SOURCE: Sturgis Bancorp Inc.

February 14, 2012 15:38 ET

Sturgis Bancorp Reports Earnings for 2011

STURGIS, MI--(Marketwire - Feb 14, 2012) - Sturgis Bancorp, Inc. (OTCBB: STBI) announced a net income of $501,000 for 2011, and net income of $560,000 for the fourth quarter of 2011, Eric L. Eishen, President and CEO, announced today.

Sturgis Bancorp is the holding company for Sturgis Bank & Trust Company (Bank), 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.

Key Highlights for 2011:

  • Net income for 2011 increased to $501,000, or $0.25 per share, compared to a loss of $709,000, or $0.34 per share, in 2010.
  • The Bank further increased capital ratios, exceeding "well-capitalized" requirements and ending 2011 with Tier 1 capital at 8.04% and 11.18% of average assets and risk-weighted assets, respectively. Total capital at December 31, 2011 was 12.45% of risk-weighted assets.
  • Net interest income decreased $272,000.
  • Provision for loan losses decreased by $3.8 million to $1.6 million.
  • Total deposits decreased 11.8% to $234.6 million, including $35.4 million decrease in interest-bearing deposits.
  • Realized gain on sale of securities was $536,000, compared to $1.1 million in 2010.
  • Borrowed funds and repurchase agreements were reduced $25.4 million, or 32.6%.
  • The general allowance for loan losses increased to 2.05% of performing loans from 1.65% at the end of 2010. The total allowance for loan losses was 2.28% of loans, down from 2.48% at the end of 2010.
  • Exposure to land development has been reduced to $8.1 million at December 31, 2011, from $18.9 million at December 31, 2008.

Nonaccrual loans peaked in June 2011 at $14.5 million, up $9.3 million from December 31, 2010. Since June 2011, nonaccrual loans have been reduced to $10.5 million, or 4.07% of total loans, while accruing delinquent loans decreased to 0.85% of total loans from 2.52% at December 31, 2010.

President and CEO Eishen stated: "Over the last few quarters I have discussed credit quality and capital. These seem to be the two items of most interest to bank investors. Core earnings are also of interest and have been negatively impacted by the Bank's provision expense over the past two years. Management believes the increased provision expense over the past few years will not be repeated going forward. This will lead to a more normal earnings stream. There are still loans that management is working through with customers, but these loans have been written down, or reserved, to a level reflective of future expected cash flows. In my last quarter's earnings announcement I reported a significant improvement to earnings. I also made it clear that this result was positively impacted by gain on sale of securities and provision expenses. These are non-recurring events. I discussed these in more detail in my third quarter 2011 earnings release. Core earnings are solid but still suppressed by the extended low interest rate environment. We do not expect significant erosion to core earnings in the next 12 months and are positioned to take advantage of increasing rates. Management elected to reduce Bank assets by "unwinding" a balance sheet leverage strategy that we deemed had played out all of the intended benefits, so that the risk of maintaining this strategy was greater than the remaining expected benefit. Again, I discussed this in more detail with my third quarter announcement. Management's reduction to total assets, by divesting of lower earning investments and cash held, has not impacted the core business of the Bank. These decisions were made to enhance the Bank's capital position and place the Bank in a more favorable position once interest rates begin to increase. Loan demand is weak and the loan portfolio decreased, primarily due to principal reductions on existing loans. These reductions, coupled with a return to positive earnings, have positively impacted our capital position and the Bank ended 2011 with its highest capital ratios since 2003, Management continues to focus on additional non-interest expense reductions. In addition to this, Management is focused on credit quality. There has been improvement in credit quality in the fourth quarter of 2011, and Management expects additional improvement in 2012. The primary causes of our credit difficulties were land development loans and one large loan to a recreational vehicle manufacturer. The Bank is not originating loans in either of these loan segments and has no remaining exposure to losses in the RV segment. Our land development segment has been reduced over the past two years, and we anticipate further reductions in the next year. The economic conditions are improved in our primary market and we are hopeful the worst of this great recession is behind us."

Year 2011 vs. 2010 - Net income for the year ended December 31, 2011 increased to $501,000, or $0.25 per share from a net loss of $709,000, or $0.34 per share, for 2010. Net interest income decreased 2.7% to $9.8 million, from $10.1 million for 2010. The decrease in net interest income is primarily due to the decrease in average earning assets to $307.0 million in 2011 from $338.3 million in 2010. The tax equivalent net interest margin increased to 3.22% in 2011 from 3.01% in 2010. The decrease in assets was used to fund planned reductions in deposit liabilities and borrowings.

Noninterest income was $4.5 million for 2011, compared to $5.7 million for 2010. The Company realized $536,000 of gains on sales of available-for-sale securities in 2011, compared to $1.1 million in 2010. Mortgage banking activities decreased $296,000 to $759,000, as proceeds from loan sales decreased to $24.4 million from $29.9 million in 2010.

Noninterest expense increased $597,000 for 2011, compared to 2010. Real estate owned expense increased $311,000, to $1.0 million, as the Company wrote down the carrying value of foreclosed assets. Professional services increased by $96,000, primarily due to increased legal expenses related to foreclosure and loan loss mitigation. The early extinguishment of repurchase agreements incurred a prepayment penalty of $195,000, which was offset by the gains from the related securities.

The Company provided $1.6 million to the allowance for loan losses in 2011, compared to $5.4 million in 2010. Net charge-offs were $2.4 million in 2011, compared to $2.7 million in 2010. The net activity in the ALLL decreased the total allowance to 2.28% of gross loans at December 31, 2011, compared to 2.48% of gross loans at December 31, 2010. The portion of the allowance allocated to performing loans increased to 2.05% at December 31, 2011, compared to 1.65% at December 31, 2010.

Total assets decreased to $314.3 million at December 31, 2011 from $370.0 million at December 31, 2010, primarily in securities. Loans decreased $9.4 million from 2010. Net decreases in loans were realized in residential, construction, commercial and consumer loans.

Noninterest-bearing deposits increased to $33.6 million at December 31, 2011 from $29.6 million at December 31, 2010. Interest-bearing deposits decreased to $201.0 million at December 31, 2011 from $236.3 million at December 31, 2010. The decrease in interest-bearing deposits includes $7.0 million reduction in savings accounts, $1.4 million reduction in checking accounts, $8.4 million reduction in time accounts $100,000 and greater, and $18.6 million in smaller time accounts. Despite the decrease in balances, the number of checking accounts increased throughout 2011, as the Bank continues to expand its customer base.

During 2011, the Company used reductions in securities, interest-earning deposits in other banks, and loans to reduce borrowings and interest-bearing deposit accounts. The decrease in deposits included reductions in brokered certificates of deposit to $14.9 million at December 31, 2011, compared to $25.7 million at December 31, 2010. The $25.0 million repurchase agreements at December 31, 2010 were fully prepaid in 2011 with the proceeds from securities sales.

In 2011, the Company paid cash dividends of $0.03 per common share, totaling $60,000. Total equity was $24.9 million at December 31, 2011, compared to $23.3 million at December 31, 2010. Book value per share increased to $12.34 at December 31, 2011 from $11.56 at December 31, 2010.

Mr. Eishen added, "Our earnings releases usually include limited commentary from me to describe the cause of differences in earnings from year to year. In this release I wish to add a few additional comments that may answer some of your questions on banking and how the current environment is impacting Sturgis Bank & Trust Company and in turn Sturgis Bancorp, Inc.

"One concern for many bank stockholders is asset quality. In today's environment, this is a legitimate concern. The Bank's investment portfolio consists primarily of government guaranteed mortgage-backed securities and fully insured deposits. It is of the highest asset quality. As a result of credit quality concerns, I have provided more detailed loan quality information in our quarterly earnings releases this year."

"Loan quality is of greater interest because it has posed the biggest challenges for small community banks. The table below compares the Bank's nonperforming loans and Real Estate Owned (REO) for year-end 2011 versus year-end 2010. It is broken down into five categories and reflects percentages of loans and assets. All three past due categories decreased significantly in 2011. Management works to keep borrowers from migrating into the next category of delinquency. Nonaccrual loans are loans for which collection of interest is questionable. When a loan enters the nonaccrual category, the Bank analyzes the underlying collateral and adjusts the carrying amount of the loan amount to reflect the expected cash flow. Part of the increase in the general ALLL is related to growth in loans in this nonaccrual status, as adjustments are made to historical losses to incorporate trends in the portfolio. Nonaccrual loans increased in the first half of 2011 to $14.5 million, or 5.47%, of gross loans at June 30, 2011. In the last half of 2011, the nonaccrual loans been reduced to $10.5 million, or 4.07% of gross loans. The final category is REO, which increased slightly. Management makes every effort to liquidate REO properties in a timely basis, and writes these assets down to a marketable level. Management does not believe it is prudent to sell REO properties below market value, simply to reduce this ratio.

Percentage of Gross Loans at December 31, Percentage of Total Assets at December 31,
Past due and still accruing: 2011 2010 2011 2010
Past due one month 0.53 % 0.94 % 0.43 % 0.69 %
Past due two months 0.18 % 1.12 % 0.15 % 0.82 %
Past due three or more months 0.14 % 0.46 % 0.12 % 0.34 %
Nonaccrual loans 4.07 % 1.95 % 3.34 % 1.42 %
Real Estate Owned 0.81 % 0.75 % 0.66 % 0.55 %

Fourth Quarter of 2011 vs. 2010 - Net income for the quarter ended December 31, 2011 increased to earnings of $560,000, or $0.28 per share, from $72,000, or $0.03 per share, for the year-earlier quarter. Net interest income decreased 5.6% to $2.4 million in the fourth quarter of 2011, from $2.6 million in 2010. The decrease is primarily due to reductions in average interest-earning assets. The tax-equivalent net interest margin increased to 3.49% in 2011 from 3.07% in the last quarter of 2010.

Noninterest income was $957,000 in the fourth quarter of 2011, compared to $2.2 million for the fourth quarter of 2010. The largest component of this decrease was realized gain on sale of available-for-sale securities of $1.0 million in the fourth quarter of 2010. Mortgage banking income decreased $167,000. Noninterest expense decreased $193,000 to $2.8 million. The primary component of the decrease in noninterest expense was salaries and employee benefits, which decreased $201,000 to $1.5 million.

Net charge-offs for the fourth quarter of 2011 were $404,000, compared to $632,000 a year ago. The Company provided ($91,000) for loan losses in the fourth quarter of 2011, compared to $1.8 million in the fourth quarter of 2010.

Mr. Eishen said, "Positive earnings were restored for the Company in 2011, after one loss year in 2010. But earnings are still low for the Bank in 2011. This is primarily due to the Company's provisions for loan losses, which remained high in 2011, and the continuing low interest rate environment. Credit losses have diminished in recent months, and Management is hopeful that the worst is behind us. We look forward to 2012 with hopes we will return to a more normal economic environment."

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.

CONSOLIDATED BALANCE SHEETS
December 31, 2011 and 2010
(Amounts in thousands, except share and per share data)
2011 2010
ASSETS
Cash and due from banks $ 7,297 $ 16,146
Other short-term investments 15,443 10,338
Total cash and cash equivalents 22,740 26,484
Interest-earning deposits in banks 4,760 10,376
Securities - Available for sale 265 27,669
Securities - Held to maturity (fair value $0 and $6,578) - 6,452
Federal Home Loan Bank stock, at cost 4,064 4,424
Loans held for sale 986 2,191
Loans, net of allowance of $5,875 and $6,691 252,001 261,416
Premises and equipment, net 7,855 7,739
Goodwill 5,109 5,109
Originated mortgage servicing rights 1,279 1,381
Real estate owned 2,082 1,730
Bank-owned life insurance 8,976 8,696
Accrued interest receivable 1,191 1,602
Prepaid FDIC assessment 814 1,175
Other assets 2,136 3,517
Total assets $ 314,258 $ 369,961
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 33,642 $ 29,609
Interest-bearing 200,957 236,342
Total deposits 234,599 265,951
Federal Home Loan Bank advances and other borrowings 52,575 53,000
Repurchase agreements - 25,000
Accrued interest payable 344 466
Other liabilities 1,830 2,229
Total liabilities 289,348 346,646
Stockholders' equity
Preferred stock - $1 par value: authorized - 1,000,000 shares issued and outstanding - 0 shares
Common stock - $1 par value: authorized - 9,000,000 shares issued and outstanding 2,019,235 shares at December 31, 2011 and 2,017,245 at December 31, 2010 2,019 2,017
Additional paid-in capital 6,881 6,872
Retained earnings 16,087 15,646
Accumulated other comprehensive income (loss) (77 ) (1,220 )
Total stockholders' equity 24,910 23,315
Total liabilities and stockholders' equity $ 314,258 $ 369,961
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2011 and 2010
(Amounts in thousands, except share and per share data)
2011 2010
Interest income
Loans $ 12,736 $ 14,275
Investment securities:
Taxable 916 1,334
Tax-exempt 41 63
Dividends 124 107
Total interest income 13,817 15,779
Interest expense
Deposits 2,273 3,422
Borrowed funds 1,763 2,304
Total interest expense 4,036 5,726
Net interest income
9,781 10,053
Provision for loan losses 1,608 5,385
Net interest income after provision for loan losses 8,173 4,668
Noninterest income:
Service charges and other fees 1,379 1,457
Investment brokerage commission income 1,183 1,224
Mortgage banking activities 759 1,055
Trust fee income 322 338
Increase in value of bank owned life insurance 280 295
Gain on sale of securities 536 1,134
Gain (loss) on sale of real estate owned 19 11
Other income 68 147
Total noninterest income 4,546 5,661
Noninterest expenses:
Salaries and employee benefits 6,663 6,690
Occupancy and equipment 1,436 1,432
Data processing 690 670
Professional services 469 373
Real estate owned expense 1,004 693
Advertising 126 138
FDIC premiums 389 480
Prepayment penalty on early debt extinguishment 195 -
Other 1,443 1,342
Total noninterest expenses 12,415 11,818
Income (loss) before income tax expense (benefit) 304 (1,489 )
Provision for income tax (197 ) (780 )
Net income (loss) $ 501 $ (709 )
Earnings per share $ 0.25 $ (0.34 )
Dividends declared per share $ 0.03 $ 0. 12
Key Ratios:
Return on average equity 2.11 % (2.78 %)
Return on average assets 0.14 % (0.19 %)
Net interest margin (tax equivalent) 3.22 % 3.01 %
Efficiency ratio 86.66 % 75.21 %
CONSOLIDATED STATEMENTS OF INCOME
Three months ended December 31, 2011 and 2010
(Amounts in thousands, except share and per share data)
2011 2010
Interest income
Loans $ 3,204 $ 3,513
Investment securities:
Taxable 45 323
Tax-exempt 4 15
Dividends 34 31
Total interest income 3,287 3,882
Interest expense
Deposits 429 807
Borrowed funds 426 498
Total interest expense 855 1,305
Net interest income 2,432 2,577
Provision for loan losses (91 ) 1,801
Net interest income after provision for loan losses 2,523 776
Noninterest income:
Service charges and other fees 330 367
Investment brokerage commission income 275 367
Mortgage banking activities 147 314
Trust fee income 67 81
Increase in value of bank owned life insurance 72 71
Gain on sale of securities - 1,007
Gain (loss) on sale of real estate owned 54 (4 )
Other income 12 12
Total noninterest income 957 2,215
Noninterest expenses:
Salaries and employee benefits 1,521 1,722
Occupancy and equipment 343 335
Data processing 176 172
Professional services 108 108
Real estate owned expense 126 118
Advertising 29 46
FDIC premiums 105 127
Prepayment penalty on early debt extinguishment - -
Other 383 356
Total noninterest expenses 2,791 2,984
Income (loss) before income tax expense (benefit) 689 7
Provision for income tax 129 (65 )
Net income (loss) $ 560 $ 72
Earnings per share $ 0.28 $ 0. 03
Dividends declared per share $ 0.00 $ 0. 03
Key Ratios:
Return on average equity 8.94 % 1.16 %
Return on average assets 0.70 % 0.08 %
Net interest margin (tax equivalent) 3.49 % 3.07 %
Efficiency ratio 82.37 % 62.27 %

Contact Information

  • Contacts:
    Sturgis Bancorp
    Eric Eishen
    President & CEO
    Brian P. Hoggatt
    CFO
    P: 269 651-9345