STBI Sturgis Bancorp Inc (QX)

STURGIS, Mich., Nov. 1, 2011 /PRNewswire/ -- Sturgis Bancorp, Inc. (OTCBB: STBI) posted $792,000 net income for the third quarter of 2011, compared to a net loss of $631,000 for the third quarter of 2010, Eric L. Eishen, President and CEO, announced today.  The increase was primarily due to the lower required provisions for loan losses and gains from sales of securities.  The net loss for the first nine months of 2011 was $59,000, compared to a net loss of $781,000 in the first nine months of 2010.  

Mr. Eishen stated, "I am pleased to present a significant positive change in earnings this quarter.  While I do not believe it fully reflects base earnings, due to extraordinary income and expense items for the quarter, it does represent a positive change in direction.  Credit quality continues to be management's top priority.  You will notice in a later table that past due loans have been reduced.  Although reduced from June 30, 2011, nonaccrual loans continue to be elevated and management is focusing on reducing them further over the next few quarters to more manageable levels.  Some credits are showing signs of improvement and a few are in various stages of liquidation.  While core earnings are strong, we continue to have a depressed interest margin, relative to our history, due to extended low rates.  The Bank is positioned for rising rates and has resisted unwise temptations to abandon this strategy at this time.  This may depress earnings for the next several quarters, but it is not prudent to layer in significant long-term fixed rate asset commitments at this time.  The Bank regularly reviews and refines loan and deposit pricing to enhance the net interest margin, and I am pleased to report the increases described herein.

"Bank investors seem to be more interested in stronger capital levels than in efficient equity markets at the moment.  I understand the fear of the unknown for bank investors and this is why I made a significant purchase of Bancorp stock at the end of last quarter.  I made this purchase to demonstrate my belief that our Bank's core business is strong and I believe will improve in the future.  The least damaging way to increase capital ratios is to reduce assets.  The asset reductions put in place over the last quarter and anticipated in the next quarter represent "non-core" changes.  We are not negatively impacting customer relationships.  We have terminated a balance sheet leverage strategy that was implemented as an interest rate hedge when rates were higher.  This worked very well and resulted in over $2.50 million in gains over the last few years.  This also helped stabilize the net interest margin as rates fell.  However this strategy represented more risk to the Bank in the future than the remaining benefit it was providing.  This fact, coupled with the desire to increase the Bank's tier one capital ratio, was the reason for "unwinding" this investment strategy.  The Bank intends to push out excess cash in the next quarter to further reduce assets and increase the capital ratios of the Bank.  This is prudent balance sheet management given the weak loan demand present in our primary market.

"Management continues to monitor non-interest expense and expects a reduction in expenses related to problem loans in the next quarter." 

Key Highlights for the first nine months of 2011:

• Bank reports that it continues to exceed "well-capitalized" requirements.
• Net income improved relative to 2010.
• Provision for loan losses decreased to $1.7 million in 2011 from $3.6 million in 2010.
• Professional fees increased for collection efforts and REO write downs increased.
• Total deposits decreased 2.3% to $259.9 million.  Most of the decrease was due to $10.7 million decrease in brokered CDs, reducing the Bank's reliance on wholesale funding.
• Noninterest bearing deposits increased 24.0% to $36.7 million.
• All held-to-maturity investment securities were transferred to available-for-sale, and most were sold.  Gains on sale of securities were $536,000 in the first nine months of 2011, compared to $126,000 in 2010.  The securities sales in 2011 funded prepayments of the Bank's repurchase agreements, accompanied by a prepayment penalty of $195,000.  Total assets are $30.0 million lower, primarily due to these prepayments.
• Net charge-offs were $2.0 million in the first nine months of 2011, compared to $2.0 million in the same period of 2010.  
• Nonaccrual loans increased $7.3 million and delinquent loans decreased to 0.89% of total loans from 2.52% at December 31, 2010.

First Nine Months of 2011 vs. 2010 – The net loss for the first nine months of 2011 was ($59,000), or ($0.03) per share, compared to net loss of ($781,000), or ($0.39) per share, for the first nine months of 2010.  The tax-equivalent net interest margin increased to 3.14% in 2011 from 2.98% in 2010.  Average interest-earning assets decreased to $316.6 million for the nine months ended September 30, 2011 from $339.0 million for the same period in 2010.

Net charge-offs for the first nine months of 2011 were $2.0 million, unchanged from $2.0 million a year ago.  The Bank's provision for loan losses was $1.7 million in 2011, compared to $3.6 million in 2010.  The ALLL as a percentage of loans was 2.47% at September 30, 2011.

Noninterest income was $3.6 million in 2011, compared to $3.4 million in 2010.  Gains on sales of securities increased to $536,000 in 2011, compared to $126,000 in 2010.  Noninterest income in 2010 also included $110,000 gain on sale of assets.  Mortgage banking activities decreased 17.3% to $613,000, due to slower residential mortgage activity and related sales.  

Noninterest expense was $9.6 million in 2011, compared to $8.8 million in 2010.  This increase was primarily due to increased professional fees (collection expenses) and write downs of REO.  The largest component of the increase was $195,000 prepayment penalties on prepayments of repurchase agreements.  The Bank's defined benefit plan was permanently frozen in the first nine months of 2011, as part of Management ongoing cost containment initiatives.

Third Quarter of 2011 vs. 2010 – The net income for the quarter ended September 30, 2011 was $792,000, or $0.39 per share, compared to net loss of ($631,000), or ($0.31) per share, for the same year-earlier quarter. Net interest income remained unchanged at $2.5 million, despite the increase in average nonaccrual loans.  This was due to an increase in the tax equivalent net interest margin to 3.33% in 2011, compared to 2.97% in 2010.  Average interest-earning assets decreased to $297.7 million for the quarter ended September 30, 2011 from $337.8 million for the same quarter in 2010.

Net charge-offs for the third quarter of 2011 were $118,000, compared to $1.3 million a year ago.  This substantial decrease, along with improvements in impaired commercial loans, allowed for a $156,000 reversal of loan loss provisions in the third quarter of 2011, compared to $1.9 million provided in 2010.

Noninterest income was $1.6 million for the third quarter of 2011, compared to $1.2 million for 2010.  The primary component of this increase was $536,000 gains on sales of securities, compared to none in the third quarter of 2010.  Mortgage banking activities decreased 30.9% to $235,000.  Commission income increased 14.1% to $308,000, as market values increased for advisory accounts.

Noninterest expense increased $225,000, primarily due to $195,000 prepayment penalties on early debt extinguishment.  

Mr. Eishen said, "Management continues to control expenses and has made adjustments to maintain a healthy core interest and non-interest income stream.  With the positive interest rate gap, the Bank is positioned for increasing rates.  If the Federal Reserve makes significant interest rate increases, the Bank will realize an increase in the net interest margin.

"The Bank continues to be in the "Well Capitalized" category as defined by Regulators and DID NOT participate in TARP or any other government capital assistance programs.  The Company has not issued any Trust Preferred indentures and has not recently been to the capital markets to raise capital.  We maintain a loan at the Holding Company.

"As we complete 2011 and into 2012, we hope to see earnings return to more normal levels, although the low rate environment makes that challenging."

Total assets decreased to $339.9 million at September 30, 2011 from $370.0 million at December 31, 2010, primarily in investment securities that were sold to prepay the repurchase agreements.  Loans decreased $9.6 million during the first nine months of 2011.

Delinquent loans changed from December 31, 2010, as follows:

Noninterest-bearing deposits increased to $36.7 million at September 30, 2011 from $29.6 million at December 31, 2010.  Interest-bearing deposits decreased to $223.2 million at September 30, 2011 from $236.3 million at December 31, 2010.  Brokered certificates of deposit decreased $10.7 million to $15.0 million at September 30, 2011.  Brokered certificates of deposit are used as an alternative to Federal Home Loan Bank ("FHLB") advances, when the total interest cost is lower.  In addition, other certificates of deposit in excess of $100,000 decreased $1.7 million.  The decreases in brokered and other jumbo certificates of deposits indicate the Bank's decreased reliance on wholesale (out-of-market) funding.

In the nine months ended September 30, 2011, the Company paid cash dividends of $0.03 per common share, totaling $61,000. Total equity was $24.3 million at September 30, 2011, compared to $23.3 million at December 31, 2010.  Book value per share increased to $12.06 at September 30, 2011 from $11.56 at December 31, 2010.  Most of the improvements in equity and book value are due to reductions in unrealized losses on available-for-sale securities, which is reported in Accumulated Other Comprehensive Income (loss).

Sturgis Bancorp is the holding company for Sturgis Bank & Trust Company, and its subsidiaries Oakleaf Financial Services, Inc. and Oak Mortgage, LLC.  Sturgis Bancorp provides a full array of trust, commercial and consumer banking services from 11 banking centers in Sturgis, Bronson, Centreville, Climax, Colon, South Haven, Three Rivers and White Pigeon, Mich. Oakleaf Financial Services offers a complete range of investment and financial-advisory services.  Oak Mortgage offers residential mortgages in all markets of the Bank.

This release contains statements that constitute forward-looking statements.  These statements appear in several places in this release 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.  The numbers presented herein are unaudited.

For additional information, visit our website at www.sturgisbank.com.

(Financial statements follow)

SOURCE Sturgis Bancorp, Inc.