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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

_________________

FORM 10-Q

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

For the quarterly period ended March 31, 2004

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

For the transition period from _______ to ________

Commission file number 000-22461

OAK FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

2445 84th Street, S.W., Byron Center, Michigan 49315
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (616) 878-1591

_________________

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 Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____.

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

The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 2,035,191 shares of the Corporation’s Common Stock ($1 par value) were outstanding as of May 11, 2004.

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INDEX

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OAK FINANCIAL CORPORATION AND SUBSIDIARY			CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements.

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OAK FINANCIAL CORPORATION AND SUBSIDIARY			CONSOLIDATED STATEMENTS OF INCOME

The accompanying notes are an integral part of these consolidated financial statements.

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OAK FINANCIAL CORPORATION AND SUBSIDIARY			CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

The accompanying notes are an integral part of these consolidated financial statements.

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OAK FINANCIAL CORPORATION AND SUBSIDIARY			CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these consolidated financial statements.

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OAK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1 – 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 accounting principles generally accepted in the United States of America 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, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the consolidated financial statements and footnotes thereto included in the Corporation’s annual report on Form 10-K for the year ended December 31, 2003.

Note 2 – Earnings per Share (in thousands)

        All earnings per share amounts have been presented to conform to the requirements of Statement of Financial Accounting Standard (SFAS) No. 128, Earnings Per Share. Basic earnings per share exclude any dilutive effect of stock options. The basic earnings per share for the Corporation is computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share for the Corporation is computed by dividing net income by the sum of the weighted average number of common shares outstanding plus the dilutive effect of outstanding stock options. The following table summarizes the number of shares used in the denominator of the basic and diluted earnings per share computations:

Note 3 – Comprehensive Income (in thousands)

Note 4 – Segment Reporting

        The Corporation provides a broad range of financial products and services through its branch network in West Michigan. While the Corporation’s chief decision makers monitor the revenue streams of various products and services, operations are managed and financial performance is evaluated on a corporate wide basis. Accordingly, all of the Corporation’s operations are considered by Management to be aggregated in one reportable operating segment.

Note 5 – Special Purpose Entities

        OAK ELC is an employee leasing company that leases employees to Byron Center State Bank, OAK Financial Services and Dornbush Insurance Agency. The purpose of OAK ELC is to reduce the administrative burden of multiple payrolls, minimize the payroll tax reporting burden, and allocate shared employment costs between business units. The financial results of OAK ELC and elimination of inter-company transactions are included in the consolidated results of the corporation.

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Note 6 – Allowance for Loan Losses

        The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings.  Loan losses are charged against the allowance when management believes the uncollectibility of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

        The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

        A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Note 7 – Interest Rate Risk

        The primary components of the balance sheet are interest-earning assets, which are funded by interest-bearing liabilities. The differences in cash flows of these rate sensitive assets and liabilities, combined with shifts, or changes in the overall market yield curve result in interest rate risk. Interest rate risk is the change in net interest income due to interest rate changes. Interest rate risk is inherent to banking and cannot be eliminated.

        The Asset and Liability Management Committee (ALCO) is responsible for overseeing the financial management of net interest income, liquidity, investment activities, and other related activities. To address interest rate risk, management utilizes re-pricing GAP analysis, which is a traditional method of assessing interest rate risk. Recognizing that there is no single measure that absolutely measures current or future risk, management also relies on a simulation analysis to assess risk in dynamic interest rate environments.

Note 8 – Stock Compensation and Stock Option Plans (dollars in thousands, except per share data)

        The Corporation maintains stock option plans for non-employee directors (the Director’s Plan) and employees and officers of the Corporation and its subsidiary (the Employees’ Plan). The stock compensation plans were established in 1999, and authorize the issue of up to 165,000 options under the Employees’ Plan and up to 35,000 options under the Directors’ Plan.

        Options under both plans become exercisable after the first anniversary of the award date. The option exercise price is at least 100% of the market value of the common stock at the grant date. During 2004, 1,000 options were awarded at an exercise price of $45.00. No options were awarded in the year 2003. During 2002, 14,747 options were awarded with an exercise price of $44.50 per share.

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The following tables summarize information about stock option transactions:

        All options expire 10 years after the date of the grant; 138,113 shares are reserved for future issuance under the Employee Stock Compensation Plan and 25,000 shares are reserved for future issuance under the Stock Option Plan for non-employee directors.

        SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation, encourages all entities to adopt a fair value based method of accounting for stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period.

        Had compensation costs for the Corporation’s stock option plans been determined based on fair value at the grant dates for awards under the plans consistent with the method prescribed by FASB 123, the Corporation’s net income and earnings per share would have been adjusted to the pro forma amounts indicated below:

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FORWARD LOOKING STATEMENTS

        This report includes “forward-looking statements” as that term is used in the securities laws. All statements regarding our expected financial position, business and strategies are forward-looking statements. In addition, the words “anticipates,” “believes,” “estimates,” “seeks,” “expects,” “plans,” “intends,” and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. The presentation and discussion of the provision and allowance for loan losses and statements concerning future profitability or future growth or increases, are examples of inherently forward looking statements in that they involve judgments and statements of belief as to the outcome of future events. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on our operations and our future prospects include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in our market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning us and our business, including additional factors that could materially affect our financial results, is included within our other filings with the Securities and Exchange Commission.

ITEM 2.

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

        OAK Financial Corporation (the “Corporation”) is a single bank holding company, which owns OAK ELC (which is discussed above under Special Purpose Entities), and Byron Center State Bank (the “Bank”). The Bank has twelve banking offices serving communities in Kent, Ottawa and Allegan Counties. The Bank owns a subsidiary, OAK Financial Services. OAK Financial Services offers mutual fund products, securities brokerage services, retirement planning services, investment management and advisory services. OAK Financial Services in turn owns Dornbush Insurance Agency, which sells property / casualty, life, disability and long-term health care insurance products.

        During the third quarter of 2003, the Bank launched Mobile Banking, a courier service in West Michigan that provides convenient, safe, and reliable pick-up and delivery for a variety of items including cash, checks and important bank documents. The Mobile Banking vans are staffed by experienced Bank employees along with professional armed guards. Deposits are kept secure within a vault inside the van.

        The Bank opened a banking office in Jenison in November of 2003. The office was previously a banking office of a competitor that was purchased and significantly remodeled.

        The following is management’s discussion and analysis of the factors that influenced OAK Financial Corporation’s financial performance. The discussion should be read in conjunction with the Corporation’s 2003 annual report on Form 10-K and the audited financial statements and notes contained therein.

Critical Accounting Policies

        The financial services industry is highly regulated. Furthermore, the nature of the financial services industry is such that, other than described below, the use of estimates and management judgment are not likely to present a material risk to the financial statements. In cases where estimates or management judgment are required, internal controls and processes are established to provide assurance that such estimates and management judgments are materially correct to the best of management’s knowledge.

        Allowance for loan losses — Accounting for loan classifications, accrual status, and determination of the allowance for loan losses is based on regulatory guidance and accounting pronouncements. This guidance includes, but is not limited to, generally accepted accounting principles, the Uniform Retail Credit Classification and Account Management Policy issued by the Federal Financial Institutions Examination Council (“FFIEC”), and the Interagency Policy on the Allowance for Loan and Lease Losses issued by the FFIEC. Accordingly, the allowance for loan losses includes a reserve calculation based on an evaluation of loans determined to be impaired, risk ratings, historical losses, loans past due, and other subjective factors.

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        Commercial loan rating system and identification of impaired loans – The Corporation has a defined risk rating system that is designed to assess the risk of individual loans along with the overall risk of the commercial loan portfolio. The system assigns a risk weighting to factors such as cash flow, collateral, financial condition, operating performance, repayment history, management, and strength of the industry. An assessment of risk is performed as a part of the loan approval process as well as periodic updates based on the circumstances of the individual loan. The Corporation employs both internal and periodic external loan review services to assess risk ratings.

        Originated mortgage-servicing rights (“OMSR”) — The Corporation records the original “OMSR” based on market data. The “OMSR” is amortized over the shorter of the estimated life of the intangible asset or actual loan repayment of the underlying mortgages. An independent third party valuation is routinely performed to determine potential impairment of the “OMSR” as a result of changes in interest rates, expected future loan repayment speeds and other market variables. Changes in these variables could have a significant impact of the carrying value of the mortgage servicing assets.

        Accounting for deferred income taxes – The Corporation’s accounting for income taxes involves the valuation of deferred tax assets and liabilities primarily associated with differences in the timing of the recognition of revenues and expenses for financial reporting and tax purposes. Changes in tax laws, tax rates and the Corporation’s future level of earnings can adversely impact the ultimate realization of the Corporation’s net deferred tax asset or liability.

        Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any such matters that will have a material effect on the financial statements.

FINANCIAL CONDITION

Summary

        Total assets increased by $3.5 million, or 0.68% from December 31, 2003 to March 31, 2004. The significant changes include a decline in cash and cash equivalents, an increase in available-for-sale securities, and an increase in net loans receivable. The mix of total liabilities changed as evidenced by a loan-to-deposit ratio of 89% at December 31, 2003 versus a ratio of 96% at March 31, 2004.

        For the three months year to date (YTD), cash and cash equivalents declined $4.5 million, or 23%. The decline was mainly the result of funds being invested in available-for-sale securities to manage liquidity needs. The pipeline of loans held for sale remained level for the three months ended March 31, 2004, despite real and perceived changes in longer-term interest rates by our customers.

Securities (dollars in thousands)

        The Corporation maintains a diversified securities portfolio, which includes obligations of government sponsored entities, securities issued by states and political subdivisions, corporate securities, and mortgage-backed securities. The Corporation’s investment securities portfolio serves as a source of earnings and contributes to the management of interest rate risk and liquidity risk.

        All of the Corporation’s securities are classified as available-for-sale. The Corporation’s total holdings increased $4 million from December 31, 2003 to March 31, 2004. The increase in the investment portfolio is intended to manage the Bank’s interest rate risk and short–term liquidity needs. The majority of the securities purchased over the past year have been obligations of government sponsored entities and securities issued by state and political subdivisions with maturities or call features of less than 5 years. The modified duration of the portfolio at March 31, 2004 was 3.16, compared to 3.10 at December 31, 2003. Also, see Asset/Liability Gap Position.

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Securities available-for-sale			Amortized Cost			Fair Value			Amount Pledged
March 31, 2004			$	105,136		$	107,702		$	83,489
December 31, 2003			$	101,504		$	103,395		$	85,086

        The majority of the securities are pledged to secure borrowed funds from the Federal Home Loan Bank, securities sold under agreements to repurchase and other purposes as required or permitted by law. The Bank generally pledges more securities than required to assure that adequate collateral is available to meet the Bank’s pledging requirement, which changes on a daily basis as a result of customer balances in the repurchase product.

Loans

        The Bank’s lending policy is intended to reduce credit risk, enhance earnings and guide the lending officers in making credit decisions. The Board of Directors of the Bank approves the loan authority for each lender and has appointed a Chief Lending Officer who is responsible for the supervision of the lending activities of the Bank. The Board has also appointed a loan review officer who monitors the credit quality of the loan portfolio independent of the loan approval process. The loan review officer submits periodic reviews to the Risk Management Officer and these reviews are submitted to the Audit Committee on a quarterly basis. Requests to the Bank for credit are considered on the basis of creditworthiness of each applicant, without consideration of race, color, religion, national origin, sex, marital status, physical handicap, age, or the receipt of income from public assistance programs. Consideration is given to the applicant’s capacity for repayment based on cash flow, collateral, capital and alternative sources of repayment. Loan applications are accepted at all the Bank’s offices and are approved within the limits of each lending officer’s authority. Loan requests in excess of specific lending officers’ authority, are required to be presented to the Board of Directors or the Director Loan Committee for review and approval.

        In addition to the communities served by the Bank’s branches, principal lending markets include nearby communities and metropolitan areas. Subject to established underwriting criteria, the Bank participates with other financial institutions to fund certain large commercial loans, which would exceed the Bank’s legal lending limit if made solely by the Bank.

Loan Portfolio Composition (dollars in thousands)

        The Bank has no foreign loans and there were no concentrations greater than 10% of total loans that are not disclosed as a separate category. The Bank’s largest concentration of loans is to businesses in the form of commercial loans and real estate mortgages. Management reviews the concentration, and changes in concentrations of loans, using the method of coding the commercial loan portfolio by Standard Industrial Classification (S.I.C.) code. Commercial and commercial real estate loans have increased $7.2 million in the first quarter this year. This increase of almost 3% is a trend the Corporation expects to continue with an improving economic climate in West Michigan. Total consumer loans continue to decline as a result of incentive rate financing provided by the auto industry and the Bank’s intentional exit from the consumer indirect business.

The Bank’s current practice is to sell residential real estate loans with maturities over 10 years to secondary market buyer’s . The Bank retains servicing rights on substantially all such loans sold. At December 31, 2003 and March 31, 2004, the Bank was servicing loans for secondary market entities totaling approximately $257 million and $255 million, respectively.

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Non-performing Assets (dollars in thousands)

        Non-performing assets are comprised of loans for which the accrual of interest has been discontinued, accruing loans 90 days or more past due in payments, collateral for loans and other real estate, which has been acquired primarily through foreclosure and is awaiting disposition. Loans, including loans considered impaired under SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures, are generally placed on a non-accrual basis when principal or interest is past due 90 days or more and when, in the opinion of management, full collection of principal and interest is unlikely.

        The increase in non-accrual loans from December 31, 2003 to March 31, 2004 is primarily due to the addition of two borrowers to non-accrual status. These two borrowers loan balances represent 71% of non-accrual loans at March 31, 2004. Excluding those two borrowers, the March 31, 2004 delinquency and non-performing asset analyses would indicate the consistent trend of loan quality control.

Allowance for Loan Losses (dollars in thousands)

        The allowance for loan losses represents the Corporation’s estimate of probable credit losses related to specifically identified loans as well as probable credit losses inherent in the remainder of the loan portfolio that have been incurred as of the balance sheet date. The allowance for loan losses is maintained at an adequate level through additions to the provision for loan losses. An appropriate level of the risk allocated allowance is determined based on the application of risk percentages to graded loans by categories. Specific reserves are established for individual loans when deemed necessary by management. In addition, management considers other factors when determining the unallocated allowance, including loan quality, changes in the size and character of the loan portfolio, consultation with regulatory authorities, amount of non-performing loans, delinquency trends and economic conditions and industry trends.

        Inherent risks and uncertainties related to the operation of a financial institution require management to rely on estimates, appraisals and evaluations of loans to prepare the Corporation’s financial statements. Changes in economic conditions and the financial prospects of borrowers may result in abrupt changes to the estimates, appraisals or evaluations used. In addition, if actual circumstances and losses differ substantially from management’s assumptions and estimates, the allowance for loan losses may not be sufficient to absorb all future losses, and net income could be significantly impacted.

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        Impaired loans as of March 31, 2004 and December 31, 2003 were $11.4 million and $13.0 million, respectively. The allowance for impaired loans was $2.1 million and $2.6 million as of March 31, 2004 and December 31, 2003, respectively.

Allocation of the Allowance for Loan Losses (dollars in thousands)

        The allowance for loan losses is analyzed quarterly by management. In so doing, management assigns a portion of the allowance to specific credits that have been identified as impaired loans, reviews past loss experience, the local economy and a number of other factors.

        In determining the adequacy of the allowance for loan losses, management determines (i) a specific allocation for loans when a loss is probable, (ii) an allocation based on credit risk rating for individual commercial loans, (iii) an allocation based principally on historical losses for various categories of loans, and (iv) subjective factors including local and general economic factors and trends. The allowance for loan losses as a percent of total loans reflects management’s assessment of a slowly improving economy and labor market.

        The allocation of the allowance for loan losses attributed to commercial and commercial real estate loans declined by $308,000 from December 2003. The decline is a result of continued improvement in asset quality. Additionally, the continued shrinkage of the indirect consumer loan portfolio resulted in a $283,000 decline in the allocation of the allowance necessary for consumer loans. The result is a $562,000 increase in the subjective allocation. Management believes the allowance for loan losses is adequate based on identified risks. Furthermore, management does not expect that it will be necessary to add to the allowance for loan losses by recording a provision for loan losses during the next several quarters.

        Actual losses experienced in the future, could vary significantly from the estimated allocation of the loan loss reserve. Changes in local and national economic factors could significantly affect the adequacy of the allowance for loan losses. While amounts are allocated to various portfolios as directed by SFAS No. 118, the entire allowance for loan losses is available to absorb losses from any portfolio segment.

Deposits and borrowed funds (dollars in thousands)

The following table sets forth the deposit balances and the portfolio mix:

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        In a campaign to collect local deposits, a “high interest plus” rate checking product was given a promotional rate in the first quarter of the year 2004. Although the product does not guarantee an interest rate for any period of time, the campaign was considered successful as the balance in this product grew from $11.6 million at December 31, 2003 to $29.8 million at March 31, 2004. Time deposits of less than $100,000 have declined as the Bank has intentionally not renewed those time deposit products offered at promotional interest rates.

        The use of alternative funding sources such as fed funds, brokered time certificates and FHLB advances supplement the Bank’s core deposits and also are an integral component of the Bank’s asset/liability management effort. The balance of brokered time certificates was $ 40.8 million at March 31, 2004 and $ 47.4 million at December 31, 2003

Contractual Obligations (dollars in thousands)

Commitments to extend credit and standby letters of credit are not recorded as an asset or liability by the Corporation until the instrument is exercised. All of the commercial commitments are underwritten using the Bank’s commercial loan underwriting guidelines. The Corporations total outstanding financial commitments are listed in the table below:

The Corporation’s debt repayment schedule is in the table below:

        The Corporation’s debt obligations consist entirely of fixed rate advances from the Federal Home Loan Bank that were purchased to fund growth in the loan portfolio. Advances with put options held by the Federal Home Loan Bank amounted to $16.8 million and are due in the period of after 5 years. At March 31, 2004, the weighted average cost of all advances was 5.23%. Not included in the table is $1.2 million of Treasury, Tax and Loan payments residing in a demand deposit account , callable at the discretion of the Federal Reserve Bank.

RESULTS OF OPERATIONS

Summary

        Net income totaled $812,000 for the three months ended March 31, 2004, compared to $ 671,000 for the same period in 2003. This is a 21% increase. The increase is mainly the result of lower provision for loan losses which was offset by a reduction of net interest income.

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Earnings Performance (dollars in thousands, except per share data)

Net Interest Income (dollars in thousands)

        The following schedule presents the average daily balances, interest income on a fully taxable equivalent basis (“FTE”) and interest expense and average rates earned and paid by the Corporation for the periods indicated:

        Net interest income is the principal source of income for the Corporation. Net interest income is the difference between the interest earned on loans and investments and the interest paid on deposits and borrowed funds. Tax equivalent net interest income decreased $668,000 for the three-month period ended March 31, 2004, a 15% decrease from the same period in 2003. The Corporation’s spread on interest rates has continued to narrow as market interest rates have remained in a historically low trough. Competitive pressures within our geographic market have also contributed to the reduced margin. The Corporation is currently asset sensitive, which suggests the Corporation is expected to benefit from an increasing interest rate environment.

Provision for loan losses

        The provision for loan losses charged to earnings declined to $0 for the three-month period ended March 31, 2004, compared to $525,000 for the same period in 2003. The first quarter increase of non-performing assets is not indicative of management’s assessment of the loan portfolio. The fluctuation of non-performing asset balance was primarily the result of two new non-accrual borrowers. The decrease in the provision primarily reflects the overall improved credit quality of the loan portfolio.

        Management took significant steps to improve underwriting standards and administration of the loan portfolios in the prior year. An intentional decision was made to exit the indirect consumer loan business, which Management believes to have an inherently higher risk than the Bank’s other loan portfolios. Management is optimistic about recent economic trends and their respective impact upon the loan portfolios.

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Non-interest Income

        Non-interest income consists of service charges on deposit accounts, insurance fees, brokerage fees, gains or losses on the sales of investment securities, gains from the sales of mortgage loans and servicing fees on the loans sold with the servicing rights retained. The majority of the mortgage loans, that the Bank originates, are sold to the Federal Home Loan Mortgage Corporation (FHLMC). The Bank retains the servicing rights on the loans sold to FHLMC.

Service charge income on deposit accounts and net mortgage banking income increased moderately for the three months ended March 31, 2004, when compared to the same time period of 2003. Insurance premium revenue declined significantly in the first quarter of 2004 compared to a year ago. The decline reflects a general decline in insurance premium rates and lower annual income from the insurance underwriters, which is based on the loss rate of the Dornbush Insurance Agency policy holders.

Non-interest Expense

        Non-interest expense decreased $169,000 or 4% for the three-month period ended March 31, 2004, versus the same period in 2003. Salaries and employee benefits increased $300,000 or 16% for the three-month period ended March 31, 2004, versus the same period in 2003. This increase was offset by a reduction of $494,000 of expense for the first three months of 2004 compared to the same period of 2003. This reduction of 38% was primarily due to two factors. First, FDIC insurance premiums were $14,000 in the first quarter of 2004 versus $180,000in the same quarter of 2003. This cost reduction is due to the improved regulatory condition of the Bank. Second, the 1988 director’s deferred compensation plan was amended to accrue benefits using a floating rate which is lower than the fixed rate that had been in place since 1988. As a result of the change, the estimated net present value of the liability was reduced by $300,000. The determination of future benefits and expenses will reflect changes in interest rates.

Provision for Federal Income Tax

        The provision for income taxes was $282,000, which equates to an effective tax rate of 26% for the three-month period ended March 31, 2004, compared to $220,000, which equates to an effective tax rate of 25%, for the same period in 2003. The difference between the Corporation’s effective tax rate and statutory tax rate is largely due to investment interest income that is exempt from federal taxation. The Corporation does not expect significant fluctuations in the effective tax rate for the remainder of this year.

Impact of Inflation

        The majority of assets and liabilities of financial institutions are monetary in nature. Generally, changes in interest rates have a more significant impact on earnings of the Corporation than inflation. Although influenced by inflation, changes in rates do not necessarily move in either the same magnitude or direction as changes in the price of goods and services. Inflation does impact the growth of total assets, creating a need to increase equity capital at a higher rate to maintain an adequate equity to assets ratio, which in turn reduces the amount of earnings available for cash dividends.

LIQUIDITY AND CAPITAL RESOURCES

Capital

        The capital of the Corporation consists of common stock, additional paid-in capital, retained earnings and accumulated other comprehensive income. Total stockholders’ equity increased $1,258,000, from December 31, 2003, to March 31, 2004, this represents a change of 2.3%. This change includes a $446,000 increase in accumulated other comprehensive income.

        A dividend was declared to shareholders as of April 9, 2004 and paid on April 30, 2004 in the amount of $.30 per share.

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         During the first quarter of 2004, the Board of Directors approved a plan to pay a quarterly dividend beginning in the third quarter of 2004. Subject to Board approval, the new quarterly dividend will approximate $0.15 per share, per quarter. This will be equivalent to $0.60 on an annual basis.

        Under the regulatory “risk-based” capital guidelines in effect for both banks and bank holding companies, minimum capital levels are based upon perceived risk in the Company’s various asset categories. These guidelines assign risk weights to on-balance sheet and off-balance sheet categories in arriving at total risk-adjusted assets. Regulatory capital is divided by the computed total of risk adjusted assets to arrive at the minimum levels prescribed by the Federal Reserve Board at March 31, 2004 as shown in the table below:

Capital Resources (dollars in thousands)

Liquidity

        Liquidity is measured by our ability to raise funds through deposits, borrowed funds, capital or cash flow from the repayment of loans and investment securities. These funds are used to meet deposit withdrawals, maintain reserve requirements, fund loans and operate our company. Liquidity is primarily achieved through the growth of deposits and liquid assets such as securities available for sale, matured securities, and federal funds sold. Asset and liability management, which is a significant responsibility of the Asset and Liability Management Committee (ALCO), is the process of managing the balance sheet to achieve a mix of earning assets and liabilities that maximizes profitability, while providing adequate liquidity.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

        The Corporation’s exposure to market risk is reviewed on a regular basis by the ALCO. Interest rate risk represents the Corporations primary component of market risk. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. Tools used by management include the standard Asset/Liability Gap report and a simulation model. The objective is to measure the effect on net interest income and to adjust the balance sheet to manage the inherent risk while at the same time maximize income. Management realizes certain risks are inherent and that the goal is to identify and minimize these risks.

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Asset/Liability Gap Position (dollars in thousands)