp at the dates indicated:


	September 30, 2003			December 31, 2002

Equity to assets		10.0	%		9.2	%
Tier I leverage		8.3	%		7.5	%
Risk-based: Tier I capital		11.4	%		11.1	%
Total capital		12.7	%		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 September 30, 2003, the following table illustrates the interest rate sensitivity of Bancorp’s equity to 3% positive and negative changes in market interest rates.


(in Thousands of Dollars)

Book value of stockholders’ equity	$	28,844

3% increase in market rates		47,488
2% increase in market rates		46,696
1% increase in market rates		45,709
No change (current market value of equity)		44,470
1% decrease in market rates		41,776
2% decrease in market rates		38,744
3% decrease in market rates		35,189

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

Bancorp 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 Bancorp’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 Bancorp’s loan types, investment maturities and new investment alternatives, and various other internal and external reports.

Simulation: Bancorp 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. Bancorp’s sensitivity is estimated by first forecasting the next twelve months of net interest income under an assumed environment of constant market interest rates. Next, immediate parallel interest rate shocks are constructed in the model. The rate shocks reflect changes of equal magnitude to all market interest forecast under each of the rate shock scenarios. The resulting change in net interest income is an indication of the sensitivity change in net earnings to directional changes in market interest rates. This model is based solely on parallel changes in market rates and does not reflect the levels of interest rate risk that may arise from other factors such as changes in the spreads between key market rates or in the shape of the Treasury yield curve. The net interest income simulation model includes on-balance sheet loan, investment, deposit, and debt instruments.

Bancorp’s Board of Directors compares net interest income sensitivity and has established tolerance limits for fluctuation. At September 30, 2003, the forecasted exposure was within Bancorp’s established policy limits, except in falling rate change scenarios. Bancorp’s Board of Directors and Management consider further significant rate decreases from September 30, 2003 as unlikely.

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

12 Month Projection – September 2003 through September 2004


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

Percent Change in net interest income vs constant rates		(16.15	%)		(7.27	%)		0.00	%		5.70	%		13.47	%
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 Bancorp’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.

Bancorp 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. Bancorp’s Board of Directors reviews quarterly reports that estimate Bancorp’s sensitivity to changes in interest rates. Sensitivity is estimated for net interest income and market value of portfolio equity.

While Bancorp 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 Bancorp’s financial assets is sensitive to fluctuations in market interest rates. Fixed-rate investments including mortgage loans and mortgage-backed securities decline in value as interest rates rise. Adjustable-rate loans and securities generally have less market value volatility than do fixed-rate products.

Liquidity

Bancorp 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. Bancorp 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.

The primary factor that contributed to the increased liquidity at September 30, 2003 was low interest rates for residential mortgages. Residential mortgages that have refinanced into low fixed-rate terms have been sold to the secondary mortgage market, providing funds for Bancorp to redeploy. Bancorp originated commercial mortgage and commercial nonmortgage loans to hold in its portfolio, so the percentage of commercial loans to total loans increased. Excess funds from refinanced residential mortgages have been invested in securities available-for-sale and funded the decrease in deposits. An increase in loan rates would probably reduce Bancorp’s liquidity position, because borrowers would be more likely to prefer adjustable-rate mortgages, which Bancorp holds in its portfolio. Management deems the current liquidity level of Bancorp adequate for current and anticipated needs.

Cash Flows

Operating. Cash flows from operating activities are most significantly affected by net income and mortgage banking activities. Net income was $2,039,836 and $1,995,972 for the nine months ended September 30, 2003 and 2002, respectively. The increase in the gain on sale of loans to $1,358,252 in the nine months ended September 30, 2003 from

$721,197 in the nine months ended September 30, 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 $107.1 million and $60.0 million for the nine months ended September 30, 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 $110.9 million and $61.5 million for the nine months ended September 30, 2003 and 2002, respectively. Because Bancorp 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 Bancorp’s investment portfolio, and increases in or maturities of interest-bearing deposits in banks. For the nine months ended September 30 2003 there was a decrease in loans of $1.0 million, partially offset by a increase in commercial mortgage loans, due to adjustable-rate residential loans refinanced into fixed-rate mortgages to lock in low rates and subsequently sold. For the nine months ended September 30, 2002 there was an increase in loans of $5.1 million due to loans serviced for others refinanced into portfolio loans. Investment purchases and maturities also affect cash flows from investing activities. Bancorp’s management maintains investments at levels that provide Bancorp with optimal return, risk and liquidity. In the nine months ended September 30, 2003, Bancorp decreased its holdings in interest-bearing deposits in banks by $12.4 million to $10.6 million. This decrease in interest-bearing deposits was offset by $9.1 invested in securities available for sale. The securities available for sale increases Bancorp’s liquidity, which positions Bancorp to capitalize on anticipated increases in interest rates. In contrast, for the nine months ended September 30, 2002, Bancorp increased interest-bearing deposits in banks by $11.6 million to securely lock in interest rates as short-term market rates decreased. Bancorp also purchased $9.1 million and $1.1 million of other securities and an investment in a limited partnership, respectively, during the nine months ended September 30, 2003.

Financing. Cash flows from financing activities are mostly affected by changes in deposits and FHLB advances. Deposits decreased $3.7 million in the nine months ended September 30, 2003 and increased $28.5 million in the nine months ended September 30, 2003 and 2002, respectively. Deposit increases in the nine months ended September 30, 2002 included jumbo certificates of deposit, which the Bank used as an alternative to additional FHLB advances. Bancorp also used FHLB advances for financing its operating and investing activities. The FHLB advances decreased $6.0 million and $3.0 million during the nine months ended September 30, 2003 and 2002, respectively. Bancorp generally does not borrow funds from FHLB without a specific investment strategy, such as funding specific loan commitments, holding (rather than selling) selected loans, or increasing leverage of Bancorp through investments in interest-bearing deposits in banks.

Contractual Obligations


	Payments Due by Period

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

Certificates of deposit	$	86,232,491	$	34,078,065	$	22,916,654	$	24,135,746	$	5,102,026
FHLB advances		58,375,883		11,472,600		5,903,283		10,000,000		31,000,000

Total contractual cash obligations	$	144,608,374	$	45,550,665	$	28,819,937	$	34,135,746	$	36,102,026

The long-term debt obligations consist of certificates of deposit and advances from the Federal Home Loan Bank. Certificates of deposit include $10.5 million of brokered deposits, most of which matures in 4-6 years. Bancorp utilizes jumbo and brokered deposits when the interest rate of similar-term FHLB advances is higher. The above schedule represents principal payments only and does not include interest.

Results of Operations

Bancorp reported net income of $716,801 or $0.26 per share for the three months ended September 30, 2003 compared to net income of $717,687 or $0.24 per share for the three months ended September 30, 2002. The increase noninterest income and decrease in provision for loan losses were offset by the decrease in net interest income. Bancorp reported net income of $2,039,836 or $0.73 per share for the nine months ended September 30, 2003 compared to net income of $1,652,356 or $0.54 per share for the nine months ended September 30, 2002. The increase in net income was primarily due to an increase in mortgage banking activities.

Interest Income

Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002. Interest income decreased $0.8 million to $3.6 million from $4.4 million. This decrease is primarily due to decreases in the average interest rates earned to 5.72% in 2003 from 6.58% in 2002. The decrease in interest income is likely to reverse when interest rates increase.

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002. Interest income decreased $1.5 million to $11.7 million from $13.1 million. This decrease is primarily due to the reduction of net loans to $209.6 million in 2003 from $221.4 in 2003 and interest bearing deposits to $10.6 million in 2003 from $26.6 million in 2002. The average interest rates decreased to 6.68% in 2003 and from 6.83% in 2002.

During the three and nine months ended September 30, 2003 and September 30, 2002, Bancorp increased investment securities as loans refinanced and were subsequently sold.

Interest Expense

Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002. Interest expense decreased $0.5 million to $1.7 million from $2.2 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 2.75% from 3.36%.

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002. Interest expense decreased $0.9 million to $5.4 million from $6.3 million. This was primarily due to the decrease in rates paid on average interest-bearing deposits and FHLB advances and a decrease of $9.0 million in average interest-bearing liabilities. The rate paid on average interest-bearing liabilities decreased to 3.19% from 3.45%.

During the three and nine months ended September 30, 2003 compared to the three and nine months ended September 30, 2002, the shift from FHLB borrowings to lower rate deposit accounts also contributed to the decrease in interest expense.

Net Interest Income

Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002. Net interest income decreased $301,417 to $2.0 million from $2.3 million. This decrease was primarily caused by a decrease in net interest-earning assets to $10.8 million from $11.7 million and a decrease in the net interest margin to 2.97% from 3.22%.

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002. Net interest income decreased $512,640 to $6.3 million from $6.8 million. This decrease was primarily caused by a decrease in net interest-earning assets to $8.5 million from $11.3 million, partially offset by an increase in the net interest margin to 3.49% from 3.38%.

During the three and nine months ended September 20, 2003 compared to the three and nine months ended September 30, 2002, 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 September 30, 2003 Compared to Three Months Ended September 30, 2002. The provision for loan losses was $53,600 for the quarter ended September 30, 2003 and $248,635 for the quarter ended September 30, 2002. The provision for loan losses decreased primarily due to a decrease in net charge-offs to $21,510 for the quarter ended September 30, 2003 from $160,612 for the quarter ended September 30, 2002.

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002. The provision for loan losses was $1,083,075 for the nine months ended September 30, 2003 and $1,063,892 for the nine months ended September 30, 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 September 30, 2003 Compared to Three Months Ended September 30, 2002. Noninterest income was $1.5 million for the three months ended September 30, 2003 compared to $1.3 million for the three months ended September 30, 2002, an increase of $188,914 or 14.9%. The largest component of the change in noninterest income was commission income, which increased to $371,317 for the three months ended September 30, 2003 from $222,853 for the three months ended September 30, 2002. Mortgage banking activities increased to $526,411 in 2003 from $425,633 in 2002.

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002. Noninterest income was $4.9 million for the nine months ended September 30, 2003 compared to $3.8 million for the nine months ended September 30, 2002, an increase of $1.1 million or 27.9%. The primary component of noninterest income was mortgage banking activities, which increased to $2.0 million in 2003 from $1.3 million in 2002. Commission income was $913,459 for the nine months ended September 30, 2003 compared to $715,504 for the nine months ended September 30, 2002.

During the three and nine months ended September 30, 2003 compared to the three and nine months ended September 30, 2002, the increase in mortgage banking activities is due to the increase in loan sales during 2003 compared to 2002. Management does not expect refinance activity to continue at the current pace. The increases in commission income are due to growth in account relationships at Oakleaf Financial Services, Inc., the Bank’s wholly owned investment subsidiary. Management expects commission income to continue its gradual increase as Oakleaf Financial Services, Inc. expands its services throughout Bancorp’s market area.

Noninterest Expense

Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002. Noninterest expense was $2.4 million for the three months ended September 30, 2003 compared to $2.2 million for the three months ended September 30, 2002, an increase of $129,260. Salaries and employee benefits increased by $103, 916 due to staffing changes, salary adjustments and cost of living increases that took effect January 2003 and increased cost of benefits.

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002. Noninterest expense was $7.2 million for the nine months ended September 30, 2003 compared to $6.7 million for the nine months ended September 30, 2002, an increase of $.5 million. Salaries and employee benefits increased by $322,119 due to staffing changes, salary adjustments and cost of living increases that took effect January 2003 and benefit expense. Service bureau expense increased to $594,821 from $471,608 for the nine months ended September 30, 2003 and 2002, respectively.

For the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002, the increase in service bureau expense was due to one-time conversion expenses. The conversion to a different service bureau in April 2003 enhances the technological capability and efficiency of the Bank. On-going service bureau expense is expected to be relatively unchanged.

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 and attached as Exhibit 13.1 to this Form 10-Q. 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 historical 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 with the Securities and Exchange Commission 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 and procedures (as defined in Exchange Act Rule 13a-15(e)) 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 and procedures or in other factors that could significantly affect these controls subsequent to the date of the evaluation referred to above.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 2. CHANGES IN SECURITIES

The information contained in the section captioned “Market Information” in the 2002 Annual Report to Stockholders is incorporated herein by reference and attached as Exhibit 13.2 to this Form 10-Q. 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

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

10.5		Employment Agreement with Brian P. Hoggatt

10.6		Employment Agreement with Ronald W. Scheske

10.7		Employment Agreement with Steven L. Gage

10.8		Employment Agreement with Tracey L. Parker

10.9		Employment Agreement with David E. Watters


Exhibit Number		Description

13.1		Excerpt from Annual Report to Stockholders

13.2		Excerpt from Annual Report to Stockholders

31.1		Rule 13a-14(a) Certification of Chief Executive Officer

31.2		Rule 13a-14(a) Certification of Chief Financial Officer

32.1		Rule 13a-14(b) 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.

32.2		Rule 13a-14(b) 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.

December 31, 2002.

(b) Reports on Form 8-K

During the third quarter of 2003, there were no reports filed on Form 8-K.

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 November 12, 2003		/s/ Eric L. Eishen Eric L. Eishen, President
		and Chief Executive Officer

Date November 12, 2003		/s/ Brian P. Hoggatt Brian P. Hoggatt, Chief Financial Officer

10-Q EXHIBIT INDEX


EXHIBIT No.		DESCRIPTION

	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

	10.5	Employment Agreement with Brian P. Hoggatt

	10.6	Employment Agreement with Ronald W. Scheske

	10.7	Employment Agreement with Steven L. Gage

	10.8	Employment Agreement with Tracey L. Parker

	10.9	Employment Agreement with David E. Watters

	13.1	Excerpt from Annual Report to Stockholders

	13.2	Excerpt from Annual Report to Stockholders

	31.1	Rule 13a-14(a) Certification of Chief Executive Officer

	31.2	Rule 13a-14(a) Certification of Chief Financial Officer

	32.1	Rule 13a-14(b) 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.

	32.2	Rule 13a-14(b) 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.

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