FETM - Fentura Financial Inc. Announces Second Quarter 2019 Earnings

July, 25 2019 04:32 PM Fentura Financial Inc

Dollars in thousands except per share amounts. Certain items in the prior period financial statements have been reclassified to conform with June 30, 2019 presentation.

FENTON, Mich., July 25, 2019 (GLOBE NEWSWIRE) -- Fentura Financial, Inc. (OTCQX: FETM) announces continued strong earnings with net income of $3,097 and $5,611 for the three and six month periods ended June 30, 2019, respectively.

22.99% increase in net income over the second quarter of 2018
15.01% increase in gross loans since June 30, 2018
12.89% increase in total deposits since June 30, 2018
20.28% increase in tangible book value per share since June 30, 2018

Ronald L. Justice, President and CEO said, “I am pleased to report another quarter of strong earnings. This continued growth emphasizes our team's ability to execute our community focused growth strategy. I continue to be extremely proud of our team and their hard work and dedication towards expanding in the communities we serve.”

Following is a discussion and detailed analysis as of, and for the quarter ended, June 30, 2019. 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:


6/30/2019

3/31/2019

12/31/2018

9/30/2018

6/30/2018
INCOME STATEMENT DATA









Interest income
$
10,788


$
10,437


$
9,931


$
9,311


$
8,729

Interest expense
2,195


2,090


1,926


1,638


1,232

Net interest income
8,593


8,347


8,005


7,673


7,497

Provision for loan losses
264


213


290


191


301

Noninterest income
2,250


1,522


1,703


2,760


2,013

Noninterest expenses
6,691


6,509


6,907


6,075


6,049

Federal income tax expense
791


633


502


654


642

Net income
$
3,097


$
2,514


$
2,009


$
3,513


$
2,518

PER SHARE









Earnings
$
0.67


$
0.54


$
0.46


$
0.96


$
0.69

Dividends
$
0.07


$
0.07


$
0.06


$
0.06


$
0.06

Tangible book value⁽¹⁾
$
20.28


$
19.58


$
19.01


$
17.75


$
16.86

Quoted market value









High
$
20.90


$
21.00


$
22.02


$
22.50


$
21.15

Low
$
20.45


$
20.05


$
20.94


$
20.60


$
19.32

Close⁽¹⁾
$
20.60


$
20.89


$
21.00


$
21.15


$
21.10

PERFORMANCE RATIOS









Return on average assets
1.31
%

1.09
%

0.87
%

1.61
%

1.25
%
Return on average shareholders' equity
13.14
%

11.09
%

9.87
%

21.27
%

16.20
%
Return on average tangible shareholders' equity
14.36
%

12.13
%

10.96
%

24.27
%

18.62
%
Efficiency ratio
61.71
%

65.95
%

71.15
%

58.23
%

63.61
%
Yield on earning assets (FTE)
4.81
%

4.77
%

4.54
%

4.53
%

4.62
%
Rate on interest bearing liabilities
1.46
%

1.40
%

1.29
%

1.15
%

0.96
%
Net interest margin to earning assets (FTE)
3.83
%

3.82
%

3.66
%

3.73
%

3.97
%
BALANCE SHEET DATA⁽¹⁾









Total investment securities
$
73,285


$
82,222


$
94,721


$
79,531


$
49,110

Gross loans
$
813,547


$
809,863


$
772,227


$
728,302


$
707,364

Total assets
$
949,790


$
946,172


$
926,450


$
909,901


$
841,459

Total deposits
$
792,555


$
789,533


$
763,124


$
766,587


$
702,035

Borrowed funds
$
54,000


$
59,000


$
69,000


$
74,000


$
74,000

Total shareholders' equity
$
95,504


$
92,236


$
89,516


$
66,340


$
63,078

Net loans to total deposits
102.02
%

101.97
%

100.60
%

94.46
%

100.18
%
Common shares outstanding
4,653,343


4,647,978


4,636,455


3,645,402


3,640,060

QTD BALANCE SHEET AVERAGES









Total assets
$
947,095


$
934,078


$
917,242


$
866,253


$
805,794

Earning assets
$
900,738


$
887,974


$
868,498


$
817,110


$
759,746

Interest bearing liabilities
$
603,965


$
604,973


$
592,878


$
565,908


$
514,012

Total shareholders' equity
$
94,519


$
91,964


$
80,781


$
65,541


$
62,333

Total tangible shareholders' equity
$
86,478


$
84,025


$
72,742


$
57,419


$
54,254

Earned common shares outstanding
4,641,161


4,635,255


4,332,665


3,643,151


3,637,799

Unvested stock grants
9,967


9,788


3,022


—


—

Total common shares outstanding
4,651,128


4,645,043


4,335,687


3,643,151


3,637,799

ASSET QUALITY⁽¹⁾









Nonperforming loans to gross loans
0.13
%

0.15
%

0.14
%

0.09
%

0.14
%
Nonperforming assets to total assets
0.11
%

0.13
%

0.12
%

0.09
%

0.13
%
ALLL to gross loans
0.62
%

0.59
%

0.58
%

0.57
%

0.57
%
CAPITAL RATIOS⁽¹⁾









Shareholders' equity to assets
10.06
%

9.75
%

9.66
%

7.29
%

7.50
%
Tier 1 leverage⁽²⁾
12.47
%

12.23
%

12.15
%

10.22
%

10.11
%
CET1 capital to risk weighted assets⁽²⁾
12.47
%

12.23
%

12.15
%

10.22
%

10.11
%
Tier 1 capital to average assets⁽²⁾
10.28
%

10.05
%

9.90
%

8.48
%

8.70
%










⁽¹⁾At end of period









⁽²⁾The State Bank

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










Variance

6/30/2019

6/30/2018

Amount

%
INCOME STATEMENT DATA














Interest income
$
21,225


$
17,108


$
4,117


24.06
%
Interest expense
4,285


2,263


2,022


89.35
%
Net interest income
16,940


14,845


2,095


14.11
%
Provision for loan losses
477


576


(99
)

(17.19
)%
Noninterest income
3,772


3,814


(42
)

(1.10
)%
Noninterest expenses
13,200


12,328


872


7.07
%
Federal income tax expense
1,424


1,163


261


22.44
%
Net income
$
5,611


$
4,592


$
1,019


22.19
%
PER SHARE







Earnings
$
1.21


$
1.26


$
(0.05
)

(3.97
)%
Dividends
$
0.14


$
0.12


$
0.02


16.67
%
Tangible book value⁽¹⁾
$
20.28


$
16.86


$
3.42


20.28
%
Quoted market value







High
$
21.00


$
21.15


$
(0.15
)

(0.71
)%
Low
$
20.05


$
18.88


$
1.17


6.20
%
Close⁽¹⁾
$
20.60


$
21.10


$
(0.50
)

(2.37
)%
PERFORMANCE RATIOS







Return on average assets
1.20
%

1.16
%



0.04
%
Return on average shareholders' equity
12.14
%

15.13
%



(2.99
)%
Return on average tangible shareholders' equity
13.27
%

17.44
%



(4.17
)%
Efficiency ratio
63.73
%

66.07
%



(2.34
)%
Yield on earning assets (FTE)
4.79
%

4.61
%



0.18
%
Rate on interest bearing liabilities
1.43
%

0.90
%



0.53
%
Net interest margin to earning assets (FTE)
3.83
%

4.00
%



(0.17
)%
BALANCE SHEET DATA⁽¹⁾







Total investment securities
$
73,285


$
49,110


$
24,175


49.23
%
Gross loans
$
813,547


$
707,364


$
106,183


15.01
%
Total assets
$
949,790


$
841,459


$
108,331


12.87
%
Total deposits
$
792,555


$
702,035


$
90,520


12.89
%
Borrowed funds
$
54,000


$
74,000


$
(20,000
)

(27.03
)%
Total shareholders' equity
$
95,504


$
63,078


$
32,426


51.41
%
Net loans to total deposits
102.02
%

100.18
%



1.84
%
Common shares outstanding
4,653,343


3,640,060


1,013,283


27.84
%
YTD BALANCE SHEET AVERAGES







Total assets
$
940,585


$
797,594


$
142,991


17.93
%
Earning assets
$
894,357


$
749,755


$
144,602


19.29
%
Interest bearing liabilities
$
604,469


$
509,294


$
95,175


18.69
%
Total shareholders' equity
$
93,239


$
61,219


$
32,020


52.30
%
Total tangible shareholders' equity
$
85,249


$
53,106


$
32,143


60.53
%
Earned common shares outstanding
4,638,208


3,635,446


1,002,762


27.58
%
Unvested stock grants
9,878


—


9,878


N/M
Total common shares outstanding
4,648,086


3,635,446


1,012,640


27.85
%
ASSET QUALITY⁽¹⁾







Nonperforming loans to gross loans
0.13
%

0.14
%



(0.01
)%
Nonperforming assets to total assets
0.11
%

0.13
%



(0.02
)%
ALLL to gross loans
0.62
%

0.57
%



0.05
%
CAPITAL RATIOS⁽¹⁾







Shareholders' equity to assets
10.06
%

7.50
%



2.56
%
Tier 1 leverage⁽²⁾
12.47
%

10.11
%



2.36
%
CET1 capital to risk weighted assets⁽²⁾
12.47
%

10.11
%



2.36
%
Tier 1 capital to average assets⁽²⁾
10.28
%

8.70
%



1.58
%








⁽¹⁾At end of period







⁽²⁾The State Bank

Income Statement Breakdown and Analysis


Quarter to Date

6/30/2019

3/31/2019


12/31/2018

9/30/2018

6/30/2018
GAAP net income
$
3,097


$
2,514


$
2,009


$
3,513


$
2,518

Provision for loan losses (net of tax)

209



168



229



151



238

Acquisition related items (net of tax)














Accretion on purchased loans

(145
)


(175
)


(167
)


(116
)


(255
)
Amortization of core deposit intangible

90



89



107



107



107

Amortization on acquired time deposits

7



7



9



9



9

Amortization on purchased MSRs

3



3



6



6



6

Total acquisition related items (net of tax)

(45
)


(76
)


(45
)


6



(133
)
Other nonrecurring items (net of tax)














Net gain from BOLI death benefit

—



—



—



(932
)


—

Total other nonrecurring items (net of tax)

—



—



—



(932
)


—

Adjusted net income from operations
$

3,261


$

2,606


$

2,193


$

2,738


$

2,623
















GAAP net interest income
$

8,593


$

8,347


$

8,005


$

7,673


$

7,497

Accretion on purchased loans

(183
)


(222
)


(211
)


(147
)


(323
)
Amortization on acquired time deposits

9



9



12



12



12

Adjusted net interest income
$

8,419


$

8,134


$

7,806


$

7,538


$

7,186
















PERFORMANCE RATIOS














Based on adjusted net income from operations














Earnings per share
$

0.70


$

0.56


$

0.51


$

0.75


$

0.72

Return on average assets

1.38
%


1.13
%


0.95
%


1.25
%


1.31
%
Return on average shareholders' equity

13.84
%


11.49
%


10.77
%


16.57
%


16.88
%
Return on average tangible shareholders' equity

15.13
%


12.58
%


11.96
%


18.92
%


19.39
%















Based on adjusted net interest income














Yield on earning assets (FTE)

4.73
%


4.67
%


4.44
%


4.46
%


4.45
%
Rate on interest bearing liabilities

1.47
%


1.41
%


1.30
%


1.16
%


0.97
%
Net interest margin to earning assets (FTE)

3.75
%


3.72
%


3.57
%


3.66
%


3.81
%


Year to Date June 30

Variance

2019

2018

Amount

%
GAAP net income
$
5,611


$
4,592


$
1,019


22.19
%
Provision for loan losses (net of tax)
377


455


(78
)

(17.14
)%
Acquisition related items (net of tax)







Accretion on purchased loans
(320
)

(505
)

185


(36.63
)%
Amortization of core deposit intangible
179


214


(35
)

(16.36
)%
Amortization on acquired time deposits
13


18


(5
)

(27.78
)%
Amortization on purchased MSRs
6


12


(6
)

(50.00
)%
Total acquisition related items (net of tax)
(122
)

(261
)

139


(53.26
)%
Other nonrecurring items (net of tax)







Net gain from BOLI death benefit
—


—


—


N/M
Total other nonrecurring items (net of tax)
—


—


—


N/M
Adjusted net income from operations
$
5,866


$
4,786


1,080


22.57
%








GAAP net interest income
$
16,940


$
14,845


$
2,095


14.11
%
Accretion on purchased loans
(405
)

(640
)

235


(36.72
)%
Amortization on acquired time deposits
17


23


(6
)

(26.09
)%
Adjusted net interest income
$
16,552


$
14,228


$
2,324


16.33
%








PERFORMANCE RATIOS







Based on adjusted net income from operations







Earnings per share
$
1.26


$
1.32


$
(0.06
)

(4.55
)%
Return on average assets
1.26
%

1.21
%



0.05
%
Return on average shareholders' equity
12.69
%

15.77
%



(3.08
)%
Return on average tangible shareholders' equity
13.88
%

18.17
%



(4.29
)%








Based on adjusted net interest income







Yield on earning assets (FTE)
4.70
%

4.44
%



0.26
%
Rate on interest bearing liabilities
1.44
%

0.91
%



0.53
%
Net interest margin to earning assets (FTE)
3.74
%

3.83
%



(0.09
)%

To effectively compare core operating results from period to period, the impact of the provision for loan losses and acquisition related items have been isolated.

As outlined in the preceding tables, the Corporation has been able to generate strong net income and adjusted net income from operations. The Corporation has also been successful at consistently increasing adjusted net interest income. This increase continues to be primarily driven through increases in loans while maintaining relatively healthy interest margins. Through 2019, the Corporation expects to see a continued increase in net interest income. This increase will primarily be driven by loan growth. The Corporation expects net interest margin to earning assets to approximate current levels due to the current, and anticipated future, interest rate environment.

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, non-earning 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

June 30, 2019

March 31, 2019

June 30, 2018



Tax

Average



Tax

Average



Tax

Average

Average

Equivalent

Yield /

Average

Equivalent

Yield /

Average

Equivalent

Yield /

Balance

Interest

Rate

Balance

Interest

Rate

Balance

Interest

Rate
Interest earning assets

















Total loans
$
805,954


$
10,141


5.05
%

$
791,069


$
9,741


4.99
%

$
703,967


$
8,433


4.80
%
Taxable investment securities ⁽¹⁾
67,237


462


2.76
%

79,367


559


2.86
%

37,763


198


2.10
%
Nontaxable investment securities
9,374


70


3.00
%

10,582


76


2.91
%

11,478


72


2.52
%
Federal funds sold
10,195


61


2.40
%

43


—


—
%

1,320


6


1.82
%
Cash
4,828


28


2.33
%

3,763


25


2.69
%

2,265


10


1.77
%
FHLB stock
3,150


41


5.22
%

3,150


52


6.69
%

2,953


25


3.40
%
Total earning assets
900,738


10,803


4.81
%

887,974


10,453


4.77
%

759,746


8,744


4.62
%


















Non-earning assets

















ALLL
(4,822
)





(4,591
)





(3,783
)




Fixed assets
14,837






14,818






14,538





Accrued income and other assets
36,342






35,877






35,293





Total assets
$
947,095






$
934,078






$
805,794























Interest bearing liabilities

















Interest bearing demand deposits
$
75,496


$
117


0.62
%

$
73,414


$
84


0.46
%

$
58,997


$
25


0.17
%
Savings deposits
243,794


319


0.52
%

241,815


297


0.50
%

238,862


124


0.21
%
Time deposits
229,863


1,319


2.30
%

225,866


1,220


2.19
%

147,620


603


1.64
%
Borrowed funds
54,812


440


3.22
%

63,878


489


3.10
%

68,533


480


2.81
%
Total interest bearing liabilities
603,965


2,195


1.46
%

604,973


2,090


1.40
%

514,012


1,232


0.96
%


















Noninterest bearing liabilities

















Noninterest bearing deposits
243,010






234,268






227,459





Accrued interest and other liabilities
5,601






2,873






1,990





Shareholders' equity
94,519






91,964






62,333





Total liabilities and shareholders' equity
$
947,095






$
934,078






$
805,794





Net interest income (FTE)


$
8,608






$
8,363






$
7,512



Net interest margin to earning assets (FTE)




3.83
%





3.82
%





3.97
%

⁽¹⁾ Includes taxable AFS securities and equity securities.


Six Months Ended

June 30, 2019

June 30, 2018



Tax

Average



Tax

Average

Average

Equivalent

Yield /

Average

Equivalent

Yield /

Balance

Interest

Rate

Balance

Interest

Rate
Interest earning assets





















Total loans
$
798,511


$
19,882


5.02
%

$
691,280


$
16,471


4.80
%
Taxable investment securities ⁽¹⁾
73,303


1,021


2.81
%

38,603


391


2.04
%
Nontaxable investment securities
9,977


146


2.95
%

12,228


153


2.52
%
Federal funds sold
5,119


61


2.40
%

2,547


19


1.50
%
Cash
4,297


53


2.49
%

2,158


20


1.87
%
FHLB stock
3,150


93


5.95
%

2,939


86


5.90
%
Total earning assets
894,357


21,256


4.79
%

749,755


17,140


4.61
%












Non-earning assets











ALLL
(4,706
)





(3,714
)




Fixed assets
14,827






14,560





Accrued income and other assets
36,107






36,993





Total assets
$
940,585






$
797,594

















Interest bearing liabilities











Interest bearing demand deposits
$
74,454


$
201


0.54
%

$
61,861


$
47


0.15
%
Savings deposits
242,805


616


0.51
%

241,284


247


0.21
%
Time deposits
227,865


2,539


2.25
%

148,509


1,174


1.59
%
Borrowed funds
59,345


929


3.16
%

57,640


795


2.78
%
Total interest bearing liabilities
604,469


4,285


1.43
%

509,294


2,263


0.90
%












Noninterest bearing liabilities











Noninterest bearing deposits
238,640






224,357





Accrued interest and other liabilities
4,237






2,724





Shareholders' equity
93,239






61,219





Total liabilities and shareholders' equity
$
940,585






$
797,594





Net interest income (FTE)


$
16,971






$
14,877



Net interest margin to earning assets (FTE)




3.83
%





4.00
%

⁽¹⁾ Includes taxable AFS securities and equity securities.

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

Six Months Ended

June 30, 2019

June 30, 2019

June 30, 2019

Compared To

Compared To

Compared To

March 31, 2019

June 30, 2018

June 30, 2018

Increase (Decrease) Due to

Increase (Decrease) Due to

Increase (Decrease) Due to

Volume

Rate

Net

Volume

Rate

Net

Volume

Rate

Net
Changes in interest income



































Total Loans
$
244


$
156


$
400


$
1,256


$
452


$
1,708


$
778


$
2,633


$
3,411

Taxable Investment Securities
(79
)

(18
)

(97
)

188


76


264


186


444


630

Nontaxable Investment Securities
(20
)

14


(6
)

(55
)

53


(2
)

52


(59
)

(7
)
Fed Funds Sold
—


61


61


52


3


55


16


26


42

Cash
21


(18
)

3


14


4


18


8


25


33

FHLB Stock
—


(11
)

(11
)

2


14


16


1


6


7

Total changes in interest income
166


184


350


1,457


602


2,059


1,041


3,075


4,116



















Changes in interest expense

















Interest Bearing Demand Deposits
3


30


33


9


83


92


11


143


154

Savings Deposits
4


18


22


3


192


195


2


367


369

Time Deposits
26


73


99


416


300


716


768


597


1,365

Borrowed Funds
(159
)

110


(49
)

(348
)

308


(40
)

24


110


134

Total changes in interest expense
(126
)

231


105


80


883


963


805


1,217


2,022

Net change in net interest income (FTE)
$
292


$
(47
)

$
245


$
1,377


$
(281
)

$
1,096


$
236


$
1,858


$
2,094


Average Yield/Rate for the Three Month Periods Ended

6/30/2019

3/31/2019

12/31/2018

9/30/2018

6/30/2018
Total earning assets

4.81
%


4.77
%


4.54
%


4.53
%


4.62
%
Total interest bearing liabilities

1.46
%


1.40
%


1.29
%


1.15
%


0.96
%
Net interest margin to earning assets (FTE)

3.83
%


3.82
%


3.66
%


3.73
%


3.97
%





















Quarter to Date Net Interest Income (FTE)

6/30/2019

3/31/2019

12/31/2018

9/30/2018

6/30/2018
Total interest income (FTE)

10,803



10,453



9,947



9,327



8,744

Total interest expense

2,195



2,090



1,926



1,638



1,232

Net interest income (FTE)
$
8,608


$
8,363


$
8,021


$
7,689


$
7,512

As outlined in the previous tables, the Corporation has increased net interest income primarily through increases in volume. Net interest margins are expected to approximate current levels for the remainder of the year.

Noninterest Income


Quarter to Date

6/30/2019

3/31/2019

12/31/2018

9/30/2018

6/30/2018
Trust and investment services
$
459


$
328


$
372


$
444


$
392

ATM and debit card income

404



360



397



386



388

Net gain on sales of mortgage loans

422



195



162



277



187

Service charges on deposit accounts

222



234



259



273



253

Mortgage servicing fees

230



211



208



199



192

Net MSR income

344



8



67



133



79

Net gain on sales of commercial loans

—



—



—



—



368

Other income and fees

169



186



238



1,048



154

Total noninterest income
$

2,250


$

1,522


$

1,703


$

2,760


$

2,013


Year to Date June 30

Variance

2019

2018

Amount

%
Trust and investment services
$
787


$
775


$
12


1.55
%
ATM and debit card income
764


742


22


2.96
%
Net gain on sales of mortgage loans
617


402


215


53.48
%
Service charges on deposit accounts
456


512


(56
)

(10.94
)%
Mortgage servicing fees
441


378


63


16.67
%
Net MSR income
352


163


189


115.95
%
Net gain on sales of commercial loans
—


518


(518
)

(100.00
)%
Other income and fees
355


324


31


9.57
%
Total noninterest income
$
3,772


$
3,814


$
(42
)

(1.10
)%

Trust and investment services include income the Corporation earns from its 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 increase throughout 2019.

ATM and debit card income are fees earned on ATM and debit card transactions. The Corporation expects these fees to increase modestly throughout 2019.

Net gain on sales of mortgage loans represents the income earned on the sale of residential mortgage loans into the secondary market. The first three months of the year are typically the lowest in terms of mortgage activity. In the second quarter of 2019, the Corporation sold approximately $28,000 of residential mortgages that was previously held in its loan portfolio which generated a gain of $25. Excluding the impact of this sale, and excluding the impact of the same type of sale that occurred in the first quarter of 2018, net gains from the sales of mortgage loans increased by $237 when the first six months of 2019 are compared to the same period in 2018 and this trend is expected to continue throughout the remainder of the year.

Service charges on deposit accounts include fees earned from the Corporation's deposit customers for transaction-based, account maintenance and overdraft services. The decrease in service charges on deposit accounts is a result of declines in NSF fees as well as a shift of customer demand toward deposit accounts with no or reduced service charges. Service charges on deposit accounts are expected to approximate current levels throughout the remainder of the year.

Mortgage servicing fees include 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 as mortgage demand remains strong.

Net MSR income is the net of income generated from the capitalization of new mortgage services rights and the amortization of serviced loans as a result of paydowns and payoffs. As noted above, the Corporation sold of pool of residential mortgage loans out of its loan portfolio in the second quarter of 2019. This sale generated $266 of net MSR income from the capitalization of the associated servicing rights. The Corporation expects net MSR income to stabilize and approximate prior trends in future period.

Net gain on sales of commercial loans includes the income earned on the sale of commercial loans into the secondary market. There were no sales for the six months ending June 30, 2019. The Corporation continues to analyze the portfolio for opportunities and will sell commercial loans into the secondary market when deemed financially beneficial.

Other income and fees include other income items, none of which are individually significant. Other income and fees are expected to approximate current levels for the for the remainder of 2019.

Noninterest Expenses


Quarter to Date

6/30/2019

3/31/2019

12/31/2018

9/30/2018

6/30/2018
Compensation
$
3,749


$
3,630


$
3,429


$
3,359


$
3,316

Furniture and equipment

525



491



508



486



441

Professional services

426



458



518



381



388

Occupancy

426



437



416



379



417

Data Processing

294



265



512



164



143

Advertising and promotional

291



163



198



177



219

Loan and collection

119



110



134



135



139

Amortization of core deposit intangible

114



112



136



135



136

Telephone and communication

108



111



107



106



105

ATM and debit card

100



95



96



105



98

FDIC insurance premiums

17



101



120



132



110

Other losses

4



11



152



2



(1
)
Other general and administrative

518



525



581



514



538

Total noninterest expenses
$

6,691


$

6,509


$

6,907


$

6,075


$

6,049


Year to Date June 30

Variance

2019

2018

Amount

%
Compensation
$
7,379


$
6,633


$
746


11.25
%
Furniture and equipment
1,016


904


112


12.39
%
Professional services
884


888


(4
)

(0.45
)%
Occupancy
863


844


19


2.25
%
Data Processing
559


292


267


91.44
%
Advertising and promotional
454


343


111


32.36
%
Loan and collection
229


268


(39
)

(14.55
)%
Amortization of core deposit intangible
226


271


(45
)

(16.61
)%
Telephone and communication
219


200


19


9.50
%
ATM and debit card
195


186


9


4.84
%
FDIC insurance premiums
118


220


(102
)

(46.36
)%
Other losses
15


259


(244
)

(94.21
)%
Other general and administrative
1,043


1,020


23


2.25
%
Total noninterest expenses
$
13,200


$
12,328


$
872


7.07
%

Compensation includes all compensation and benefits paid to the Corporation's employees. Compensation has increased, and is expected to continue to increase, due to the continued growth in size and complexity of the organization.

Furniture and equipment and occupancy expenses primarily consist of depreciation, repairs and maintenance, property taxes, utilities, insurance, and other related items. These expenses are expected to approximate current levels throughout the remainder of the year.

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 approximate their current levels for the remainder of the year.

Data Processing primarily includes the expenses relating to the Corporation's core data processor. The increase is largely due to the growth in size and complexity of the organization. These expenses are expected to approximate current levels throughout the remainder of the year.

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 approximate current levels throughout the remainder of the year.

Loan and collection include expenses related to the origination and collection of loans, as well as expenses related to OREO. The Corporation does not expect any significant fluctuations in 2019.

Amortization of core deposit intangible relates to the core deposits acquired from Community Bancorp, Inc. on December 31, 2016 and is expected to approximate current levels for the remainder of 2019.

Telephone and communication include expenses relating to the Corporation's communication systems. These expenses have increased due to the growth in size and complexity of the organization and are expected to approximate current levels for the remainder of the year.

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 2019.

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 are expected to increase over 2019 as a result of anticipated balance sheet growth.

Included in other losses was a $260 one time loan related expense in the first quarter of 2018 and one time losses totaling $132 in the fourth quarter of 2018 related to assets acquired from Community Bancorp, Inc. Excluding these isolated items, other losses have not been significant and management does not anticipate any significant other losses in 2019.

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

Balance Sheet Breakdown and Analysis


6/30/2019

3/31/2019

12/31/2018

9/30/2018

6/30/2018
ASSETS



















Cash and cash equivalents
$
20,067


$
16,509


$
23,412


$
63,469


$
44,280

Total investment securities
73,285


82,222


94,721


79,531


49,110

Loans held for sale
6,771


1,835


903


2,021


4,936

Gross loans
813,547


809,863


772,227


728,302


707,364

Less ALLL
5,014


4,745


4,488


4,146


4,033

Net loans
808,533


805,118


767,739


724,156


703,331

All other assets
41,134


40,488


39,675


40,724


39,802

Total assets
$
949,790


$
946,172


$
926,450


$
909,901


$
841,459











LIABILITIES AND SHAREHOLDERS' EQUITY









Total deposits
$
792,555


$
789,533


$
763,124


$
766,587


$
702,035

Total borrowed funds
54,000


59,000


69,000


74,000


74,000

Accrued interest and other liabilities
7,731


5,403


4,810


2,974


2,346

Total liabilities
854,286


853,936


836,934


843,561


778,381











Total shareholders' equity
95,504


92,236


89,516


66,340


63,078

Total liabilities and shareholders' equity
$
949,790


$
946,172


$
926,450


$
909,901


$
841,459


6/30/2019 vs 3/31/2019

6/30/2019 vs 6/30/2018

Variance

Variance

Amount

%

Amount

%
ASSETS













Cash and cash equivalents
$
3,558


21.55
%

$
(24,213
)

(54.68
)%
Total investment securities
(8,937
)

(10.87
)%

24,175


49.23
%
Loans held for sale
4,936


268.99
%

1,835


37.18
%
Gross loans
3,684


0.45
%

106,183


15.01
%
Less ALLL
269


5.67
%

981


24.32
%
Net loans
3,415


0.42
%

105,202


14.96
%
All other assets
646


1.60
%

1,332


3.35
%
Total assets
$
3,618


0.38
%

$
108,331


12.87
%








LIABILITIES AND SHAREHOLDERS' EQUITY







Total deposits
$
3,022


0.38
%

$
90,520


12.89
%
Total borrowed funds
(5,000
)

(8.47
)%

(20,000
)

(27.03
)%
Accrued interest and other liabilities
2,328


43.09
%

5,385


229.54
%
Total liabilities
350


0.04
%

75,905


9.75
%








Total shareholders' equity
3,268


3.54
%

32,426


51.41
%
Total liabilities and shareholders' equity
$
3,618


0.38
%

$
108,331


12.87
%

Cash and cash equivalents


6/30/19

3/31/19

12/31/18

9/30/18

6/30/18
Cash and due from banks
$
17,067


$
16,509


$
19,412


$
21,469


$
24,280

Federal funds sold

3,000



—



4,000



42,000



20,000

Cash and cash equivalents
$

20,067


$

16,509


$

23,412


$

63,469


$

44,280



























6/30/2019 vs 3/31/2019






6/30/2019 vs 6/30/2018

Variance






Variance

Amount

%






Amount

%
Cash and due from banks
$

558




3.38
%






$

(7,213
)



(29.71
)%
Federal funds sold


3,000




N/M









(17,000
)



(85.00
)%
Cash and cash equivalents
$

3,558




21.55
%






$

(24,213
)



(54.68
)%

Cash and cash equivalents fluctuate from period to period based on loan demand and variances in deposit accounts. Cash and cash equivalents are expected to approximate current levels for the foreseeable future.

Total investment securities



6/30/2019

3/31/2019

12/31/2018

9/30/2018

6/30/2018
AFS




















U.S. Government and federal agency

$
33,842


$
38,796


$
57,029


$
49,011


$
20,945

Collateralized mortgage obligations - agencies

11,856


12,516


9,833


1,662


1,789

State and municipal

8,889


10,322


10,558


12,741


14,118

Certificates of deposit

7,154


8,394


8,393


7,171


3,456

Mortgage backed residential

6,733


7,031


4,276


4,408


4,791

Unrealized gain/(loss) on AFS securities

776


288


(235
)

(478
)

(262
)
Total available-for-sale

69,250


77,347


89,854


74,515


44,837

HTM State and municipal

2,104


2,965


2,971


3,728


2,985

Equity securities

1,931


1,910


1,896


1,288


1,288

Total investment securities

73,285


82,222


94,721


79,531


49,110




















6/30/2019 vs 3/31/2019



6/30/2019 vs 6/30/2018


Variance



Variance


Amount

%



Amount

%
AFS
















U.S. Government and federal agency

$
(4,954
)

(12.77
)%



$
12,897


61.58
%
Collateralized mortgage obligations - agencies

(660
)

(5.27
)%



10,067


562.72
%
State and municipal

(1,433
)

(13.88
)%



(5,229
)

(37.04
)%
Certificates of deposit

(1,240
)

(14.77
)%



3,698


107.00
%
Mortgage backed residential

(298
)

(4.24
)%



1,942


40.53
%
Unrealized gain/(loss) on AFS securities

488


169.44
%



1,038


(396.18
)%
Total available-for-sale

(8,097
)

(10.47
)%



24,413


54.45
%
HTM State and municipal

(861
)

(29.04
)%



(881
)

(29.51
)%
Equity securities

21


1.10
%



643


49.92
%
Total investment securities

(8,937
)

(10.87
)%



24,175


49.23
%

During 2018, the Corporation increased total investment securities due to advantageous pricing opportunities. However, since late 2018, yields on bonds that meet the Corporation's investment standards have declined significantly. As such, the Corporation has not replaced maturing investments. Total investment securities are expected to approximate current levels or decline slightly over the remainder of 2019.

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. Loans held for sale are expected to approximate current levels for the foreseeable future.

Net loans


6/30/2019

3/31/2019

12/31/2018

9/30/2018

6/30/2018
Commercial real estate
$
408,103


$
394,462


$
369,043


$
351,739


$
344,658

Residential real estate

289,944



306,466



293,271



274,035



257,776

Commercial

63,998



56,790



56,583



48,594



49,776

Home equity

42,890



43,130



43,597



41,136



41,736

Installment

8,612



9,015



9,733



12,798



13,418

Gross loans
$

813,547


$

809,863


$

772,227


$

728,302


$

707,364

















6/30/2019 vs 3/31/2019




6/30/2019 vs 6/30/2018

Variance




Variance

Amount

%




Amount

%
Commercial real estate
$
13,641



3.46
%




$
63,445



18.41
%
Residential real estate

(16,522
)


(5.39
)%





32,168



12.48
%
Commercial

7,208



12.69
%





14,222



28.57
%
Home equity

(240
)


(0.56
)%





1,154



2.76
%
Installment

(403
)


(4.47
)%





(4,806
)


(35.82
)%
Gross loans
$

3,684



0.45
%




$

106,183



15.01
%

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


6/30/2019

3/31/2019

12/31/2018

9/30/2018

6/30/2018
Accruing interest



















Current
$
811,184


$
807,671


$
769,799


$
725,954


$
705,331

Past due 30-89 days
1,275


1,009


1,325


1,689


1,052

Past due 90 days or more
301


310


191


150


726

Total accruing interest
812,760


808,990


771,315


727,793


707,109

Nonaccrual
787


873


912


509


255

Total loans
$
813,547


$
809,863


$
772,227


$
728,302


$
707,364

Total loans past due and in nonaccrual status
$
2,363


$
2,192


$
2,428


$
2,348


$
2,033

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


6/30/2019

3/31/2019

12/31/2018

9/30/2018

6/30/2018
Nonaccrual loans
$
787


$
873


$
912


$
509


$
255

Accruing loans past due 90 days or more

301



310



191



150



726

Total nonperforming loans

1,088



1,183



1,103



659



981

OREO

—



—



32



143



92

Total nonperforming assets
$
1,088


$
1,183


$
1,135


$
802


$
1,073

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


6/30/2019

3/31/2019

12/31/2018

9/30/2018

6/30/2018
Nonperforming loans to gross loans
0.13
%

0.15
%

0.14
%

0.09
%

0.14
%
Nonperforming assets to total assets
0.11
%

0.13
%

0.12
%

0.09
%

0.13
%
ALLL to gross loans
0.62
%

0.59
%

0.58
%

0.57
%

0.57
%

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, commercial real estate and residential real estate loans. Despite the above peer growth, the Corporation has not relaxed its underwriting standards as evidenced by the low level of nonperforming loans. This comparatively low level of nonperforming loans has also resulted in an ALLL to gross loans at a level below many of the Corporation's peers. While the Corporation's ALLL to gross loans is below its peers, it is important to keep in mind that the the ALLL does not include the net unamortized discount on purchased loans as it is a component of gross loans.

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


6/30/2019

3/31/2019

12/31/2018

9/30/2018

6/30/2018
Net unamortized discount on purchased loans
$
1,914


$
2,095


$
2,317


$
2,529


$
2,675

All other assets

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


6/30/19

3/31/19

12/31/18

9/30/18

6/30/18
Premises and equipment
$
14,792


$
14,838


$
14,761


$
14,644


$
14,701

BOLI

10,181



10,070



10,007



9,959



9,935

MSRs

3,758



3,414



3,406



3,340



3,206

Accrued interest receivable

3,350



3,298



3,020



3,082



2,463

Goodwill

3,219



3,219



3,219



3,219



3,219

FHLB stock

3,150



3,150



3,150



3,150



3,150

Core deposit intangible

1,128



1,241



1,353



1,489



1,624

All other assets

1,556



1,258



759



1,841



1,504

Total deposits
$

41,134


$

40,488


$

39,675


$

40,724


$

39,802





















6/30/2019 vs 3/31/2019




6/30/2019 vs 6/30/2018

Variance




Variance

Amount

%




Amount

%
Premises and equipment
$
(46
)


(0.31
)%




$
91



0.62
%
BOLI

111



1.10
%





246



2.48
%
MSRs

344



10.08
%





552



17.22
%
Accrued interest receivable

52



1.58
%





887



36.01
%
Goodwill

—



—
%





—



—
%
FHLB stock

—



—
%





—



—
%
Core deposit intangible

(113
)


(9.11
)%





(496
)


(30.54
)%
All other assets

298



23.69
%





52



3.46
%
Total deposits
$

646



1.60
%




$

1,332



3.35
%

All other assets is expected to increase commensurate with the overall growth of the Corporation.

Total deposits

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


6/30/19

3/31/19

12/31/18

9/30/18

6/30/18
Demand
$
245,703


$
235,305


$
233,954


$
235,208


$
236,899

Savings

232,094



230,006



223,728



221,028



218,512

Money market demand

69,374



61,294



61,369



60,836



53,654

NOW

18,017



19,358



10,234



8,952



6,346

Time deposits

227,367



243,570



233,839



240,563



186,624

Total deposits
$

792,555


$

789,533


$

763,124


$

766,587


$

702,035

















6/30/2019 vs 3/31/2019




6/30/2019 vs 6/30/2018

Variance




Variance

Amount

%




Amount

%
Demand
$
10,398



4.42
%




$
8,804



3.72
%
Savings

2,088



0.91
%





13,582



6.22
%
Money market demand

8,080



13.18
%





15,720



29.30
%
NOW

(1,341
)


(6.93
)%





11,671



183.91
%
Time deposits

(16,203
)


(6.65
)%





40,743



21.83
%
Total deposits
$

3,022



0.38
%




$

90,520



12.89
%

The Corporation has continued its focus of growing non-contractual deposits while supplementing funding with time deposits. On a quarterly average basis, non-interest bearing deposits increased $8,742, or 3.73%, from March 31, 2019. The Corporation has also been able to drive this meaningful increase through enhanced organic growth strategies. The Corporation expects that deposit growth will continue to be strong with the majority of the growth coming in the form of demand and money market accounts.

Total borrowed funds

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


6/30/19

3/31/19

12/31/18

9/30/18

6/30/18
FHLB advances

40,000


$
40,000


$
55,000


$
60,000


$
60,000

Subordinated debentures

14,000



14,000



14,000



14,000



14,000

Federal funds purchased

—



5,000



—



—



—

Total borrowed funds
$

54,000


$

59,000


$

69,000


$

74,000


$

74,000





















6/30/2019 vs 3/31/2019




6/30/2019 vs 6/30/2018

Variance




Variance

Amount

%




Amount

%
FHLB advances
$
—



—
%




$
(20,000
)


(33.33
)%
Subordinated debentures

—



—
%





—



—
%
Federal funds purchased

(5,000
)


(100.00
)%





—



N/M

Total borrowed funds
$
(5,000
)


(8.47
)%




$
(20,000
)


(27.03
)%

While the Corporation increased its reliance on borrowed funds in 2018 to fund its strong loan demand, borrowed funds have gradually declined in the last five quarters as the Corporation has been able to fund organic growth through increases in deposit accounts. Total borrowed funds are expected to approximate current levels for the remainder of 2019.
Accrued interest and other liabilities

Accrued interest 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 and other liabilities are not expected to fluctuate significantly in future periods. All other assets is expected to increase commensurate with the overall growth of the Corporation.

Total shareholders' equity

Total shareholders' equity includes common stock, retained earnings, and AOCI. During the fourth quarter of 2018, the Corporation increased its capital position through a private placement of common stock to both retail and accredited individual investors. The private placement generated net proceeds of $20,500. These proceeds were used to fund the Corporation's strong organic growth, opportunistic strategic growth, and enhance its capital position. The balance of growth in retained earnings was the result of the Corporation's strong earnings. Total shareholders' equity is expected to continue to grow throughout 2019 through the Corporation's earnings as no significant changes in dividend strategy are anticipated.

Abbreviations and Acronyms

ABA: American Bankers Association

GAAP: Generally Accepted Accounting Principles

ALLL: Allowance for loan and lease losses

HFS: Held-for-sale

AFS: Available-for-sale

HTM: Held-to-maturity

AOCI: Accumulated other comprehensive income

IRA: Individual retirement account

ASC: Accounting Standards Codification

MSR: Mortgage servicing rights

ASU: Accounting Standards Update

NASDAQ: National Association of Securities Dealers Automated Quotations

ATM: Automated teller machine

N/M: Not meaningful

BOLI: Bank owned life insurance

NOW: Negotiable order of withdrawal

CET1: Common equity tier 1

NSF: Non-sufficient funds

FDIC: Federal Deposit Insurance Corporation

OREO: Other real estate owned

FHLB: Federal Home Loan Bank

QTD: Quarter to date

FRB: Federal Reserve Bank

SBA: Small Business Association

FTE: Fully taxable equivalent

YTD: Year to date

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. The aim of The State Bank is to become and remain “Your Financial Partner for Life.” 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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