Sturgis Bancorp Reports Earnings for Second Quarter 2012

STURGIS, MI--(Marketwire - Jul 19, 2012) - Sturgis Bancorp, Inc. (OTCBB: STBI) today announced a net income of $502,000 for the second quarter of 2012, and $1.0 million year-to-date.

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:

• Net income for the second quarter of 2012 increased to $502,000, or $0.25 per share, compared to a loss of $734,000, or $0.36 per share, in the second quarter of 2011.
• Net income for the first half of 2012 increased to $1.0 million, or $0.50 per share, compared to a loss of $851,000, or $0.42 per share, in the first half of 2011.
• The Bank further increased capital ratios, continuing to exceed "well-capitalized" requirements, with Tier 1 capital at 8.53%. Total capital at June 30, 2012 was 13.14% of risk-weighted assets.
• Provision for loan losses was down significantly.
• Total deposits decreased $2.7 million, or 1.1%, primarily due to $2.1 million reduction in brokered CDs.
• Allowance for loan losses was 2.13% of loans, down slightly from 2.28% at the end of 2011, due to asset quality improvements.

Nonaccrual loans peaked in June 2011 at $14.5 million, up $9.3 million from December 31, 2010. Since June 2011, nonaccrual loans were reduced to $10.5 million at December 31, 2011 and further to $7.3 million at June 30, 2012.

President and CEO Eric L. Eishen stated: "I am pleased to provide a very positive first half financial performance. Loan quality is improving and core earnings are stable. The net interest income, non-interest income and non-interest expense have all been managed very closely. Our 2012 first half income is already double the full year income for 2011. Interest income continues to be suppressed by sustained low interest rates and poor loan demand. However, fewer credit quality issues resulted in a significant reduction in the provision for loan losses in 2012. The Bank continues to maintain a significant reserve in our Allowance for Loan and Lease Losses. It was only modestly reduced in the first six months of 2012. As the economy improves, the Bank expects continued improvement in credit quality, and therefore earnings. Management continues to focus on our core business. Earnings in the first half were also enhanced by strong mortgage refinance activity, as rates continue to remain at historic lows."

President Eishen added, "Consumer and Commercial loan demand continues to be weak. This is being experienced by the industry as a whole. Mortgage origination volume has been strong in the first half, due to historically low rates. This low rate scenario is positive for the mortgage origination segment of the Bank's business, but creates a very challenging environment for the banking industry. I am concerned that the ever increasing regulations and much tighter credit standards imposed by actions of Congress, Freddie Mac, Fannie Mae and the new Consumer Financial Protection Agency, primarily related to mortgage finance, pose significant risk to this business line and the economic recovery as a whole. I am pleased we have increased our interest margin on loans originated for portfolio. But I expect this is going to be exceedingly more difficult in the coming months if rates continue at the current levels. The Bank is not going to change its risk profile in an attempt to maintain the interest margin, and as a result we may see pressure on this margin in late 2012 and 2013, due to our adherence to rational pricing and loan quality."

President Eishen concluded, "Bank management continues to focus on building our franchise value and capital, in preparation for the proposed capital rules under consideration. We continue to be focused on controlling expenses as evidenced in our performance."

Three months ended June 30, 2012 vs. three months ended June 30, 2011 -- Net income for the three months ended June 30, 2012 was $502,000, or $0.25 per share, compared to a net loss of $734,000, or $0.36 per share, for the three months ended June 30, 2011. The tax equivalent net interest margin increased to 3.55% in 2012 from 3.04% in 2011. The increase in tax equivalent net interest margin is primarily due to the Bank's sales of low-margin investment securities, mostly in the third quarter of 2011.

Noninterest income was $1.2 million in the second quarter of 2012, compared to $960,000 in the second quarter of 2011. Mortgage banking activities increased to $305,000, as loan sale volume continued relatively strong.

Noninterest expense decreased $698,000 in 2012, compared to 2011. Salaries and employee benefits decreased $202,000, or 11.4%, to $1.6 million. Real estate owned expense decreased to $212,000, as the Company's write downs of the carrying value of foreclosed assets reduced.

The Company recorded a negative provision for loan losses of $11,000 in the three months ended June 30, 2012, compared to a positive provision of $974,000 in the same quarter of 2011. Net charge-offs were $316,000 in 2012, compared to $1.2 million in 2011. The net activity in the ALLL decreased the total allowance to 2.13% of gross loans at June 30, 2012, compared to 2.28% at December 31, 2011.

Six months ended June 30, 2012 vs. six months ended June 30, 2011 -- Net income for the six months ended June 30, 2012 was $1.0 million, or $0.50 per share, compared to a net loss of $851,000, or $0.42 per share, for the six months ended June 30, 2011. The tax equivalent net interest margin increased to 3.53% in 2012 from 3.03% in 2011. The increase in tax equivalent net interest margin is primarily due to the Bank's sales of low-margin investment securities, mostly in the third quarter of 2011.

Noninterest income was $2.2 million in the first half of 2012, compared to $2.0 million in the first half of 2011. Mortgage banking activities increased $186,000 to $564,000, as loan sale volume continued relatively strong. Investment brokerage commission income also increased by $117,000 to $716,000.

Noninterest expense decreased $783,000 in 2012, compared to 2011. Salaries and employee benefits decreased $283,000, or 8.3%, to $3.1 million. Real estate owned expense decreased by $348,000, to $347,000, as the Company's write downs of the carrying value of foreclosed assets reduced.

The Company recorded a negative provision for loan losses of $9,000 in the first half of 2012, compared to a positive provision of $1.9 million in the first half of 2011. Net charge-offs were $411,000 in 2012, compared to $1.9 million in 2011.

Total assets decreased to $312.3 million at June 30, 2012 from $314.3 million at December 31, 2011, primarily in cash and cash equivalents. Loans also decreased $1.6 million from December 31, 2011, primarily in Home Equity Lines of Credit and Commercial Loans.

Noninterest-bearing deposits increased to $37.0 million at June 30, 2012 from $33.6 million at December 31, 2011. Interest-bearing deposits decreased to $194.9 million at June 30, 2012 from $201.0 million at December 31, 2011. The decreases in deposits included $2.1 million decrease in brokered CDs. The number of checking accounts continues to increase, as the Bank continues to expand its customer base.

Total equity was $26.0 million at June 30, 2012, compared to $24.9 million at December 31, 2011. Book value per share increased to $12.79 at June 30, 2012 from $12.34 at December 31, 2011.

During the worst part of the national financial crisis, the Company began including expanded ratios for the Bank's asset quality in quarterly press releases. Because the Company believes these ratios remain meaningful and relevant to investors, the Company has elected to continue providing them.

			Percentage of Gross Loans						Percentage of Total Assets
Past due and still accruing:			June 30 2012			Dec. 31 2011			June 30, 2012			Dec. 31 2011
	Past due one month		0.64	%		0.53	%		0.53	%		0.43	%
	Past due two months		0.12	%		0.18	%		0.10	%		0.15	%
	Past due three or more months		0.05	%		0.14	%		0.04	%		0.12	%
Nonaccrual loans			2.85	%		4.07	%		2.33	%		3.34	%
Real Estate Owned			0.53	%		0.81	%		0.43	%		0.66	%

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
June 30, 2012 and December 31, 2011
(Amounts in thousands, except share and per share data)
					June 30, 2012				Dec. 31, 2011
ASSETS
	Cash and due from banks				$	9,393			$	7,297
	Other short-term investments					9,377				15,443
		Total cash and cash equivalents				18,770				22,740
	Interest-earning deposits in banks					8,467				4,760
	Securities - Available for sale					1,222				265
	Federal Home Loan Bank stock, at cost					4,064				4,064
	Loans held for sale					800				986
	Loans, net of allowance of $5,455 and $5,875					250,442				252,001
	Premises and equipment, net					7,657				7,855
	Goodwill					5,109				5,109
	Originated mortgage servicing rights					1,306				1,279
	Real estate owned					1,351				2,082
	Bank-owned life insurance					9,116				8,976
	Accrued interest receivable					1,135				1,191
	Prepaid FDIC assessment					612				814
	Other assets					2,259				2,136
		Total assets			$	312,310			$	314,258
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
	Deposits
		Noninterest-bearing			$	37,024			$	33,642
		Interest-bearing				194,892				200,957
			Total deposits			231,916				234,599
	Federal Home Loan Bank advances and other borrowings					52,500				52,575
	Accrued interest payable					298				344
	Other liabilities					1,625				1,830
		Total liabilities				286,339				289,348
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 2,029,898 shares at June 30, 2012 and 2,019,235 at December 31, 2011					2,030				2,019
	Additional paid-in capital					6,931				6,881
	Retained earnings					17,090				16,087
	Accumulated other comprehensive income (loss)					(80	)			(77	)
		Total stockholders' equity				25,971				24,910
			Total liabilities and stockholders' equity		$	312,310			$	314,258

CONSOLIDATED STATEMENTS OF INCOME
Three Months ended June 30, 2012 and 2011
(Amounts in thousands, except share and per share data)
				Three Months ended June 30,
				2012				2011
Interest income
	Loans			$	3,080			$	3,099
	Investment securities:
		Taxable			26				327
		Tax-exempt			12				15
	Dividends				34				30
		Total interest income			3,152				3,471
Interest expense
	Deposits				337				609
	Borrowed funds				426				451
		Total interest expense			763				1,060
Net interest income					2,389				2,411
Provision for loan losses					(11	)			974
Net interest income after provision for loan losses					2,400				1,437
Noninterest income:
	Service charges and other fees				319				353
	Investment brokerage commission income				417				321
	Mortgage banking activities				305				129
	Trust fee income				80				95
	Increase in value of bank owned life insurance				70				69
	Other income				(16	)			(7	)
		Total noninterest income			1,175				960
Noninterest expenses:
	Salaries and employee benefits				1,569				1,771
	Occupancy and equipment				361				367
	Data processing				181				173
	Professional services				69				137
	Real estate owned expense				212				629
	Advertising				24				30
	FDIC premiums				211				124
	Other				283				377
		Total noninterest expenses			2,910				3,608
Income (loss) before income tax expense (benefit)					665				(1,211	)
Provision for income tax					163				(477	)
Net income (loss)				$	502			$	(734	)
Earnings per share				$	0.25			$	(0.36	)
Dividends declared per share				$	0.00			$	0. 01
		Key Ratios:
Return on average equity					7.77	%			(12.60	%)
Return on average assets					0.64	%			(0.79	%)
Net interest margin (tax equivalent)					3.55	%			3.04	%

CONSOLIDATED STATEMENTS OF INCOME
Six Months ended June 30, 2012 and 2011
(Amounts in thousands, except share and per share data)
				Six Months ended June 30,
				2012				2011
Interest income
	Loans			$	6,218			$	6,293
	Investment securities:
		Taxable			48				665
		Tax-exempt			15				29
	Dividends				71				60
		Total interest income			6,352				7,047
Interest expense
	Deposits				708				1,299
	Borrowed funds				850				904
		Total interest expense			1,558				2,203
Net interest income					4,794				4,844
Provision for loan losses					(9	)			1,855
Net interest income after provision for loan losses					4,803				2,989
Noninterest income:
	Service charges and other fees				693				698
	Investment brokerage commission income				716				599
	Mortgage banking activities				564				378
	Trust fee income				158				186
	Increase in value of bank owned life insurance				139				138
	Other income				(27	)			19
		Total noninterest income			2,243				2,018
Noninterest expenses:
	Salaries and employee benefits				3,138				3,421
	Occupancy and equipment				714				739
	Data processing				356				344
	Professional services				187				249
	Real estate owned expense				347				695
	Advertising				51				65
	FDIC premiums				211				234
	Other				708				748
		Total noninterest expenses			5,712				6,495
Income (loss) before income tax expense (benefit)					1,334				(1,488	)
Provision for income tax					331				(637	)
Net income (loss)				$	1,003			$	(851	)
Earnings per share				$	0.50			$	(0.42	)
Dividends declared per share				$	0.00			$	0.02
		Key Ratios:
Return on average equity					7.93	%			(7.35	%)
Return on average assets					0.63	%			(0.46	%)
Net interest margin (tax equivalent)					3.53	%			3.03	%