Sturgis Bancorp Inc. in Michigan is suspending dividend payments to shareholders because management believes its strategy for propping up capital ratios by shrinking assets is no longer viable.

In the last year or so, the company has shrunk its assets by about 18%, to $320 million, largely by reducing the size of its investment portfolio. 

But in a letter to shareholders Wednesday, President and Chief Executive Eric Eishen said that the company simply cannot shrink assets any more if it ultimately wants to increase its profits.

"The board of directors does not intend to reduce assets any further at this time," Eishen wrote. "A bank must lend to maintain earnings and any further reduction in assets would negatively impact the lending function of the bank and therefore our core business."

Sturgis has steadily been steadily reducing dividend payments in recent years in order to preserve capital, and in the last three quarters it has paid out just a penny per share.

While Sturgis is well capitalized in the view of regulators, its Tier 1 capital ratio is still below the 8% goal the company has set for itself. (Banks must have a ratio of at least 5% to be considered well capitalized.)

Eishen said the company also needs to hang on to capital so that it can repay a $4 million loan it took out to repurchase shares and beef its capital levels.

"The alternative to repayment of this debt from earnings would be to raise capital by issuing additional shares," Eishen wrote. "In the current environment this would be damaging to our existing shareholder value since new stock would be issued below book value."

Eishen did not say when he expects the company to resume paying dividends.

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