FETM - Fentura Financial Inc. Announces First Quarter 2020 Earnings

May, 04 2020 02:43 PM Fentura Financial Inc

FENTON, Mich., May 04, 2020 (GLOBE NEWSWIRE) -- Fentura Financial, Inc. (OTCQX: FETM) announces quarterly results of net income of $3,352 for the three month period ended March 31, 2020.

3.52% increase in total assets since December 31, 2019
6.88% increase in gross loans since March 31, 2019
2.40% increase in total deposits since December 31, 2019
Net interest margin of 3.61% for the quarter ended March 31, 2020

“Considering the challenging environment we faced in the first quarter of 2020 based on the global pandemic, I am pleased with our operating results,” said Fentura’s President and CEO Ronald Justice. “Despite the pressures faced by the organization based on the impact of the Coronavirus, we have taken measures to protect the safety of our team while continuing to meet the needs of our clients. Our branch offices remain open by appointment, while the majority of banking transactions have been processed through online banking, our mobile application and ITMs. Recognizing the financial pressures placed on so many, we have actively worked with individuals, families and business clients to defer loan payments and created a short term, interest free loan program to help bridge the gap for many in need as well. We have been active in the SBA’s Paycheck Protection Program assisting hundreds of businesses in accessing funding to support their operations during this unprecedented time. All of these efforts demonstrate our continued commitment to help those we serve manage through this crisis.”

“The Company entered this crisis with strong capital and liquidity that will support us as we move forward during these uncertain times,” added Justice.

Following is a discussion of the Corporation's financial performance as of, and for the quarter ended, March 31, 2020. At the end of this document is a list of abbreviations and acronyms.

Results of Operations
The following table outlines the Corporation's QTD results of operations and provides certain performance measures as of, and for the three month periods ended:



3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019
INCOME STATEMENT DATA










Interest income

$
11,070


$
11,076


$
11,240


$
10,788


$
10,437

Interest expense

2,145


2,158


2,184


2,195


2,090

Net interest income

8,925


8,918


9,056


8,593


8,347

Provision for loan losses

1,542


436


422


264


213

Noninterest income

4,513


2,129


2,262


2,250


1,522

Noninterest expenses

7,686


7,415


6,608


6,691


6,509

Federal income tax expense

858


644


873


791


633

Net income

$
3,352


$
2,552


$
3,415


$
3,097


$
2,514

PER SHARE










Earnings

$
0.72


$
0.55


$
0.73


$
0.67


$
0.54

Dividends

$
0.075


$
0.07


$
0.07


$
0.07


$
0.07

Tangible book value⁽¹⁾

$
21.56


$
20.87


$
20.37


$
19.59


$
18.88

Quoted market value










High

$
26.00


$
25.50


$
21.00


$
21.00


$
21.00

Low

$
12.55


$
20.60


$
20.45


$
20.45


$
20.05

Close⁽¹⁾

$
15.50


$
25.23


$
21.00


$
20.60


$
20.89

PERFORMANCE RATIOS










Return on average assets

1.28
%

1.02
%

1.40
%

1.31
%

1.09
%
Return on average shareholders' equity

13.01
%

10.03
%

13.83
%

13.14
%

11.09
%
Return on average tangible shareholders' equity

13.54
%

10.46
%

14.47
%

13.79
%

11.66
%
Efficiency ratio

57.20
%

67.12
%

58.38
%

61.71
%

65.95
%
Yield on earning assets (FTE)

4.47
%

4.66
%

4.85
%

4.81
%

4.77
%
Rate on interest bearing liabilities

1.28
%

1.36
%

1.42
%

1.46
%

1.40
%
Net interest margin to earning assets (FTE)

3.61
%

3.75
%

3.91
%

3.83
%

3.82
%
BALANCE SHEET DATA⁽¹⁾










Total investment securities

$
76,312


$
61,621


$
62,351


$
73,285


$
82,222

Gross loans

$
865,577


$
870,555


$
826,597


$
813,547


$
809,863

Total assets

$
1,071,180


$
1,034,759


$
978,046


$
949,790


$
946,172

Total deposits

$
883,837


$
863,102


$
801,101


$
792,555


$
789,533

Borrowed funds

$
71,500


$
61,500


$
69,000


$
54,000


$
59,000

Total shareholders' equity

$
104,828


$
101,444


$
99,142


$
95,504


$
92,236

Net loans to total deposits

97.11
%

100.19
%

102.51
%

102.02
%

101.97
%
Common shares outstanding

4,675,499


4,664,369


4,658,722


4,653,343


4,647,978

QTD BALANCE SHEET AVERAGES










Total assets

$
1,049,245


$
994,094


$
971,074


$
947,095


$
934,078

Earning assets

$
997,089


$
944,692


$
920,857


$
900,738


$
887,974

Interest bearing liabilities

$
672,564


$
629,454


$
611,804


$
603,965


$
604,973

Total shareholders' equity

$
103,646


$
100,991


$
97,958


$
94,519


$
91,964

Total tangible shareholders' equity

$
99,558


$
96,796


$
93,650


$
90,098


$
87,430

Earned common shares outstanding

4,659,279


4,652,569


4,646,835


4,641,161


4,635,255

Unvested stock grants

13,481


9,947


9,967


9,967


9,788

Total common shares outstanding

4,672,760


4,662,516


4,656,802


4,651,128


4,645,043

ASSET QUALITY⁽¹⁾










Nonperforming loans to gross loans

0.10
%

0.17
%

0.11
%

0.13
%

0.15
%
Nonperforming assets to total assets

0.12
%

0.14
%

0.09
%

0.11
%

0.13
%
Allowance for loan losses to gross loans

0.84
%

0.67
%

0.65
%

0.62
%

0.59
%
CAPITAL RATIOS⁽¹⁾










Total capital to risk weighted assets

14.42
%

14.03
%

14.42
%

14.18
%

13.99
%
Tier 1 capital to risk weighted assets

13.56
%

13.33
%

13.73
%

13.53
%

13.37
%
CET1 capital to risk weighted assets

11.91
%

11.64
%

11.96
%

11.73
%

11.54
%
Tier 1 leverage ratio

10.97
%

11.20
%

11.22
%

11.16
%

10.99
%











⁽¹⁾At end of period

The following table outlines the Corporation's YTD results of operations and provides certain performance measures as of, and for the three month periods ended:



3/31/2020

3/31/2019

3/31/2018

3/31/2017

3/31/2016
INCOME STATEMENT DATA










Interest income

$
11,070


$
10,437


$
8,379


$
6,427


$
4,526

Interest expense

2,145


2,090


1,031


687


573

Net interest income

8,925


8,347


7,348


5,740


3,953

Provision for loan losses

1,542


213


275


—


—

Noninterest income

4,513


1,522


1,801


1,234


1,488

Noninterest expenses

7,686


6,509


6,279


5,095


4,046

Federal income tax expense

858


633


521


592


475

Net income

$
3,352


$
2,514


$
2,074


$
1,287


$
920

PER SHARE










Earnings

$
0.72


$
0.54


$
0.57


$
0.35


$
0.36

Dividends

$
0.075


$
0.07


$
0.06


$
0.05


$
0.25

Tangible book value⁽¹⁾

$
21.56


$
18.88


$
15.27


$
12.86


$
13.02

Quoted market value










High

$
26.00


$
21.00


$
20.19


$
18.25


$
14.94

Low

$
12.55


$
20.05


$
18.88


$
15.10


$
13.70

Close⁽¹⁾

$
15.50


$
20.89


$
19.75


$
18.00


$
14.75

PERFORMANCE RATIOS










Return on average assets

1.28
%

1.09
%

0.26
%

0.18
%

0.20
%
Return on average shareholders' equity

13.01
%

11.09
%

3.45
%

2.51
%

2.75
%
Return on average tangible shareholders' equity

13.54
%

11.66
%

3.45
%

2.51
%

2.75
%
Efficiency ratio

57.20
%

65.95
%

64.19
%

70.32
%

74.36
%
Yield on earning assets (FTE)

4.47
%

4.77
%

4.51
%

4.19
%

4.43
%
Rate on interest bearing liabilities

1.28
%

1.40
%

0.83
%

0.55
%

0.77
%
Net interest margin to earning assets (FTE)

3.61
%

3.82
%

3.90
%

3.74
%

3.87
%
BALANCE SHEET DATA⁽¹⁾










Total investment securities

$
76,312


$
82,222


$
49,608


$
72,472


$
23,440

Gross loans

$
865,577


$
809,863


$
686,140


$
554,415


$
386,685

Total assets

$
1,071,180


$
946,172


$
789,943


$
730,636


$
455,603

Total deposits

$
883,837


$
789,533


$
683,775


$
630,055


$
376,397

Borrowed funds

$
71,500


$
59,000


$
44,600


$
45,000


$
44,775

Total shareholders' equity

$
104,828


$
92,236


$
60,621


$
51,816


$
32,996

Net loans to total deposits

97.11
%

101.97
%

99.80
%

87.54
%

101.79
%
Common shares outstanding

4,675,499


4,647,978


3,635,098


3,620,964


2,534,255

YTD BALANCE SHEET AVERAGES










Total assets

$
1,049,245


$
934,078


$
789,391


$
716,998


$
456,730

Earning assets

$
997,089


$
887,974


$
755,281


$
613,904


$
408,579

Interest bearing liabilities

$
672,564


$
604,973


$
505,174


$
499.636


$
297.662

Total shareholders' equity

$
103,646


$
91,964


$
60,107


$
51,241


$
33,445

Total tangible shareholders' equity

$
99,558


$
87,430


$
55,041


$
49,104


$
33,445

Earned common shares outstanding

4,659,279


4,635,255


3,633,093


3,677,143


2,558,333

Unvested stock grants

13,481


9,788


—


—


—

Total common shares outstanding

4,672,760


4,645,043


3,633,093


3,677,143


2,558,333

ASSET QUALITY⁽¹⁾










Nonperforming loans to gross loans

0.10
%

0.15
%

0.10
%

0.33
%

0.06
%
Nonperforming assets to total assets

0.12
%

0.13
%

0.10
%

0.28
%

0.18
%
Allowance for loan losses to gross loans

0.84
%

0.59
%

0.54
%

0.52
%

0.92
%
CAPITAL RATIOS⁽¹⁾










Total capital to risk weighted assets

14.42
%

13.99
%

11.03
%

11.72
%

13.27
%
Tier 1 capital to risk weighted assets

13.56
%

13.37
%

10.48
%

11.20
%

12.33
%
CET1 capital to risk weighted assets

11.91
%

11.54
%

8.41
%

8.65
%

8.64
%
Tier 1 leverage ratio

10.97
%

10.99
%

9.01
%

8.60
%

10.43
%











⁽¹⁾At end of period

Income Statement Breakdown and Analysis



Quarter to Date


3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019
GAAP net income

$
3,352


$
2,552


$
3,415


$
3,097


$
2,514

Acquisition related items (net of tax)










Accretion on purchased loans

(180
)

(126
)

(189
)

(145
)

(175
)
Amortization of core deposit intangibles

71


89


88


90


89

Amortization on acquired time deposits

5


7


7


7


7

Amortization on purchased mortgage servicing rights

—


3


3


3


3

Total acquisition related items (net of tax)

(104
)

(27
)

(91
)

(45
)

(76
)
Other nonrecurring items (net of tax)










Change in fair value of equity investment due to acquisition transaction

(578
)

—


—


—


—

Impact of adoption of SAB 109

(976
)

—


—


—


—

Prepayment penalties collected

(36
)

(42
)

(284
)

(9
)

(13
)
Mortgage servicing rights impairment

173


—


—


—


—

Total other nonrecurring items (net of tax)

(1,417
)

(42
)

(284
)

(9
)

(13
)
Adjusted net income from operations

$
1,831


$
2,483


$
3,040


$
3,043


$
2,425












GAAP net interest income

$
8,925


$
8,918


$
9,056


$
8,593


$
8,347

Accretion on purchased loans

(228
)

(160
)

(239
)

(183
)

(222
)
Prepayment penalties collected

(46
)

(53
)

(360
)

(12
)

(16
)
Amortization on acquired time deposits

6


9


9


9


9

Adjusted net interest income

$
8,657


$
8,714


$
8,466


$
8,407


$
8,118












PERFORMANCE RATIOS










Based on adjusted net income from operations










Earnings per share

$
0.39


$
0.53


$
0.65


$
0.66


$
0.52

Return on average assets

0.70
%

0.99
%

1.24
%

1.29
%

1.05
%
Return on average shareholders' equity

7.11
%

9.75
%

12.31
%

12.91
%

10.69
%
Return on average tangible shareholders' equity

7.40
%

10.18
%

12.88
%

13.55
%

11.25
%











Based on adjusted net interest income










Yield on earning assets (FTE)

4.36
%

4.57
%

4.59
%

4.72
%

4.66
%
Rate on interest bearing liabilities

1.28
%

1.37
%

1.43
%

1.47
%

1.41
%
Net interest margin to earning assets (FTE)

3.50
%

3.66
%

3.66
%

3.75
%

3.72
%








Year to Date March 31

Variance


2020

2019

Amount

%
GAAP net income

$
3,352


$
2,514


$
838


33.33
%
Acquisition related items (net of tax)








Accretion on purchased loans

(180
)

(175
)

(5
)

2.86
%
Amortization of core deposit intangibles

71


89


(18
)

(20.22
)%
Amortization on acquired time deposits

5


7


(2
)

(28.57
)%
Amortization on purchased mortgage servicing rights

—


3


(3
)

(100.00
)%
Total acquisition related items (net of tax)

(104
)

(76
)

(28
)

36.84
%
Other nonrecurring items (net of tax)








Change in fair value of equity investment due to acquisition transaction

(578
)

—


(578
)

N/M

Impact of adoption of SAB 109

(976
)

—


(976
)

N/M

Prepayment penalties collected

(36
)

(13
)

(23
)

176.92
%
Mortgage servicing rights impairment

173


—


173


N/M

Total other nonrecurring items (net of tax)

(1,417
)

(13
)

(1,404
)

10,800.00
%
Adjusted net income from operations

$
1,831


$
2,425


$
(594
)

(24.49
)%









GAAP net interest income

$
8,925


$
8,347


$
578


6.92
%
Accretion on purchased loans

(228
)

(222
)

(6
)

2.70
%
Prepayment penalties collected

(46
)

(16
)

(30
)

187.50
%
Amortization on acquired time deposits

6


9


(3
)

(33.33
)%
Adjusted net interest income

$
8,657


$
8,118


$
539


6.64
%









PERFORMANCE RATIOS








Based on adjusted net income from operations








Earnings per share

$
0.39


$
0.52


$
(0.13
)

(25.00
)%
Return on average assets

0.70
%

1.05
%



(0.35
)%
Return on average shareholders' equity

7.11
%

10.69
%



(3.58
)%
Return on average tangible shareholders' equity

7.40
%

11.25
%



(3.85
)%









Based on adjusted net interest income








Yield on earning assets (FTE)

4.36
%

4.66
%



(0.30
)%
Rate on interest bearing liabilities

1.28
%

1.41
%



(0.13
)%
Net interest margin to earning assets (FTE)

3.50
%

3.72
%



(0.22
)%

To effectively compare core operating results from period to period, the impact of acquisition related items and other nonrecurring items have been isolated.

The Corporation adopted Staff Accounting Bulletin No. 109 as of January 1, 2020. This standard required the Corporation to record interest rate lock commitments, forward loan sales commitments, and loans held for sale at fair value. Changes in the fair value of these instruments is recognized as a component of noninterest income. As forward loan sales commitments were previously recorded at fair value, the nonrecurring item impact disclosed above represents the change in fair value of interest rate lock commitments and loans held for sale.

Average Balances, Interest Rate, and Net Interest Income

The following tables present the daily average amount outstanding for each major category of interest earning assets, nonearning assets, interest bearing liabilities, and noninterest bearing liabilities. These tables also present an analysis of interest income and interest expense for the periods indicated. All interest income is reported on a FTE basis using a federal income tax rate of 21%. Loans in nonaccrual status, for the purpose of the following computations, are included in the average loan balances.






















Three Months Ended


March 31, 2020

December 31, 2019

March 31, 2019


Average Balance

Tax Equivalent Interest

Average Yield / Rate

Average Balance

Tax Equivalent Interest

Average Yield / Rate

Average Balance

Tax Equivalent Interest

Average Yield / Rate
Interest earning assets


















Total loans

$
878,813


$
10,481


4.80
%

$
857,474


$
10,581


4.90
%

$
791,069


$
9,741


4.99
%
Taxable investment securities

56,963


353


2.49
%

49,982


307


2.44
%

79,367


559


2.86
%
Nontaxable investment securities

10,532


81


3.09
%

10,366


80


3.06
%

10,582


76


2.91
%
Federal funds sold

33,588


116


1.39
%

16,833


66


1.56
%

43


—


—
%
Interest earning cash and cash equivalents

14,043


26


0.74
%

6,887


28


1.61
%

3,763


25


2.69
%
Federal Home Loan Bank stock

3,150


30


3.83
%

3,150


31


3.90
%

3,150


52


6.69
%
Total earning assets

997,089


11,087


4.47
%

944,692


11,093


4.66
%

887,974


10,453


4.77
%



















Nonearning assets


















Allowance for loan losses

(5,821
)





(5,519
)





(4,591
)




Fixed assets

15,538






15,395






14,818





Accrued income and other assets

42,439






39,526






35,877





Total assets

$
1,049,245






$
994,094






$
934,078
























Interest bearing liabilities


















Interest bearing demand deposits

$
170,598


$
475


1.12
%

$
140,368


$
410


1.16
%

$
73,414


$
84


0.46
%
Savings deposits

231,188


199


0.35
%

225,219


217


0.38
%

241,815


297


0.50
%
Time deposits

205,485


1,053


2.06
%

201,640


1,089


2.14
%

225,866


1,220


2.19
%
Borrowed funds

65,293


418


2.57
%

62,227


442


2.82
%

63,878


489


3.10
%
Total interest bearing liabilities

672,564


2,145


1.28
%

629,454


2,158


1.36
%

604,973


2,090


1.40
%



















Noninterest bearing liabilities


















Noninterest bearing deposits

264,699






254,858






234,268





Accrued interest and other liabilities

8,336






8,791






2,873





Shareholders' equity

103,646






100,991






91,964





Total liabilities and shareholders' equity

$
1,049,245






$
994,094






$
934,078





Net interest income (FTE)



$
8,942






$
8,935






$
8,363



Net interest margin to earning assets (FTE)





3.61
%





3.75
%





3.82
%

Net Interest Income

Net interest income is the amount by which interest income on earning assets exceeds the interest expenses on interest bearing liabilities. Net interest income, which includes loan fees, is influenced by changes in the balance and mix of assets and liabilities and market interest rates. The Corporation exerts some control over these factors; however, FRB monetary policy and competition have a significant impact. For analytical purposes, net interest income is adjusted to a FTE basis by adding the income tax savings from interest on tax exempt loans, and nontaxable investment securities, thus making year-to-year comparisons more meaningful.

Volume and Rate Variance Analysis

The following table sets forth the effect of volume and rate changes on interest income and expense for the periods indicated. For the purpose of this table, changes in interest due to volume and rate were determined as follows:

Volume - change in volume multiplied by the previous period's rate.
Rate - change in the FTE rate multiplied by the previous period's volume.

The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.




























Three Months Ended

Three Months Ended


March 31, 2020

March 31, 2020


Compared To

Compared To


December 31, 2019

March 31, 2019


Increase (Decrease) Due to

Increase (Decrease) Due to


Volume

Rate

Net

Volume

Rate

Net
Changes in interest income
























Total loans

$
887


$
(987
)

$
(100
)

$
2,789


$
(2,049
)

$
740

Taxable investment securities

40


6


46


(141
)

(65
)

(206
)
Nontaxable investment securities

1


—


1


(2
)

7


5

Federal funds sold

97


(47
)

50


—


116


116

Interest earning cash and cash equivalents

78


(80
)

(2
)

116


(115
)

1

Federal Home Loan Bank stock

—


(1
)

(1
)

—


(22
)

(22
)
Total changes in interest income

1,103


(1,109
)

(6
)

2,762


(2,128
)

634














Changes in interest expense












Interest bearing demand deposits

153


(88
)

65


188


203


391

Savings deposits

30


(48
)

(18
)

(12
)

(86
)

(98
)
Time deposits

97


(133
)

(36
)

(101
)

(66
)

(167
)
Borrowed funds

102


(126
)

(24
)

70


(141
)

(71
)
Total changes in interest expense

382


(395
)

(13
)

145


(90
)

55

Net change in net interest income (FTE)

$
721


$
(714
)

$
7


$
2,617


$
(2,038
)

$
579



Average Yield/Rate for the Three Month Periods Ended


3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019
Total earning assets

4.47
%

4.66
%

4.85
%

4.81
%

4.77
%
Total interest bearing liabilities

1.28
%

1.36
%

1.42
%

1.46
%

1.40
%
Net interest margin to earning assets (FTE)

3.61
%

3.75
%

3.91
%

3.83
%

3.82
%



Quarter to Date Net Interest Income (FTE)


3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019
Interest income

$
11,070


$
11,076


$
11,240


$
10,788


$
10,437

FTE adjustment

17


17


15


15


16

Total interest income (FTE)

11,087


11,093


11,255


10,803


10,453

Total interest expense

2,145


2,158


2,184


2,195


2,090

Net interest income (FTE)

$
8,942


$
8,935


$
9,071


$
8,608


$
8,363

The current interest rate environment continues to create pressure on the Corporation's net interest margin. While the Corporation was able to increase net interest income for the quarter ended March 31, 2020 compared to the quarter ended December 31, 2019, the increase was not as significant as previous quarters.

In the first quarter of 2020, the Corporation made a concentrated effort to sharply decrease the interest rates on deposit products paying interest rates that were above the offered rates available in the market. Net interest margins are expected to compress throughout 2020 as rates on interest earning assets are expected to continue to fall faster than interest bearing liabilities.

Noninterest Income



Quarter to Date


3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019
Net gain on sales of mortgage loans

$
970


$
650


$
665


$
422


$
195

Change in fair value of mortgage banking hedge instruments

833


—


—


—


—

Change in fair value of equity investments

749


(5
)

16


21


14

Net gain on sales of commercial loans

668


—


—


—


—

Trust and investment services

389


337


395


459


328

ATM and debit card income

355


399


418


404


360

Mortgage servicing fees

262


256


243


230


211

Service charges on deposit accounts

219


245


239


222


234

Net mortgage servicing rights income

(50
)

130


142


344


8

Other income and fees

118


117


144


148


172

Total noninterest income

$
4,513


$
2,129


$
2,262


$
2,250


$
1,522



Year to Date March 31

Variance


2020

2019

Amount

%
Net gain on sales of mortgage loans

$
970


$
195


$
775


397.44
%
Change in fair value of mortgage banking hedge instruments

833


—


833


N/M

Change in fair value of equity investments

749


14


735


5250.00
%
Net gain on sales of commercial loans

668


—


668


N/M

Trust and investment services

389


328


61


18.60
%
ATM and debit card income

355


360


(5
)

(1.39
)%
Mortgage servicing fees

262


211


51


24.17
%
Service charges on deposit accounts

219


234


(15
)

(6.41
)%
Net mortgage servicing rights income

(50
)

8


(58
)

(725.00
)%
Other income and fees

118


172


(54
)

(31.40
)%
Total noninterest income

$
4,513


$
1,522


$
2,991


196.52
%

Net gain on sales of mortgage loans represents the income earned on the sale of residential mortgage loans into the secondary market. During 2019, and into 2020, the interest rate environment was very advantageous for residential mortgage originations and refinancing. While the interest rate environment is historically attractive for residential mortgage origination, the uncertainty that many consumers are facing due to the COVID-19 global pandemic is expected to reduce residential mortgage originations. As such, gains from the sales of mortgage loans are expected to decrease through 2020.

On January 1, 2020, the Corporation adopted SAB 109. Because of this adoption, the Corporation now recognizes the value of servicing at the time of commitment, which resulted in an increase in retained earnings of $78 at January 1, 2020. The Corporation also elected the fair value option for its residential mortgage loans HFS on January 1, 2020, which resulted in an increase in retained earnings of $436. Pursuant to this adoption, changes in the fair value of mortgage banking hedge instruments and loans held for sale are included in noninterest income.

Change in fair value of equity investments represents the income earned on equities held in the Corporation's investment portfolio. During the first quarter of 2020, an equity position held by the Corporation was bought out through an acquisition, and that transaction generated a gain of $732. The Corporation does not anticipate any significant changes in fair value from equity sales throughout the remainder of 2020.

Net gain on sales of commercial loans includes the income earned on the sale of commercial loans into the secondary market. During the first quarter of 2020, the Corporation sold the guaranteed portion of one SBA loan and one USDA loan. The Corporation continually analyzes its commercial loan portfolio for opportunistic sales strategies.

Trust and investment services includes income the Corporation earned from contracts with customers to manage assets for investment and/or to transact on their accounts. The wealth management component is strongly correlated to changes in the stock market and as such, can vary from period to period. Trust and investment services income is expected to approximate current levels throughout the remainder of the year.

ATM and debit card income represents fees earned on ATM and debit card transactions. The Corporation expects these fees to increase modestly throughout the remainder of 2020.

Mortgage servicing fees includes the fees earned for servicing loans that have been sold into the secondary market. The increase in mortgage servicing fees is directly related to the increases in the size of the serviced portfolio. Mortgage servicing fees are expected to continue to increase throughout the year.

Service charges on deposit accounts includes fees earned from deposit customers for transaction-based, account maintenance and overdraft services. The year-over-year decrease in service charges on deposit accounts is a result of a decline in NSF fees as well as a shift of customer demand toward deposit accounts with no or reduced service charges. In order to provide relief to customers during the COVID-19 global pandemic, the Corporation reduced fees charged on NSF transactions by more than 50%. This reduction in fees runs through May 31, 2020. For these reasons, service charges on deposit accounts are expected to decrease in the foreseeable future.

Net mortgage servicing rights income represents income generated from the capitalization of mortgage servicing rights, net of amortization. During the second quarter of 2019, the Corporation sold a pool of residential mortgage loans out of its loan portfolio, but retained servicing. This sale generated $266 of net MSR income. During the first quarter of 2020, the Corporation recognized an impairment on the MSR portfolio of $219. This impairment was recognized due to the fact that the MSR portfolio had a carrying balance that was larger than the value produced by a forecasting model. The model that was used is produced by a third-party consultant, and uses proprietary analytical tools to calculates unique present values of expected future cash flows. This cash flow analysis is calculated by pooling loans into homogeneous characteristics. The impairment recognized is attributable to the pool of loans with an original term of 30 years. The Corporation also decreased the rates at which MSR are capitalized so as to reflect more accurate fair value. The Corporation expects net MSR income to slightly decrease in 2020 due to the decreased rates that MSR are capitalized at and slowing residential mortgage loan origination.

Other income and fees includes other income items, none of which are individually significant. Other income and fees are expected to approximate current levels throughout 2020.

Noninterest Expenses



Quarter to Date


3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019
Total compensation

$
4,248


$
4,037


$
3,530


$
3,749


$
3,630

Furniture and equipment

610


665


579


525


491

Professional services

522


582


494


439


445

Occupancy

476


467


444


426


437

Data processing

442


272


323


281


278

Advertising and promotional

252


232


222


291


163

Loan and collection

162


203


120


119


110

ATM and debit card

108


98


109


100


95

Telephone and communication

96


115


110


108


111

Amortization of core deposit intangibles

90


113


112


114


112

FDIC insurance premiums

55


6


20


17


101

Other general and administrative

625


625


545


522


536

Total noninterest expenses

$
7,686


$
7,415


$
6,608


$
6,691


$
6,509



Year to Date March 31

Variance


2020

2019

Amount

%
Total compensation

$
4,248


$
3,630


$
618


17.02
%
Furniture and equipment

610


491


119


24.24
%
Professional services

522


445


77


17.30
%
Occupancy

476


437


39


8.92
%
Data processing

442


278


164


58.99
%
Advertising and promotional

252


163


89


54.60
%
Loan and collection

162


110


52


47.27
%
ATM and debit card

108


95


13


13.68
%
Telephone and communication

96


111


(15
)

(13.51
)%
Amortization of core deposit intangibles

90


112


(22
)

(19.64
)%
FDIC insurance premiums

55


101


(46
)

(45.54
)%
Other general and administrative

625


536


89


16.60
%
Total noninterest expenses

$
7,686


$
6,509


$
1,177


18.08
%

Total compensation includes salaries, commissions and incentives, employee benefits, and payroll taxes. Total compensation has increased due to annual merit increases and an increase in commissions and incentives paid. Fluctuations in commissions and incentives are primarily driven by residential mortgage originations, which can vary significantly from period to period. Total compensation is expected to continue to increase modestly throughout 2020 as increases related to the growth in size and complexity of the Corporation will likely be offset by reductions in commissions and incentives.

Furniture and equipment and occupancy expenses primarily consist of depreciation, repairs and maintenance, property taxes, utilities, insurance, certain service contracts, and other related items. These expenses are expected to increase with the size and complexity of the Corporation.

Professional services include expenses relating to third-party professional services. These services include, but are not limited to, regulatory, auditing, consulting, and legal. These expenses are expected to increase in future periods to ensure compliance with audit and regulatory requirements.

Data processing primarily includes the expenses relating to the Corporation's core data processor. These expenses are expected to increase throughout 2020 with the size and complexity of the Corporation.

Advertising and promotional includes the Corporation's media costs and any donations or sponsorships made on behalf of the Corporation. The increase in expenses is a direct result of the Corporation enhancing its marketing efforts to attract new and expand existing customer loans and deposit accounts. These expenses are expected to increase throughout 2020 due to the Corporation's re-branding strategy and continued growth strategy.

Loan and collection includes expenses related to the origination and collection of loans, as well as expenses related to OREO. Given the impact that COVID-19 has had on the economy, the Corporation may experience elevated levels of these expenses in 2020.

ATM and debit card expenses fluctuate based on customer and non-customer utilization of ATMs and customer debit card volumes. The Corporation expects these fees to increase modestly throughout 2020.

Telephone and communication includes expenses relating to the Corporation's communication systems. These expenses are expected to maintain current levels for the remainder of 2020.

Amortization of core deposit intangibles relates to the core deposits acquired from Community Bancorp, Inc. on December 31, 2016 and is expected to approximate current levels throughout 2020.

FDIC insurance premiums typically fluctuate based on the size of the Corporation's balance sheet, capital position, overall risk profile, and examination ratings. FDIC insurance premiums decreased significantly in 2019 due to a Small Bank Assessment Credit issued by the FDIC in the second quarter of 2019. The credit was fully applied during the first quarter of 2020. Due to the application of the Small Bank Assessment Credit, FDIC insurance premiums are not expected to increase in 2020.

Other general and administrative includes miscellaneous other expense items, none of which are individually significant. These expenses are expected to approximate current levels into the foreseeable future.

Balance Sheet Breakdown and Analysis



3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019
ASSETS










Cash and cash equivalents

$
71,140


$
46,803


$
37,572


$
20,067


$
16,509

Total investment securities

76,312


61,621


62,351


73,285


82,222

Loans held-for-sale

21,154


19,491


15,111


6,771


1,835

Gross loans

865,577


870,555


826,597


813,547


809,863

Less allowance for loan losses

7,250


5,813


5,413


5,014


4,745

Net loans

858,327


864,742


821,184


808,533


805,118

All other assets

44,247


42,102


41,828


41,134


40,488

Total assets

$
1,071,180


$
1,034,759


$
978,046


$
949,790


$
946,172












LIABILITIES AND SHAREHOLDERS' EQUITY










Total deposits

$
883,837


$
863,102


$
801,101


$
792,555


$
789,533

Total borrowed funds

71,500


61,500


69,000


54,000


59,000

Accrued interest payable and other liabilities

11,015


8,713


8,803


7,731


5,403

Total liabilities

966,352


933,315


878,904


854,286


853,936

Total shareholders' equity

104,828


101,444


99,142


95,504


92,236

Total liabilities and shareholders' equity

$
1,071,180


$
1,034,759


$
978,046


$
949,790


$
946,172



3/31/2020 vs 12/31/2019

3/31/2020 vs 3/31/2019


Variance

Variance


Amount

%

Amount

%
ASSETS








Cash and cash equivalents

$
24,337


52.00
%

$
54,631


330.92
%
Total investment securities

14,691


23.84
%

(5,910
)

(7.19
)%
Loans held-for-sale

1,663


8.53
%

19,319


1,052.81
%
Gross loans

(4,978
)

(0.57
)%

55,714


6.88
%
Less allowance for loan losses

1,437


24.72
%

2,505


52.79
%
Net loans

(6,415
)

(0.74
)%

53,209


6.61
%
All other assets

2,145


5.09
%

3,759


9.28
%
Total assets

$
36,421


3.52
%

$
125,008


13.21
%









LIABILITIES AND SHAREHOLDERS' EQUITY








Total deposits

$
20,735


2.40
%

$
94,304


11.94
%
Total borrowed funds

10,000


16.26
%

12,500


21.19
%
Accrued interest payable and other liabilities

2,302


26.42
%

5,612


103.87
%
Total liabilities

33,037


1.84
%

112,416


6.84
%









Total shareholders' equity

3,384


3.34
%

12,592


13.65
%
Total liabilities and shareholders' equity

$
36,421


3.52
%

$
125,008


13.21
%

Cash and cash equivalents



3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019
Cash and due from banks










Noninterest bearing

$
33,312


$
17,754


$
21,808


$
12,143


$
7,683

Interest bearing

37,828


6,049


6,764


4,924


8,826

Federal funds sold

—


23,000


9,000


3,000


—

Cash and cash equivalents

$
71,140


$
46,803


$
37,572


$
20,067


$
16,509














3/31/2020 vs 12/31/2019



3/31/2020 vs 3/31/2019


Variance



Variance


Amount

%



Amount

%
Cash and due from banks










Noninterest bearing

$
15,558


87.63
%



$
25,629


333.58
%
Interest bearing

31,779


525.36
%



29,002


328.60
%
Federal funds sold

(23,000
)

(100.00
)%



—



N/M

Cash and cash equivalents

$
24,337


52.00
%



$
54,631


330.92
%

Cash and cash equivalents, which is comprised of cash and due from banks and federal funds sold, fluctuate from period to period based on loan demand and variances in deposit accounts. Federal funds sold increased in the fourth quarter of 2019 compared to that year's third quarter due to an increase in total deposits. Towards the end of the first quarter of 2020, the Corporation shifted funds from federal funds sold to cash and due from banks as those accounts were yielding a higher interest rate. The overall increase in cash and cash equivalents from the fourth quarter of 2019 to the first quarter of 2020 is largely due to an increase in total deposits. The Corporation expects to fund investment security growth and PPP loans with cash and cash equivalents.

Primary and secondary liquidity sources

While the Corporation continues to have strong cash and cash equivalents, it is important to monitor all sources of liquidity. Because of the volume of PPP loans, the Corporation may have to make significant draws on these sources of liquidity in the near term. The following table outlines the Corporation's primary and secondary sources of liquidity as of:



3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019
Cash and cash equivalents

$
71,140


$
46,803


$
37,572


$
20,067


$
16,509

Unpledged investment securities

51,889


40,094


40,675


50,729


60,032

FHLB borrowing availability

42,500


52,500


45,000


60,000


60,000

Federal funds purchased lines of credit

17,500


17,500


17,500


17,500


12,500

Funds available through the Fed Discount Window

10,000


10,000


10,000


10,000


10,000

Total liquidity sources

$
193,029


$
166,897


$
150,747


$
158,296


$
159,041

Total investment securities



3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019
Available-for-sale










U.S. Government and federal agency

$
23,610


$
18,867


$
22,854


$
33,842


$
38,796

State and municipal

10,657


10,691


10,194


8,889


10,322

Mortgage backed residential

10,176


10,748


6,227


6,733


7,031

Certificates of deposit

8,644


6,659


7,155


7,154


8,394

Collateralized mortgage obligations - agencies

18,288


9,527


10,826


11,856


12,516

Unrealized gain/(loss) on available-for-sale securities

1,735


1,092


1,048


776


288

Total available-for-sale

73,110


57,584


58,304


69,250


77,347

Held-to-maturity state and municipal

2,091


2,096


2,100


2,104


2,965

Equity securities

1,111


1,941


1,947


1,931


1,910

Total investment securities

$
76,312


$
61,621


$
62,351


$
73,285


$
82,222














3/31/2020 vs 12/31/2019



3/31/2020 vs 3/31/2019


Variance



Variance


Amount

%



Amount

%
Available-for-sale










U.S. Government and federal agency

$
4,743


25.14
%



$
(15,186
)

(39.14
)%
State and municipal

(34
)

(0.32
)%



335


3.25
%
Mortgage backed residential

(572
)

(5.32
)%



3,145


44.73
%
Certificates of deposit

1,985


29.81
%



250


2.98
%
Collateralized mortgage obligations - agencies

8,761


91.96
%



5,772


46.12
%
Unrealized gain/(loss) on available-for-sale securities

643


58.88
%



1,447


502.43
%
Total available-for-sale

15,526


26.96
%



(4,237
)

(5.48
)%
Held-to-maturity state and municipal

(5
)

(0.24
)%



(874
)

(29.48
)%
Equity securities

(830
)

(42.76
)%



(799
)

(41.83
)%
Total investment securities

$
14,691


23.84
%



$
(5,910
)

(7.19
)%

The amortized cost and fair value of AFS investment securities as of March 31, 2020 were as follows:



Maturing






Due in One Year or Less

After One Year But Within Five Years

After Five Years But Within Ten Years

After Ten Years

Securities with Variable Monthly Payments or Noncontractual Maturities

Total
U.S. Government and federal agency

$
18,692


$
4,918


$
—


$
—


$
—


$
23,610

State and municipal

3,380


4,663


1,379


1,235


—


10,657

Mortgage backed residential

—


—


—


—


10,176


10,176

Certificates of deposit

4,454


4,190


—


—


—


8,644

Collateralized mortgage obligations - agencies

—


—


—


—


18,288


18,288

Total amortized cost

$
26,526


$
13,771


$
1,379


$
1,235


$
28,464


$
71,375

Fair value

$
26,701


$
14,352


$
1,488


$
1,497


$
29,072


$
73,110

The amortized cost and fair value of HTM investment securities as of March 31, 2020 were as follows:



Maturing






Due in One Year or Less

After One Year But Within Five Years

After Five Years But Within Ten Years

After Ten Years

Securities with Variable Monthly Payments or Noncontractual Maturities

Total
State and municipal

$
486


$
1,155


$
370


$
80


$
—


$
2,091

Fair value

$
480


$
1,122


$
341


$
72


$
—


$
2,015

Throughout 2019, yields on bonds that met the Corporation's investment standards declined significantly. As such, the Corporation did not replace the majority of maturing investments in 2019. However, an influx of liquidity in late 2019 and into 2020 led the Corporation to make investment security purchases in order to stabilize net interest margin. Total investment securities are expected to grow with overall balance sheet growth as it is an important source of liquidity and consistent earnings. The following table summarizes information as of March 31, 2020 for investment securities purchased YTD:



Book Value

Tax Effective Weighted Average Yield

Weighted Average Remaining Maturity (Months)
U.S. Government and federal agency

$
10,454


0.46
%

8

State and municipal

—


—
%

—

Collateralized mortgage obligations - agencies

9,723


2.48
%

291

Certificates of deposit

1,984


1.01
%

5

Mortgage backed residential

—


—
%

—

Held-to-maturity state and municipal

—


—
%

—

Total

$
22,161


1.40
%

132

Loans held-for-sale

Loans held-for-sale represent the balance of loans that have been committed to be sold to the secondary market, but have not yet been delivered. The level of loans HFS fluctuates based on loan demand as well as the timing of loan deliveries to the secondary market. As residential mortgage activity is likely to decrease in 2020, the balance of loans HFS will also decline.

During the first quarter of 2020, the Corporation adopted SAB 109. Because of this adoption, the Corporation now recognizes loans HFS at fair value. The Corporation believes that fair value is the price at which the loans could be sold in the principal market at the measurement date.

Loans and allowance for loan losses

The following tables outline the composition and changes in the loan portfolio as of:



3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019
Commercial

$
67,731


$
71,689


$
63,747


$
63,998


$
56,790

Commercial real estate

462,561


455,289


420,127


408,103


394,462

Total commercial loans

530,292


526,978


483,874


472,101


451,252

Residential mortgage

285,392


292,946


291,401


289,944


306,466

Home equity

43,222


41,987


43,061


42,890


43,130

Total residential real estate loans

328,614


334,933


334,462


332,834


349,596

Consumer

6,671


8,644


8,261


8,612


9,015

Gross loans

865,577


870,555


826,597


813,547


809,863

Allowance for loan losses

(7,250
)

(5,813
)

(5,413
)

(5,014
)

(4,745
)
Loans, net

$
858,327


$
864,742


$
821,184


$
808,533


$
805,118














3/31/2020 vs 12/31/2019



3/31/2020 vs 3/31/2019


Variance



Variance


Amount

%



Amount

%
Commercial

$
(3,958
)

(5.52
)%



$
10,941


19.27
%
Commercial real estate

7,272


1.60
%



68,099


17.26
%
Total commercial loans

3,314


0.63
%



79,040


17.52
%
Residential mortgage

(7,554
)

(2.58
)%



(21,074
)

(6.88
)%
Home equity

1,235


2.94
%



92


0.21
%
Total residential real estate loans

(6,319
)

(1.89
)%



(20,982
)

(6.00
)%
Consumer

(1,973
)

(22.83
)%



(2,344
)

(26.00
)%
Gross loans

(4,978
)

(0.57
)%



55,714


6.88
%
Allowance for loan losses

(1,437
)

24.72
%



(2,505
)

52.79
%
Loans, net

$
(6,415
)

(0.74
)%



$
53,209


6.61
%

The following table presents historical loan balances by portfolio segment and impairment evaluation as of:



3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019
Originated loans collectively evaluated for impairment










Commercial

$
66,524


$
70,322


$
61,970


$
61,122


$
53,549

Commercial real estate

446,713


436,626


400,470


386,970


372,347

Residential mortgage

280,265


286,635


285,499


283,638


299,439

Home equity

40,459


39,023


39,586


39,243


39,407

Consumer

6,391


8,330


7,902


8,169


8,404

Subtotal

840,352


840,936


795,427


779,142


773,146

Originated loans individually evaluated for impairment










Commercial

—


—


—


—


—

Commercial real estate

1,658


1,668


1,677


1,703


2,058

Residential mortgage

672


1,362


631


660


618

Home equity

—


—


240


218


—

Consumer

5


—


—


—


—

Subtotal

2,335


3,030


2,548


2,581


2,676

Acquired loans collectively evaluated for impairment










Commercial

1,204


1,362


1,753


2,806


3,160

Commercial real estate

13,630


16,346


17,194


18,526


19,164

Residential mortgage

3,459


3,911


4,139


4,388


5,070

Home equity

2,743


2,943


3,213


3,399


3,693

Consumer

273


314


358


441


608

Subtotal

21,309


24,876


26,657


29,560


31,695

Acquired loans individually evaluated for impairment










Commercial

—


—


—


—


—

Commercial real estate

—


—


—


—


—

Residential mortgage

58


58


61


113


117

Home equity

—


—


—


—


—

Consumer

—


—


—


—


—

Subtotal

58


58


61


113


117

Acquired loans with deteriorated credit quality










Commercial

3


5


24


70


81

Commercial real estate

560


649


786


904


893

Residential mortgage

938


980


1,071


1,145


1,222

Home equity

20


21


22


30


30

Consumer

2


—


1


2


3

Subtotal

1,523


1,655


1,904


2,151


2,229

Gross Loans

$
865,519


$
870,497


$
826,536


$
813,434


$
809,746












Total originated loans

$
842,687


$
843,966


$
797,975


$
781,723


$
775,822

Total acquired loans

22,890


26,589


28,622


31,824


34,041

Gross loans

$
865,577


$
870,555


$
826,597


$
813,547


$
809,863

The following table presents historical allowance for loan losses allocations by portfolio segment and impairment evaluation as of:



3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019
Originated loans collectively evaluated for impairment










Commercial

$
478


$
358


$
301


$
278


$
240

Commercial real estate

3,609


2,790


2,539


2,381


2,282

Residential mortgage

2,442


1,917


1,820


1,662


1,744

Home equity

280


195


198


191


186

Consumer

89


87


87


90


88

Subtotal

6,898


5,347


4,945


4,602


4,540

Originated loans individually evaluated for impairment










Commercial

—


—


—


—


—

Commercial real estate

111


127


26


—


—

Residential mortgage

6


128


27


28


39

Home equity

—


—


213


218


—

Consumer

5


—


—


—


—

Subtotal

122


255


266


246


39

Acquired loans collectively evaluated for impairment










Commercial

1


1


2


5


3

Commercial real estate

7


5


5


5


8

Residential mortgage

9


8


9


9


12

Home equity

14


12


13


14


15

Consumer

—


—


—


—


—

Subtotal

31


26


29


33


38

Acquired loans with deteriorated credit quality










Commercial

—


—


—


—


—

Commercial real estate

39


34


31


15


25

Residential mortgage

156


147


137


114


97

Home equity

4


4


5


4


4

Consumer

—


—


—


—


2

Subtotal

199


185


173


133


128

Allowance for loan losses

$
7,250


$
5,813


$
5,413


$
5,014


$
4,745












Total originated loans

$
7,020


$
5,602


$
5,211


$
4,848


$
4,579

Total acquired loans

230


211


202


166


166

Allowance for loan losses

$
7,250


$
5,813


$
5,413


$
5,014


$
4,745

Commercial

$
479


$
359


$
303


$
283


$
243

Commercial real estate

3,766


2,956


2,601


2,401


2,315

Residential mortgage

2,613


2,200


1,993


1,813


1,892

Home equity

298


211


429


427


205

Consumer

94


87


87


90


90

Allowance for loan losses

$
7,250


$
5,813


$
5,413


$
5,014


$
4,745

The following table summarizes the Corporation's current, past due, and nonaccrual loans as of:



3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019
Accruing interest










Current

$
862,581


$
867,901


$
824,587


$
811,184


$
807,671

Past due 30-89 days

2,152


1,213


1,089


1,275


1,009

Past due 90 days or more

166


239


209


301


310

Total accruing interest

864,899


869,353


825,885


812,760


808,990

Nonaccrual

678


1,202


712


787


873

Total loans

$
865,577


$
870,555


$
826,597


$
813,547


$
809,863

Total loans past due and in nonaccrual status

$
2,996


$
2,654


$
2,010


$
2,363


$
2,192

The following table summarizes the Corporation's nonperforming assets as of:



3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019
Nonaccrual loans

$
678


$
1,202


$
712


$
787


$
873

Accruing loans past due 90 days or more

166


239


209


301


310

Total nonperforming loans

844


1,441


921


1,088


1,183

Other real estate owned

400


—


—


—


—

Total nonperforming assets

$
1,244


$
1,441


$
921


$
1,088


$
1,183

The following table summarizes the Corporation's primary asset quality measures as of:



3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019
Nonperforming loans to gross loans

0.10
%

0.17
%

0.11
%

0.13
%

0.15
%
Nonperforming assets to total assets

0.12
%

0.14
%

0.09
%

0.11
%

0.13
%
Allowance for loan losses to gross loans

0.84
%

0.67
%

0.65
%

0.62
%

0.59
%

The following table summarizes the balance of net unamortized discounts on purchased loans as of:



3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019
Net unamortized discount on purchased loans

$
1,233


$
1,462


$
1,626


$
1,914


$
2,095

As outlined in the preceding tables, the Corporation has been successful in growing its loan portfolio over the past 12 months with most of the growth coming in the form of commercial and commercial real estate loans. Despite the significant growth, the Corporation has not relaxed its underwriting standards as evidenced by the low level of nonperforming loans.

While the Corporation's credit quality metrics remain at historically low levels, the uncertainty in the local, national and global economy, especially as it relates to the impact of the COVID-19 global pandemic, the Corporation increased the ALLL by $1,437, or 24.72%, as March 31, 2020.

The following table summarizes the average loan size as of:



3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019
Commercial

$
214


$
228


$
204


$
195


$
174

Commercial real estate

644


641


605


609


597

Total commercial loans

513


514


481


473


457

Residential mortgage

194


198


200


206


206

Home equity

46


44


45


45


45

Total residential real estate loans

137


138


139


140


142

Consumer

26


32


31


32


33

Gross loans

$
234


$
234


$
225


$
223


$
218

COVID-19, CARES Act and SBA activity

As stated above, the communities which the Corporation serves were not immune to the fallout of the COVID-19 global pandemic. The Corporation has committed significant efforts to work with customers through temporary loan modifications and participation in the PPP loan program.

The Corporation has been extremely active in participating in the PPP loan program. As of April 29, 2020 the Corporation had approved 1,128 loans totaling $208,607. To help fund PPP loans, the Federal Reserve established the PPPLF to supply liquidity in the form of non-recourse loans to participating financial institutions. The PPPLF will accept the PPP loans as collateral at face value. Extensions of credit under the PPPLF will be made at a rate of 0.35% and there are no fees associated with PPPLF. As a funding precaution, the Corporation has established the ability to utilize the PPPLF. Additionally, the Corporation requested, and was approved for, a $75,000 increase in credit availability at the FHLB.

The CARES Act also provides a variety of accommodations for loans that the Corporation services for FHLMC including:

Providing mortgage forbearance for up to 12 months,
Waiving assessments of penalties and late fees,
Halting all foreclosure actions and evictions of borrowers until at least May 17, 2020,
Offering loan modification options that lower payments or keep payments the same after the forbearance period.

The table below outlines the COVID-19 related loan modifications that have been requested to, but not yet issued by, the Corporation through April 29, 2020:



Number of Requests

Outstanding Balance
Commercial

63


$
18,210

Commercial real estate

163


128,888

Total commercial loan modification requests

226


147,098

Residential mortgage loans serviced for FHLMC

—


—

Portfolio residential mortgage loans

40


11,317

Home equity

6


373

Total residential real estate loan modification requests

46


11,690

Consumer

2


10

Total outstanding modification requests

274


$
158,798

The table below outlines the COVID-19 related loan modifications issued by the Corporation through April 29, 2020:



Number of Modifications

Outstanding Balance
Commercial

60


$
21,173

Commercial real estate

142


111,101

Total commercial loan modifications

202


132,274

Residential mortgage loans serviced for FHLMC

113


24,044

Portfolio residential mortgage loans

95


22,999

Home equity

16


1,429

Total residential real estate loan modifications

224


48,472

Consumer

2


22

Total modifications

428


$
180,768

The Corporation considers the modification type on a loan-by-loan basis. Most modifications for loans held within the Corporation's loan portfolio resulted in the deferment of principal and interest payments for 3 months.

All other assets

The following tables outline the composition and changes in other assets as of:



3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019
Premises and equipment, net

$
15,533


$
15,245


$
15,443


$
14,792


$
14,838

Mortgage servicing rights

3,980


4,030


3,900


3,758


3,414

Accrued interest receivable

3,124


2,877


2,954


3,350


3,298

Corporate owned life insurance

10,380


10,316


10,248


10,181


10,070

Federal Home Loan Bank stock

3,150


3,150


3,150


3,150


3,150

Goodwill

3,219


3,219


3,219


3,219


3,219

Core deposit intangibles

812


902


1,015


1,128


1,241

Other real estate owned

400


—


—


—


—

Derivative assets

1,063


125


172


—


—

Right-of-use assets

432


475


105


119


132

Other assets

2,154


1,763


1,622


1,437


1,126

All other assets

$
44,247


$
42,102


$
41,828


$
41,134


$
40,488














3/31/2020 vs 12/31/2019



3/31/2020 vs 3/31/2019


Variance



Variance


Amount

%



Amount

%
Premises and equipment, net

$
288


1.89
%



$
695


4.68
%
Mortgage servicing rights

(50
)

(1.24
)%



566


16.58
%
Accrued interest receivable

247


8.59
%



(174
)

(5.28
)%
Corporate owned life insurance

64


0.62
%



310


3.08
%
Federal Home Loan Bank stock

—


—
%



—


—
%
Goodwill

—


—
%



—


—
%
Core deposit intangibles

(90
)

(9.98
)%



(429
)

(34.57
)%
Other real estate owned

400



N/M




400



N/M

Derivative assets

938


750.40
%



1,063



N/M

Right-of-use assets

(43
)

(9.05
)%



300


227.27
%
Other assets

391


22.18
%



1,028


91.30
%
All other assets

2,145


5.09
%



$
3,759


9.28
%

MSR are servicing assets that are recognized from the sales of mortgage loans. A portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. The increase in MSR for 2019 is due to the increased volume of residential mortgage loan sales. As noted early, in the first quarter of 2020, the Corporation recognized an impairment on the MSR of $219. The Corporation does not expect any additional impairments for 2020, and expects nominal growth in MSR in 2020 due to continued residential mortgage origination.

Derivative assets are used in the process of hedging the Corporation's mortgage banking activities. The derivative assets are recorded at fair value at the end of each quarter. The Corporation does not expect significant growth in derivative assets as residential real estate lending is expected to tighten in 2020.

Right-of-use assets were established pursuant to the adoption of ASU 2016-02, "Leases (Topic 842)", on January 1, 2019. Right-of-use assets are recognized at the lease commencement date based on the estimated present value of the lease payments over the lease term, for leases that are longer than 12 months. The large increase from September 30, 2019 was due to an additional lease being entered into by the Corporation.

Total deposits

The following tables outline the composition and changes in the deposit portfolio as of:



3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019
Noninterest bearing demand

$
281,848


$
260,503


$
253,784


$
248,795


$
237,213

Interest bearing










Savings

215,748


215,218


213,494


232,130


230,006

Money market demand

79,070


88,350


80,873


69,374


61,294

NOW

83,910


75,976


39,286


14,925


17,450

Time deposits

223,261


223,055


213,664


227,331


243,570

Total deposits

$
883,837


$
863,102


$
801,101


$
792,555


$
789,533














3/31/2020 vs 12/31/2019



3/31/2020 vs 3/31/2019


Variance



Variance


Amount

%



Amount

%
Noninterest bearing demand

$
21,345


8.19
%



$
44,635


18.82
%
Interest bearing










Savings

530


0.25
%



(14,258
)

(6.20
)%
Money market demand

(9,280
)

(10.50
)%



17,776


29.00
%
NOW

7,934


10.44
%



66,460


380.86
%
Time deposits

206


0.09
%



(20,309
)

(8.34
)%
Total deposits

$
20,735


2.40
%



$
94,304


11.94
%

The Corporation has continued its focus of growing non-contractual deposits while supplementing funding with time deposits. The Corporation has been able to drive this meaningful increase through enhanced organic growth strategies. For 2020, the Corporation expects to monitor deposit growth and adjust interest rates so as to create minimal pressure on the net interest margin.

Schedule of time deposit maturities

The following table summarizes the contractual maturities of the time deposits as of March 31, 2020:



Maturity Buckets


3 Months or Less

3 to 6 Months

6 to 9 Months

9 to 12 Months

Beyond 12 Months
Balance

$
77,034


$
44,767


$
35,959


$
28,916


$
36,585

Weighted average yield

1.97
%

2.05
%

1.90
%

1.28
%

1.82
%













Cumulative Maturities


3 Months or Less

Up to 6 Months

Up to 9 Months

Up to 12 Months

Total
Balance

$
77,034


$
121,801


$
157,760


$
186,676


$
223,261

Weighted average yield

1.97
%

2.00
%

1.98
%

1.87
%

1.86
%

Total borrowed funds

The following tables outline the composition and changes in borrowed funds as of:



3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019
Federal Home Loan Bank borrowings

$
57,500


$
47,500


$
55,000


$
40,000


$
40,000

Subordinated debentures

14,000


14,000


14,000


14,000


14,000

Federal funds purchased

—


—


—


—


5,000

Total borrowed funds

$
71,500


$
61,500


$
69,000


$
54,000


$
59,000














3/31/2020 vs 12/31/2019



3/31/2020 vs 3/31/2019


Variance



Variance


Amount

%



Amount

%
Federal Home Loan Bank borrowings

$
10,000


21.05
%



$
17,500


43.75
%
Subordinated debentures

—


—
%



—


—
%
Federal funds purchased

—


—
%



(5,000
)

(100.00
)%
Total borrowed funds

$
10,000


16.26
%



$
12,500


21.19
%

While the Corporation increased its reliance on borrowed funds in 2018 to fund its strong loan demand, borrowed funds gradually declined in the quarters prior to December 31, 2019 as the Corporation has been able to fund organic growth through increases in deposit accounts. Total borrowed funds increased in the third quarter of 2019 as the interest rates for Federal Home Loan Bank borrowings were extremely attractive. Total borrowed funds are expected to decrease as current Federal Home Loan Bank borrowings mature. Although, as noted earlier, significant volume of PPP loans may cause the Corporation to utilize the PPPLF or other funding sources. The Corporation continually analyzes the market for opportunities and will borrow funds when deemed financially beneficial.

Wholesale funding sources

The following tables outline the composition and changes in wholesale funding sources as of:



3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019
Federal Home Loan Bank borrowings

$
57,500


$
47,500


$
55,000


$
40,000


$
40,000

Brokered time deposits

28,605


28,605


16,326


23,484


35,398

Internet time deposits

18,005


18,009


21,977


25,058


26,452

Total wholesale funds

$
104,110


$
94,114


$
93,303


$
88,542


$
101,850














3/31/2020 vs 12/31/2019



3/31/2020 vs 3/31/2019


Variance



Variance


Amount

%



Amount

%
Federal Home Loan Bank borrowings

$
10,000


21.05
%



$
17,500


43.75
%
Brokered time deposits

—


—
%



(6,793
)

(19.19
)%
Internet time deposits

(4
)

(0.02
)%



(8,447
)

(31.93
)%
Total wholesale funds

$
9,996


10.62
%



$
2,260


2.22
%

The Corporation utilizes wholesale funds to fund balance sheet growth. As wholesale funding is typically more expensive than core deposits, the Corporation continually analyzes sources of wholesale funding when the increases in interest earning assets out-pace the increases in core deposits.

Accrued interest payable and other liabilities

Accrued interest payable and other liabilities includes accrued interest payable, federal income taxes payable, deferred federal income taxes payable, and all other liabilities (none of which are individually significant). Accrued interest payable and other liabilities are not expected to fluctuate significantly in future periods.

Total shareholders' equity

Total shareholders' equity includes common stock, retained earnings, and AOCI. Total shareholders' equity is expected to continue to grow in 2020 through the Corporation's earnings. In April 2020, the Corporation's Board of Directors amended its common stock repurchase plan to authorize the repurchase of up to $5,000 of common stock.

Stock Performance

The following graph compares the cumulative total shareholder return on the Corporation's common stock for the last five years with the cumulative total return on the ABA NASDAQ Community Bank Index (NASDAQ: XX:ABAQ) over the same period. The graph assumes the value of an investment in the Corporation's common stock and the ABA NASDAQ Community Bank Index was $100 at March 31, 2015 and all dividends were reinvested.

A graph accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/d16a1278-56d1-47e4-9926-0694caf011c3

Date

FETM

ABQ Index
3/31/2015

$
100.00


$
100.00

3/31/2016

126.00


101.56

3/31/2017

154.75


140.48

3/31/2018

171.08


148.82

3/31/2019

182.67


130.86

3/31/2020

140.17


93.22

Abbreviations and Acronyms

ABA: American Bankers Association

IRA: Individual retirement account

ALLL: Allowance for loan losses

ITM: Interactive teller machine

AOCI: Accumulated other comprehensive income

MSR: Mortgage servicing rights

ASU: Accounting Standards Update

N/M: Not meaningful

ATM: Automated teller machine

NASDAQ: National Association of Securities Dealers Automated Quotations

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About Fentura Financial, Inc. and The State Bank

Fentura Financial, Inc. is the holding company for The State Bank. It was formed in 1987 and is traded on the OTCQX exchange under the symbol FETM, and was recognized as one of the Top 50 performing stocks in 2016 and 2018 on that exchange.

The State Bank is a full-service, 5-Star Bauer Financial rated commercial, retail and trust bank headquartered in Fenton, Michigan. It currently operates 15 full-service branches in Genesee, Livingston, Oakland, Saginaw, and Shiawassee Counties and a loan production office in Saginaw County. The State Bank was ranked #20 by S&P Global in terms of 2018 performance for banks under $2 billion in assets. The State Bank’s commercial department provides a complete array of products including lines of credit, term loans, commercial mortgages, SBA loans and a full-suite of cash management products. The retail department offers personal checking, savings, time and IRA deposit accounts and a wide array of loan products including home equity, auto and personal loans. The residential loan department offers construction, purchase and refinance residential mortgage loans. The wealth management department offers a full-service suite of trust and portfolio management services. More information can be found at www.thestatebank.com or www.fentura.com.

Cautionary Statement: This press release contains certain forward-looking statements that involve risks and uncertainties. Forward-looking statements include, but are not limited to, statements concerning future growth in earning assets and net income. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those expressed or implied by such forward-looking statements, including, but not limited to, economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services, interest rates and fees for services. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release.

Contacts:

Ronald L. Justice

Aaron D. Wirsing

President & CEO

Chief Financial Officer

Fentura Financial, Inc.

810.714.3902

810.714.3925

ronj@thestatebank.com

aaronw@thestatebank.com

Company Name:	Fentura Financial Inc
Stock Symbol:	FETM
Market:	OTC
Website:	fentura.com

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FETM - Fentura Financial Inc. Announces First Quarter 2020 Earnings

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