Sturgis Bancorp Reports Earnings for 2013

STURGIS, MI--(Marketwired - Jan 28, 2014) - Sturgis Bancorp, Inc. (OTCBB: STBI) announced a net income of $1.6 million for 2013, and net income of $222,000 for the fourth quarter of 2013, 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 2013:

Net income for 2013 was $1.6 million, or $0.80 per share, compared to net income of $1.9 million, or $0.92 per share, in 2012.
The Bank increased capital ratios, exceeding "well-capitalized" requirements and ending 2013 with Tier 1 capital at 9.44% and 14.24% of average assets and risk-weighted assets, respectively. Tier 1 capital was 9.59% of December 31, 2013 total assets. Total capital at December 31, 2013 was 15.50% of risk-weighted assets.
Provision for loan losses decreased by $1.0 million.
Prepayment penalties on debt extinguishment were $668,000.
Wholesale funding reliance was reduced, as brokered certificates of deposit and other jumbo certificates decreased by $5.8 million and $2.1 million, respectively.
Loans charged off, net of recoveries, decreased to $503,000 in 2013. The allowance for loan losses decreased to 1.74% of total (gross) loans from 2.03% at the end of 2012, due to improvements in credit quality and declining loss experience.

Nonaccrual loans decreased to $5.7 million, or 2.39% of gross loans on December 31, 2013.

President and CEO Eishen stated: "Although earnings are down from 2012, net income for the past 24 months is up significantly from the prior few years and is returning to more normal levels, given the rate environment. Credit quality is improving and the interest margin is stable. Commissions and mortgage banking activity have been a strong part of the Bank's earnings streams, diversifying our income. Sturgis Bank & Trust Company and its wholly-owned subsidiary Oak Mortgage continue to dominate our home mortgage market in St. Joseph County Michigan. Since the Bank retains 100% of the mortgage servicing, we are building additional relationships while maintaining existing relationships in our market. This provides the opportunity to offer other financial services to our customers. The Bank reversed $231,000 of mortgage servicing rights impairment in 2013, which was included in mortgage banking activities. Oakleaf Financial Services, another wholly-owned subsidiary, had a very successful year. Oakleaf commission income was higher in 2013, due to the positive performance of the stock market and other sales. Many of the accounts managed are fee based relationships, providing a more stable income stream to the Bank. The Bank has also continued to decrease its reliance on non-core funding sources, with consistent growth of core deposits. All of these factors have made your Bank more valuable at the end of 2013."

Year 2013 vs. 2012 - Net income for the year ended December 31, 2013 decreased to $1.6 million, or $0.80 per share from net income of $1.9 million, or $0.92 per share, for 2012. Net interest income decreased 3.1% to $9.3 million, from $9.6 million for 2012. The decrease in net interest income is primarily due to the decrease in average earning assets to $271.5 million in 2013 from $276.4 million in 2012. The tax equivalent net interest margin decreased to 3.42% in 2013 from 3.52% in 2012.

Noninterest income was $5.3 million for 2013, compared to $4.7 million for 2012. Commission income from Oakleaf Financial Services, a Bank-owned subsidiary, increased $496,000 to $2.0 million in 2013. Mortgage banking activities were $1.1 million in 2013, down slightly from $1.2 million in 2012.

Noninterest expense increased $1.7 million for 2013, compared to 2012. Noninterest expense includes brokerage commissions paid on the higher commission income. Real estate owned expense decreased by $152,000. FHLB advances of $7.5 million were prepaid in the fourth quarter of 2013, incurring a prepay penalty of $668,000. The prepayment of FHLB advances reduces future interest expense.

The Bank recorded $489,000 negative provision to the allowance for loan losses in 2013, compared to $545,000 positive provision in 2012. The reduction to reserves was due to improvements in credit quality and net charge-offs. Net charge-offs were $503,000 in 2013, compared to $1.3 million in 2012 and $2.4 million in 2011. The net activity in the ALLL decreased the total allowance to 1.74% of gross loans at December 31, 2013, compared to 2.03% of gross loans at December 31, 2012.

Total assets decreased to $305.0 million at December 31, 2013 from $317.0 million at December 31, 2012, primarily in commercial real estate loans.

Noninterest-bearing deposits increased to $41.7 million at December 31, 2013 from $41.3 million at December 31, 2012. Interest-bearing deposits decreased to $187.3 million at December 31, 2013 from $193.7 million at December 31, 2012. The decrease in interest-bearing deposits includes $5.8 million in brokered deposits and $2.1 million in non-brokered certificates of deposit with balances of $100,000 and greater.

Total equity was $28.5 million at December 31, 2013, compared to $26.9 million at December 31, 2012. Book value per share increased to $13.89 at December 31, 2013 from $13.21 at December 31, 2012.

Mr. Eishen added, "During the last few years, I have discussed capital requirements, credit quality, and Sturgis Bancorp's cash dividend several times. The Bank weathered the financial crisis very well, with only one small loss year. The Bank did not accept any assistance from the U.S. Federal Government. We have provided appropriately in our ALLL and increased capital to historical highs. Credit quality has improved markedly.

"When visiting Washington, DC subsequent to the 2008 financial crisis, I learned Regulatory expectations for capital adequacy had increased from historical levels. I set a goal of achieving Tier One Capital of 10.0%, and Sturgis Bancorp suspended the cash dividend to accelerate progress toward that goal. The Bank ended 2013 at 9.44% Tier One Capital ratio, with Total Risk Based Capital of 15.50%. The Sturgis Bancorp Board has determined this is sufficient progress toward my goal of 10.0% to reinstate a regular cash dividend in 2014. We will be announcing the cash dividend in a separate first quarter release."

Fourth Quarter of 2013 vs. 2012 - Net income for the quarter ended December 31, 2013 decreased to $222,000, or $0.11 per share, from $345,000, or $0.17 per share, for the fourth quarter of 2012. The primary component of the decrease is the FHLB advance prepayment penalty, offset by the lower provision for loan losses.

Net interest income decreased $80,000, to $2.3 million in the fourth quarter of 2013. The decrease is primarily due to reductions in average interest-earning assets. The tax-equivalent net interest margin decreased to 3.46% in 2013 from 3.48% in the last quarter of 2012.

Noninterest income was $1.5 million in the fourth quarter of 2013, compared to $1.3 million for the fourth quarter of 2012. The largest component of this increase was commission income, which increased $184,000 to $599,000.

Noninterest expense increased $962,000, primarily due to the $668,000 prepayment penalty on FHLB advances. Salaries and employee benefits also increased $194,000, partially due to increased brokerage commissions paid on the higher commission income. Real estate owned expense decreased $175,000 in 2013, compared to the fourth quarter of 2012.

Net charge-offs for the fourth quarter of 2013 were $143,000, compared to $827,000 a year ago. The Company recorded $255,000 negative provision for the allowance for loan losses in the fourth quarter of 2013, compared to $491,000 positive provision for the same quarter of 2012.

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, 2013 and 2012
(Amounts in thousands, except share and per share data)

				2013			2012
ASSETS
	Cash and due from banks			$	14,236		$	10,237
	Other short-term investments				6,638			9,611
		Total cash and cash equivalents			20,874			19,848

	Interest-earning deposits in banks				14,914			12,196
	Securities - Available for sale				1,575			1,242
	Federal Home Loan Bank stock, at cost				4,064			4,064
	Loans held for sale				1,034			2,261
	Loans, net of allowance of $4,146 and $5,138				234,549			248,520
	Premises and equipment, net				7,113			7,044
	Goodwill				5,109			5,109
	Originated mortgage servicing rights				1,501			1,273
	Real estate owned				630			1,252
	Bank-owned life insurance				9,537			9,259
	Accrued interest receivable				828			861
	Prepaid FDIC assessment				-			414
	Other assets				3,251			3,702

		Total assets		$	304,979		$	317,045

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
	Deposits
		Noninterest-bearing		$	41,706		$	41,261
		Interest-bearing			187,314			193,662
			Total deposits		229,020			234,923
	Federal Home Loan Bank advances and other borrowings				44,585			52,440
	Accrued interest payable				272			333
	Other liabilities				2,567			2,425
		Total liabilities			276,444			290,121

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 2,055,025 shares at December 31, 2013 and 2,038,395 at December 31, 2012				2,055			2,038
	Additional paid-in capital				7,094			6,979
	Retained earnings				19,579			17,953
	Accumulated other comprehensive income (loss)				(193	)		(46	)
		Total stockholders' equity			28,535			26,924

			Total liabilities and stockholders' equity	$	304,979		$	317,045


CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2013 and 2012
(Amounts in thousands, except share and per share data)

			2013			2012
Interest income
	Loans		$	11,500		$	12,362
	Investment securities:
		Taxable		208			131
		Tax-exempt		61			36
	Dividends			153			150
		Total interest income		11,922			12,679
Interest expense
	Deposits			992			1,341
	Borrowed funds			1,586			1,694
		Total interest expense		2,578			3,035

Net interest income				9,344			9,644

Provision for loan losses				(489	)		545

Net interest income after provision for loan losses				9,833			9,099

Noninterest income:
	Service charges and other fees			1,486			1,344
	Investment brokerage commission income			2,038			1,542
	Mortgage banking activities			1,137			1,219
	Trust fee income			364			310
	Increase in value of bank owned life insurance			278			282
	Gain (loss) on sale of real estate owned			(53	)		(24	)
	Other income			7			55
		Total noninterest income		5,257			4,728
Noninterest expenses:
	Salaries and employee benefits			6,883			6,257
	Occupancy and equipment			1,729			1,422
	Data processing			728			707
	Professional services			372			369
	Real estate owned expense			593			745
	Advertising			119			109
	FDIC premiums			426			418
	Prepayment penalty on early debt extinguishment			668			-
	Other			1,699			1,430
		Total noninterest expenses		13,217			11,457

Income (loss) before income tax expense (benefit)				1,873			2,370

Provision for income tax				246			504

Net income (loss)			$	1,627		$	1,866

Earnings per share			$	0.80		$	0.92
Dividends declared per share			$	-		$	-
		Key Ratios:
Return on average equity				5.88	%		7.18	%
Return on average assets				0.51	%		0.59	%
Net interest margin (tax equivalent)				3.42	%		3.52	%
Efficiency ratio				90.52	%		79.80	%


CONSOLIDATED STATEMENTS OF INCOME
Three months ended December 31, 2013 and 2012
(Amounts in thousands, except share and per share data)

			2013			2012
Interest income
	Loans		$	2,796		$	3,049
	Investment securities:
		Taxable		56			43
		Tax-exempt		15			9
	Dividends			36			38
		Total interest income		2,903			3,139
Interest expense
	Deposits			233			309
	Borrowed funds			341			421
		Total interest expense		574			730

Net interest income				2,329			2,409

Provision for loan losses				(255	)		491

Net interest income after provision for loan losses				2,584			1,918

Noninterest income:
	Service charges and other fees			379			328
	Investment brokerage commission income			599			415
	Mortgage banking activities			329			369
	Trust fee income			72			82
	Increase in value of bank owned life insurance			68			72
	Gain (loss) on sale of real estate owned			5			27
	Other income			3			18
		Total noninterest income		1,455			1,311
Noninterest expenses:
	Salaries and employee benefits			1,759			1,565
	Occupancy and equipment			460			347
	Data processing			196			175
	Professional services			71			77
	Real estate owned expense			32			207
	Advertising			38			33
	FDIC premiums			103			104
	Prepayment penalty on early debt extinguishment			668			-
	Other			529			386
		Total noninterest expenses		3,856			2,894

Income (loss) before income tax expense (benefit)				183			335

Provision for income tax				(39	)		(10	)

Net income (loss)			$	222		$	345

Earnings per share			$	0.11		$	0. 17
Dividends declared per share			$	-		$	-
		Key Ratios:
Return on average equity				3.13	%		5.11	%
Return on average assets				0.28	%		0.44	%
Net interest margin (tax equivalent)				3.46	%		3.48	%
Efficiency ratio				101.90	%		77.79	%