FETM - Fentura Financial Inc. Announces Second Quarter 2020 Earnings

August, 04 2020 12:16 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 the June 30, 2020 presentation.

FENTON, Mich., Aug. 04, 2020 (GLOBE NEWSWIRE) -- Fentura Financial, Inc. (OTCQX: FETM) announces quarterly results of net income of $4,043 and $7,395 for the three and six month periods ended June 30, 2020.

“Looking back on the second quarter, I am proud of the Fentura team. We worked hard and will continue efforts to serve our clients and help those in need get through the COVID-19 pandemic,” stated Ronald Justice, President and Chief Executive Officer of the Corporation. “We provided loan payment relief, interest free loans to individuals, significantly lowered and eliminated certain fees, performed daily cash drawings for a month, and provided more than 1,200 PPP loans totaling more than $205,000 to support local communities.”

Justice added, “Looking forward, as we navigate through these challenging times, we will continue to focus on prudent growth, a strong net interest margin, and maintaining credit quality, while supporting our customers and communities.”

Following is a discussion of the Corporation's financial performance as of, and for the quarter ended June 30, 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:



6/30/2020

3/31/2020

12/31/2019

9/30/2019

6/30/2019
INCOME STATEMENT DATA










Interest income

$
11,215


$
11,070


$
11,076


$
11,240


$
10,788

Interest expense

1,618


2,145


2,158


2,184


2,195

Net interest income

9,597


8,925


8,918


9,056


8,593

Provision for loan losses

2,001


1,542


436


422


264

Noninterest income

5,292


4,513


2,129


2,262


2,250

Noninterest expenses

7,809


7,686


7,415


6,608


6,691

Federal income tax expense

1,036


858


644


873


791

Net income

$
4,043


$
3,352


$
2,552


$
3,415


$
3,097

PER SHARE










Earnings

$
0.87


$
0.72


$
0.55


$
0.73


$
0.67

Dividends

$
0.075


$
0.075


$
0.07


$
0.07


$
0.07

Tangible book value⁽¹⁾

$
22.44


$
21.56


$
20.87


$
20.37


$
19.59

Quoted market value










High

$
18.95


$
26.00


$
25.50


$
21.00


$
21.00

Low

$
14.90


$
12.55


$
20.60


$
20.45


$
20.45

Close⁽¹⁾

$
17.35


$
15.50


$
25.23


$
21.00


$
20.60

PERFORMANCE RATIOS










Return on average assets

1.35
%

1.28
%

1.02
%

1.40
%

1.31
%
Return on average shareholders' equity

15.20
%

13.01
%

10.03
%

13.83
%

13.14
%
Return on average tangible shareholders' equity

15.79
%

13.54
%

10.46
%

14.47
%

13.79
%
Efficiency ratio

52.45
%

57.20
%

67.12
%

58.38
%

61.71
%
Yield on earning assets (FTE)

3.94
%

4.47
%

4.66
%

4.85
%

4.81
%
Rate on interest bearing liabilities

0.91
%

1.28
%

1.36
%

1.42
%

1.46
%
Net interest margin to earning assets (FTE)

3.37
%

3.61
%

3.75
%

3.91
%

3.83
%
BALANCE SHEET DATA⁽¹⁾










Total investment securities

$
75,526


$
76,312


$
61,621


$
62,351


$
73,285

Gross loans

$
1,044,564


$
865,577


$
870,555


$
826,597


$
813,547

Total assets

$
1,237,694


$
1,071,180


$
1,034,759


$
978,046


$
949,790

Total deposits

$
1,018,287


$
883,837


$
863,102


$
801,101


$
792,555

Borrowed funds

$
96,217


$
71,500


$
61,500


$
69,000


$
54,000

Total shareholders' equity

$
108,969


$
104,828


$
101,444


$
99,142


$
95,504

Net loans to total deposits

101.70
%

97.11
%

100.19
%

102.51
%

102.02
%
Common shares outstanding

4,680,920


4,675,499


4,664,369


4,658,722


4,653,343

QTD BALANCE SHEET AVERAGES










Total assets

$
1,200,966


$
1,049,245


$
994,094


$
971,074


$
947,095

Earning assets

$
1,146,941


$
997,089


$
944,692


$
920,857


$
900,738

Interest bearing liabilities

$
711,500


$
672,564


$
629,454


$
611,804


$
603,965

Total shareholders' equity

$
106,998


$
103,646


$
100,991


$
97,958


$
94,519

Total tangible shareholders' equity

$
102,999


$
99,558


$
96,796


$
93,650


$
90,098

Earned common shares outstanding

4,664,946


4,659,279


4,652,569


4,646,835


4,641,161

Unvested stock grants

14,208


13,481


9,947


9,967


9,967

Total common shares outstanding

4,679,154


4,672,760


4,662,516


4,656,802


4,651,128

ASSET QUALITY⁽¹⁾










Nonperforming loans to gross loans

0.10
%

0.10
%

0.17
%

0.11
%

0.13
%
Nonperforming assets to total assets

0.08
%

0.12
%

0.14
%

0.09
%

0.11
%
Allowance for loan losses to gross loans

0.86
%

0.84
%

0.67
%

0.65
%

0.62
%
CAPITAL RATIOS⁽¹⁾










Total capital to risk weighted assets

15.06
%

14.42
%

14.03
%

14.42
%

14.18
%
Tier 1 capital to risk weighted assets

14.00
%

13.56
%

13.33
%

13.73
%

13.53
%
CET1 capital to risk weighted assets

12.34
%

11.91
%

11.64
%

11.96
%

11.73
%
Tier 1 leverage ratio

9.90
%

10.97
%

11.20
%

11.22
%

11.16
%











⁽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 six month periods ended:



6/30/2020

6/30/2019

6/30/2018

6/30/2017

6/30/2016
INCOME STATEMENT DATA










Interest income

$
22,285


$
21,225


$
17,108


$
13,681


$
9,036

Interest expense

3,763


4,285


2,263


1,389


1,158

Net interest income

18,522


16,940


14,845


12,292


7,878

Provision for loan losses

3,543


477


576


125


—

Noninterest income

9,805


3,772


3,814


3,372


3,014

Noninterest expenses

15,495


13,200


12,328


10,837


7,972

Federal income tax expense

1,894


1,424


1,163


1,476


997

Net income

$
7,395


$
5,611


$
4,592


$
3,226


$
1,923

PER SHARE










Earnings

$
1.59


$
1.21


$
1.26


$
0.89


$
0.77

Dividends

$
0.15


$
0.14


$
0.12


$
0.10


$
0.30

Tangible book value⁽¹⁾

$
22.44


$
19.59


$
16.00


$
13.45


$
13.37

Quoted market value










High

$
26.00


$
21.00


$
21.25


$
18.50


$
14.94

Low

$
12.55


$
20.05


$
18.88


$
15.10


$
12.85

Close⁽¹⁾

$
17.35


$
20.60


$
21.10


$
18.25


$
13.30

PERFORMANCE RATIOS










Return on average assets

1.32
%

1.20
%

1.16
%

0.90
%

0.85
%
Return on average shareholders' equity

14.13
%

12.14
%

15.13
%

12.36
%

11.58
%
Return on average tangible shareholders' equity

14.69
%

12.75
%

16.47
%

13.16
%

11.58
%
Efficiency ratio

54.70
%

63.73
%

66.07
%

69.18
%

73.19
%
Yield on earning assets (FTE)

4.19
%

4.79
%

4.42
%

4.16
%

4.41
%
Rate on interest bearing liabilities

1.09
%

1.43
%

0.90
%

0.57
%

0.78
%
Net interest margin to earning assets (FTE)

3.47
%

3.82
%

3.82
%

3.73
%

3.84
%
BALANCE SHEET DATA⁽¹⁾










Total investment securities

$
75,526


$
73,285


$
49,110


$
70,699


$
24,378

Gross loans

$
1,044,564


$
813,547


$
707,364


$
591,753


$
396,565

Total assets

$
1,237,694


$
949,790


$
841,459


$
730,511


$
473,714

Total deposits

$
1,018,287


$
792,555


$
702,035


$
614,167


$
393,578

Borrowed funds

$
96,217


$
54,000


$
74,000


$
59,000


$
44,000

Total shareholders' equity

$
108,969


$
95,504


$
63,078


$
54,255


$
33,919

Net loans to total deposits

101.70
%

102.02
%

100.18
%

95.85
%

99.85
%
Common shares outstanding

4,680,920


4,653,343


3,640,060


3,629,097


2,536,948

YTD BALANCE SHEET AVERAGES










Total assets

$
1,125,064


$
940,585


$
797,594


$
723,786


$
454,152

Earning assets

$
1,072,008


$
894,357


$
749,755


$
631,928


$
410,313

Interest bearing liabilities

$
692,035


$
604,469


$
509,294


$
499,636


$
297,662

Total shareholders' equity

$
105,276


$
93,239


$
61,219


$
52,786


$
33,393

Total tangible shareholders' equity

$
101,233


$
88,762


$
56,221


$
49,586


$
33,393

Earned common shares outstanding

4,662,113


4,638,208


3,635,446


3,624,719


2,497,403

Unvested stock grants

13,844


9,878


—


—


—

Total common shares outstanding

4,675,957


4,648,086


3,635,446


3,624,719


2,497,403

ASSET QUALITY⁽¹⁾










Nonperforming loans to gross loans

0.10
%

0.13
%

0.14
%

0.09
%

0.02
%
Nonperforming assets to total assets

0.08
%

0.11
%

0.13
%

0.08
%

0.02
%
Allowance for loan losses to gross loans

0.86
%

0.62
%

0.57
%

0.52
%

0.90
%
CAPITAL RATIOS⁽¹⁾










Total capital to risk weighted assets

15.06
%

14.18
%

11.20
%

11.25
%

12.98
%
Tier 1 capital to risk weighted assets

14.00
%

13.53
%

10.62
%

10.73
%

12.08
%
CET1 capital to risk weighted assets

12.34
%

11.73
%

8.59
%

8.36
%

8.54
%
Tier 1 leverage ratio

9.90
%

11.16
%

9.14
%

8.99
%

10.40
%











⁽¹⁾At end of period

Income Statement Breakdown and Analysis



Quarter to Date


6/30/2020

3/31/2020

12/31/2019

9/30/2019

6/30/2019
GAAP net income

$
4,043



$
3,352



$
2,552



$
3,415



$
3,097


Acquisition related items (net of tax)










Accretion on purchased loans

(110
)


(180
)


(126
)


(189
)


(145
)

Amortization of core deposit intangibles

71



71



89



88



90


Amortization on acquired time deposits

5



5



7



7



7


Amortization on purchased mortgage servicing rights

—



—



3



3



3


Total acquisition related items (net of tax)

(34
)


(104
)


(27
)


(91
)


(45
)

Other nonrecurring items (net of tax)










Interest income on PPP loans

(771
)


—



—



—



—


Net gain from COLI death benefit

(137
)


—



—



—



—


Prepayment penalties collected

(12
)


(36
)


(42
)


(284
)


(9
)

Change in fair value of equity investment due to acquisition transaction

—



(578
)


—



—



—


Change in fair value of mortgage banking instruments

—



(448
)


—



—



—


Interest expense on PPPLF

6



—



—



—



—


Deferred costs recognized for PPP loans

58



—



—



—



—


Mortgage servicing rights impairment

191



173



—



—



—


Total other nonrecurring items (net of tax)

(665
)


(889
)


(42
)


(284
)


(9
)

Adjusted net income from operations

$
3,344



$
2,359



$
2,483



$
3,040



$
3,043













GAAP net interest income

$
9,597



$
8,925



$
8,918



$
9,056



$
8,593


Interest income on PPP loans

(976
)


—



—



—



—


Accretion on purchased loans

(139
)


(228
)


(160
)


(239
)


(183
)

Prepayment penalties collected

(15
)


(46
)


(53
)


(360
)


(12
)

Amortization on acquired time deposits

6



6



9



9



9


Interest expense on PPPLF

8



—



—



—



—


Deferred costs recognized for PPP loans

73



—



—



—



—


Adjusted net interest income

$
8,554



$
8,657



$
8,714



$
8,466



$
8,407













PERFORMANCE RATIOS










Based on adjusted net income from operations










Earnings per share

$
0.72



$
0.51



$
0.53



$
0.65



$
0.66


Return on average assets

1.12

%

0.90

%

0.99

%

1.24

%

1.29

%
Return on average shareholders' equity

12.57

%

9.15

%

9.75

%

12.31

%

12.91

%
Return on average tangible shareholders' equity

13.06

%

9.53

%

10.18

%

12.88

%

13.55

%











Based on adjusted net interest income










Yield on earning assets (FTE)

3.89

%

4.36

%

4.57

%

4.59

%

4.72

%
Rate on interest bearing liabilities

0.91

%

1.28

%

1.37

%

1.43

%

1.47

%
Net interest margin to earning assets (FTE)

3.32

%

3.50

%

3.66

%

3.66

%

3.75

%



Year to Date June 30

Variance


2020

2019

Amount

%
GAAP net income

$
7,395



$
5,611



$
1,784



31.79

%
Acquisition related items (net of tax)








Accretion on purchased loans

(290
)


(320
)


30



(9.38
)
%
Amortization of core deposit intangibles

142



179



(37
)


(20.67
)
%
Amortization on acquired time deposits

10



13



(3
)


(23.08
)
%
Amortization on purchased mortgage servicing rights

—



6



(6
)


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

(138
)


(122
)


(16
)


13.11

%
Other nonrecurring items (net of tax)








Interest income on PPP loans

(771
)


—



(771
)


N/M
Change in fair value of equity investment due to acquisition transaction

(578
)


—



(578
)


N/M
Change in fair value of mortgage banking instruments

(448
)


—



(448
)


N/M
Net gain from COLI death benefit

(137
)


—



(137
)


N/M
Prepayment penalties collected

(48
)


(22
)


(26
)


118.18

%
Interest expense on PPPLF

6



—



6



N/M
Deferred costs recognized for PPP loans

58



—



58



N/M
Mortgage servicing rights impairment

364



—



364



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

(1,554
)


(22
)


(1,532
)


6,963.64

%
Adjusted net income from operations

$
5,703



$
5,467



$
236



4.32

%









GAAP net interest income

$
18,522



$
16,940



$
1,582



9.34

%
Interest income on PPP loans

(976
)


—



(976
)


N/M
Accretion on purchased loans

(367
)


(405
)


38



(9.38
)
%
Prepayment penalties collected

(61
)


(28
)


(33
)


117.86

%
Amortization on acquired time deposits

12



17



(5
)


(29.41
)
%
Interest expense on PPPLF

8



—



8



N/M
Deferred costs recognized for PPP loans

73



—



73



N/M
Adjusted net interest income

$
17,211



$
16,524



$
687



4.16

%









PERFORMANCE RATIOS








Based on adjusted net income from operations








Earnings per share

$
1.22



$
1.18



$
0.04



3.39

%
Return on average assets

1.02

%

1.17

%



(0.15
)
%
Return on average shareholders' equity

10.89

%

11.82

%



(0.93
)
%
Return on average tangible shareholders' equity

11.33

%

12.42

%



(1.09
)
%









Based on adjusted net interest income








Yield on earning assets (FTE)

4.10

%

4.69

%



(0.59
)
%
Rate on interest bearing liabilities

1.09

%

1.44

%



(0.35
)
%
Net interest margin to earning assets (FTE)

3.39

%

3.73

%



(0.34
)
%

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 the servicing assets of interest rate lock commitments and loans held for sale at fair value. The Corporation also opted to recognize the interest rate lock commitments, loans held for sale, and forward commitments 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


June 30, 2020

March 31, 2020

June 30, 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

$
1,048,068



$
10,788


4.14
%

$
878,813



$
10,481


4.80
%

$
805,954



$
10,141


5.05
%
Taxable investment securities

62,829



323


2.07
%

56,963



353


2.49
%

67,237



462


2.76
%
Nontaxable investment securities

11,449



84


2.95
%

10,532



81


3.09
%

9,374



70


3.00
%
Federal funds sold

—



—


—
%

33,588



116


1.39
%

10,195



61


2.40
%
Interest earning cash and cash equivalents

21,314



5


0.09
%

14,043



26


0.74
%

4,828



28


2.33
%
Federal Home Loan Bank stock

3,281



33


4.05
%

3,150



30


3.83
%

3,150



41


5.22
%
Total earning assets

1,146,941



11,233


3.94
%

997,089



11,087


4.47
%

900,738



10,803


4.81
%



















Nonearning assets


















Allowance for loan losses

(7,753
)






(5,821
)






(4,822
)





Fixed assets

15,509







15,538







14,837






Accrued income and other assets

46,269







42,439







36,342






Total assets

$
1,200,966







$
1,049,245







$
947,095

























Interest bearing liabilities


















Interest bearing demand deposits

$
189,981



$
249


0.53
%

$
170,598



$
475


1.12
%

$
75,495



$
117


0.62
%
Savings deposits

247,687



140


0.23
%

231,188



199


0.35
%

243,795



319


0.52
%
Time deposits

181,661



821


1.82
%

205,485



1,053


2.06
%

229,863



1,319


2.30
%
Borrowed funds

92,171



408


1.78
%

65,293



418


2.57
%

54,812



440


3.22
%
Total interest bearing liabilities

711,500



1,618


0.91
%

672,564



2,145


1.28
%

603,965



2,195


1.46
%



















Noninterest bearing liabilities


















Noninterest bearing deposits

371,320







264,699







243,010






Accrued interest and other liabilities

11,148







8,336







5,601






Shareholders' equity

106,998







103,646







94,519






Total liabilities and shareholders' equity

$
1,200,966







$
1,049,245







$
947,095






Net interest income (FTE)



$
9,615






$
8,942






$
8,608



Net interest margin to earning assets (FTE)





3.37
%





3.61
%





3.83
%



Six Months Ended


June 30, 2020

June 30, 2019


Average Balance

Tax Equivalent Interest

Average Yield / Rate

Average Balance

Tax Equivalent Interest

Average Yield / Rate
Interest earning assets












Total loans

$
963,400



$
21,269


4.44
%

$
798,511



$
19,882


5.02
%
Taxable investment securities

59,896



676


2.27
%

73,303



1,021


2.81
%
Nontaxable investment securities

10,991



165


3.02
%

9,977



146


2.95
%
Federal funds sold

16,794



116


1.39
%

5,119



61


2.40
%
Interest earning cash and cash equivalents

17,712



31


0.35
%

4,297



53


2.49
%
Federal Home Loan Bank stock

3,215



63


3.94
%

3,150



93


5.95
%
Total earning assets

1,072,008



22,320


4.19
%

894,357



21,256


4.79
%













Nonearning assets












Allowance for loan losses

(6,787
)






(4,706
)





Fixed assets

15,523







14,827






Accrued income and other assets

44,320







36,107






Total assets

$
1,125,064







$
940,585



















Interest bearing liabilities












Interest bearing demand deposits

$
180,291



$
724


0.81
%

$
74,454



$
201


0.54
%
Savings deposits

239,438



339


0.28
%

242,805



616


0.51
%
Time deposits

193,574



1,874


1.95
%

227,865



2,539


2.25
%
Borrowed funds

78,732



826


2.11
%

59,345



929


3.16
%
Total interest bearing liabilities

692,035



3,763


1.09
%

604,469



4,285


1.43
%













Noninterest bearing liabilities












Noninterest bearing deposits

318,010







238,640






Accrued interest and other liabilities

9,743







4,237






Shareholders' equity

105,276







93,239






Total liabilities and shareholders' equity

$
1,125,064







$
940,585






Net interest income (FTE)



$
18,557






$
16,971



Net interest margin to earning assets (FTE)





3.48
%





3.83
%

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, 2020

June 30, 2020

June 30, 2020


Compared To

Compared To

Compared To


March 31, 2020

June 30, 2019

June 30, 2019


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

$
6,947


$
(6,640
)

$
307


$
9,573


$
(8,926
)

$
647


$
6,828


$
(5,441
)

$
1,387

Taxable investment securities

170


(200
)

(30
)

(29
)

(110
)

(139
)

(168
)

(177
)

(345
)
Nontaxable investment securities

21


(18
)

3


20


(8
)

12


15


4


19

Federal funds sold

(58
)

(58
)

(116
)

(30
)

(30
)

(60
)

134


(79
)

55

Interest earning cash and cash equivalents

60


(81
)

(21
)

151


(174
)

(23
)

127


(149
)

(22
)
Federal Home Loan Bank stock

1


2


3


11


(18
)

(7
)

6


(36
)

(30
)
Total changes in interest income

7,141


(6,995
)

146


9,696


(9,266
)

430


6,942


(5,878
)

1,064




















Changes in interest expense


















Interest bearing demand deposits

317


(543
)

(226
)

245


(113
)

132


387


136


523

Savings deposits

86


(145
)

(59
)

34


(213
)

(179
)

(8
)

(269
)

(277
)
Time deposits

(116
)

(116
)

(232
)

(250
)

(248
)

(498
)

(353
)

(312
)

(665
)
Borrowed funds

585


(595
)

(10
)

934


(966
)

(32
)

567


(670
)

(103
)
Total changes in interest expense

872


(1,399
)

(527
)

963


(1,540
)

(577
)

593


(1,115
)

(522
)
Net change in net interest income (FTE)

$
6,269


$
(5,596
)

$
673


$
8,733


$
(7,726
)

$
1,007


$
6,349


$
(4,763
)

$
1,586



Average Yield/Rate for the Three Month Periods Ended


6/30/2020

3/31/2020

12/31/2019

9/30/2019

6/30/2019
Total earning assets

3.94
%

4.47
%

4.66
%

4.85
%

4.81
%
Total interest bearing liabilities

0.91
%

1.28
%

1.36
%

1.42
%

1.46
%
Net interest margin to earning assets (FTE)

3.37
%

3.61
%

3.75
%

3.91
%

3.83
%
Net interest margin to earning assets (FTE) without impact of PPP loans

3.52
%

3.61
%

3.75
%

3.91
%

3.83
%


Quarter to Date Net Interest Income (FTE)


6/30/2020

3/31/2020

12/31/2019

9/30/2019

6/30/2019
Interest income

$
11,215


$
11,070


$
11,076


$
11,240


$
10,788

FTE adjustment

18


17


17


15


15

Total interest income (FTE)

11,233


11,087


11,093


11,255


10,803

Total interest expense

1,618


2,145


2,158


2,184


2,195

Net interest income (FTE)

$
9,615


$
8,942


$
8,935


$
9,071


$
8,608

The current low interest rate environment continues to create pressure on the Corporation's net interest margin. At the end of the first quarter of 2020, and into the second quarter of 2020, the Corporation made a concentrated effort to decrease the interest rates on deposit products.

Noninterest Income



Quarter to Date


6/30/2020

3/31/2020

12/31/2019

9/30/2019

6/30/2019
Net gain on sales of mortgage loans

$
2,644


$
970


$
650


$
665


$
422

Change in fair value of mortgage banking instruments

1,225


833


—


—


—

ATM and debit card income

394


355


399


418


404

Trust and investment services

321


389


337


395


459

Mortgage servicing fees

270


262


256


243


230

Net gain from corporate owned life insurance death benefit

173


—


—


—


—

Service charges on deposit accounts

119


219


245


239


222

Change in fair value of equity investments

7


749


(5
)

16


21

Net gain on sales of commercial loans

—


668


—


—


—

Net mortgage servicing rights income

(164
)

(50
)

130


142


344

Other income and fees

303


118


117


144


148

Total noninterest income

$
5,292


$
4,513


$
2,129


$
2,262


$
2,250



Year to Date June 30

Variance


2020

2019

Amount

%
Net gain on sales of mortgage loans

$
3,614



$
617


$
2,997



485.74

%
Change in fair value of mortgage banking instruments

2,058



—


2,058



N/M
ATM and debit card income

749



764


(15
)


(1.96
)
%
Trust and investment services

710



787


(77
)


(9.78
)
%
Mortgage servicing fees

532



441


91



20.63

%
Net gain from corporate owned life insurance death benefit

173



—


173



N/M
Service charges on deposit accounts

338



456


(118
)


(25.88
)
%
Change in fair value of equity investments

756



35


721



2060.00

%
Net gain on sales of commercial loans

668



—


668



N/M
Net mortgage servicing rights income

(214
)


352


(566
)


(160.80
)
%
Other income and fees

421



320


101



31.56

%
Total noninterest income

$
9,805



$
3,772


$
6,033



159.94

%

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 instruments and loans held for sale are included in noninterest income. Change in fair value of mortgage banking instruments will fluctuate with the Corporation's residential mortgage loan originations and interest rate fluctuations. As such, the change in fair value of mortgage banking instruments is expected to decrease through 2020.

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.

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.

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.

Net gain from corporate owned life insurance death benefit is recognized in the event of the death of an insured individual. The death on an insured individual occurred in the second quarter of 2020. The Corporation does not expect to receive any gains from COLI death benefits for the remainder of 2020.

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 primarily due to a shift of customer demand toward deposit accounts with no or reduced service charges, as well as a reduction in fees charged. 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% through May 31, 2020. Now that this program has ended, service charges on deposit accounts are expected to slightly increase in the foreseeable future.

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 represents the income earned from 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.

Net mortgage servicing rights income represents income generated from the capitalization of mortgage servicing rights, net of amortization and impairment. 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 2020, the Corporation recognized MSR impairments of $219 and $241 for the quarters ended March 31, 2020 and June 30, 2020, respectively. As interest rates remain at historically low levels, refinance opportunities continue to be very attractive to borrowers, thus driving down the value of MSR associated with the current portfolio.

Other income and fees includes miscellaneous 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


6/30/2020

3/31/2020

12/31/2019

9/30/2019

6/30/2019
Total compensation

$
4,252


$
4,248


$
4,037


$
3,530


$
3,749

Furniture and equipment

618


610


665


579


525

Professional services

571


522


582


494


439

Data processing

535


442


272


323


281

Occupancy

435


476


467


444


426

Advertising and promotional

255


252


232


222


291

Loan and collection

229


162


203


120


119

ATM and debit card

92


108


98


109


100

Amortization of core deposit intangibles

90


90


113


112


114

FDIC insurance premiums

59


55


6


20


17

Telephone and communication

86


96


115


110


108

Other general and administrative

587


625


625


545


522

Total noninterest expenses

$
7,809


$
7,686


$
7,415


$
6,608


$
6,691



Year to Date June 30

Variance


2020

2019

Amount

%
Total compensation

$
8,500


$
7,379


$
1,121



15.19

%
Furniture and equipment

1,228


1,016


212



20.87

%
Professional services

1,093


908


185



20.37

%
Data processing

977


454


523



115.20

%
Occupancy

911


863


48



5.56

%
Advertising and promotional

507


535


(28
)


(5.23
)
%
Loan and collection

391


229


162



70.74

%
ATM and debit card

200


195


5



2.56

%
Amortization of core deposit intangibles

180


226


(46
)


(20.35
)
%
FDIC insurance premiums

114


118


(4
)


(3.39
)
%
Telephone and communication

182


219


(37
)


(16.89
)
%
Other general and administrative

1,212


1,058


154



14.56

%
Total noninterest expenses

$
15,495


$
13,200


$
2,295



17.39

%

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 moderate 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 maintain current levels throughout 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 a combination of the Small Bank Assessment Credit, and increased asset size largely due to PPP loans, the Corporation expects FDIC insurance premiums to approximate current levels 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.

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



6/30/2020

3/31/2020

12/31/2019

9/30/2019

6/30/2019
ASSETS










Cash and cash equivalents

$
35,190


$
71,140


$
46,803


$
37,572


$
20,067

Total investment securities

75,526


76,312


61,621


62,351


73,285

Loans held-for-sale

46,354


21,154


19,491


15,111


6,771

Gross loans

1,044,564


865,577


870,555


826,597


813,547

Less allowance for loan losses

8,991


7,250


5,813


5,413


5,014

Net loans

1,035,573


858,327


864,742


821,184


808,533

All other assets

45,051


44,247


42,102


41,828


41,134

Total assets

$
1,237,694


$
1,071,180


$
1,034,759


$
978,046


$
949,790












LIABILITIES AND SHAREHOLDERS' EQUITY










Total deposits

$
1,018,287


$
883,837


$
863,102


$
801,101


$
792,555

Total borrowed funds

96,217


71,500


61,500


69,000


54,000

Accrued interest payable and other liabilities

14,221


11,015


8,713


8,803


7,731

Total liabilities

1,128,725


966,352


933,315


878,904


854,286

Total shareholders' equity

108,969


104,828


101,444


99,142


95,504

Total liabilities and shareholders' equity

$
1,237,694


$
1,071,180


$
1,034,759


$
978,046


$
949,790



6/30/2020 vs 3/31/2020

6/30/2020 vs 6/30/2019


Variance

Variance


Amount

%

Amount

%
ASSETS








Cash and cash equivalents

$
(35,950
)

(50.53
)
%

$
15,123


75.36
%
Total investment securities

(786
)

(1.03
)
%

2,241


3.06
%
Loans held-for-sale

25,200


119.13

%

39,583


584.60
%
Gross loans

178,987


20.68

%

231,017


28.40
%
Less allowance for loan losses

1,741


24.01

%

3,977


79.32
%
Net loans

177,246


20.65

%

227,040


28.08
%
All other assets

804


1.82

%

3,917


9.52
%
Total assets

$
166,514


15.54

%

$
287,904


30.31
%









LIABILITIES AND SHAREHOLDERS' EQUITY








Total deposits

$
134,450


15.21

%

$
225,732


28.48
%
Total borrowed funds

24,717


34.57

%

42,217


78.18
%
Accrued interest payable and other liabilities

3,206


29.11

%

6,490


83.95
%
Total liabilities

162,373


8.78

%

274,439


16.66
%









Total shareholders' equity

4,141


3.95

%

13,465


14.10
%
Total liabilities and shareholders' equity

$
166,514


15.54

%

$
287,904


30.31
%

Cash and cash equivalents



6/30/2020

3/31/2020

12/31/2019

9/30/2019

6/30/2019
Cash and due from banks










Noninterest bearing

$
20,369



$
33,312



$
17,754


$
21,808



$
12,143


Interest bearing

14,821



37,828



6,049


6,764



4,924


Federal funds sold

—



—



23,000


9,000



3,000


Cash and cash equivalents

$
35,190



$
71,140



$
46,803


$
37,572



$
20,067















6/30/2020 vs 3/31/2020



6/30/2020 vs 6/30/2019


Variance



Variance


Amount

%



Amount

%
Cash and due from banks










Noninterest bearing

$
(12,943
)


(38.85
)
%



$
8,226



67.74

%
Interest bearing

(23,007
)


(60.82
)
%



9,897



201.00

%
Federal funds sold

—



N/M



(3,000
)


(100.00
)
%
Cash and cash equivalents

$
(35,950
)


(50.53
)
%



$
15,123



75.36

%

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.

Primary and secondary liquidity sources

While the Corporation continues maintain a strong liquidity position, it is important to monitor all liquidity sources. Because of the funding 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:



6/30/2020

3/31/2020

12/31/2019

9/30/2019

6/30/2019
Cash and cash equivalents

$
35,190


$
71,140


$
46,803


$
37,572


$
20,067

Unpledged investment securities

52,647


51,889


40,094


40,675


50,729

FHLB borrowing availability

97,500


42,500


52,500


45,000


60,000

Federal funds purchased lines of credit

21,500


17,500


17,500


17,500


17,500

Funds available through the Fed Discount Window

10,000


10,000


10,000


10,000


10,000

PPPLF

202,184


—


—


—


—

Total liquidity sources

$
419,021


$
193,029


$
166,897


$
150,747


$
158,296

Total investment securities



6/30/2020

3/31/2020

12/31/2019

9/30/2019

6/30/2019
Available-for-sale










U.S. Government and federal agency

$
21,339



$
23,610



$
18,867


$
22,854



$
33,842


State and municipal

14,115



10,657



10,691


10,194



8,889


Mortgage backed residential

12,335



10,176



10,748


6,227



6,733


Certificates of deposit

6,665



8,644



6,659


7,155



7,154


Collateralized mortgage obligations - agencies

15,736



18,288



9,527


10,826



11,856


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

2,242



1,735



1,092


1,048



776


Total available-for-sale

72,432



73,110



57,584


58,304



69,250


Held-to-maturity state and municipal

1,981



2,091



2,096


2,100



2,104


Equity securities

1,113



1,111



1,941


1,947



1,931


Total investment securities

$
75,526



$
76,312



$
61,621


$
62,351



$
73,285















6/30/2020 vs 3/31/2020



6/30/2020 vs 6/30/2019


Variance



Variance


Amount

%



Amount

%
Available-for-sale










U.S. Government and federal agency

$
(2,271
)


(9.62
)
%



$
(12,503
)


(36.95
)
%
State and municipal

3,458



32.45

%



5,226



58.79

%
Mortgage backed residential

2,159



21.22

%



5,602



83.20

%
Certificates of deposit

(1,979
)


(22.89
)
%



(489
)


(6.84
)
%
Collateralized mortgage obligations - agencies

(2,552
)


(13.95
)
%



3,880



32.73

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

507



29.22

%



1,466



188.92

%
Total available-for-sale

(678
)


(0.93
)
%



3,182



4.59

%
Held-to-maturity state and municipal

(110
)


(5.26
)
%



(123
)


(5.85
)
%
Equity securities

2



0.18

%



(818
)


(42.36
)
%
Total investment securities

$
(786
)


(1.03
)
%



$
2,241



3.06

%

The amortized cost and fair value of AFS investment securities as of June 30, 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

$
16,411


$
4,928


$
—


$
—


$
—


$
21,339

State and municipal

2,474


5,772


3,777


2,092


—


14,115

Mortgage backed residential

—


—


—


—


12,335


12,335

Certificates of deposit

2,475


4,190


—


—


—


6,665

Collateralized mortgage obligations - agencies

—


—


—


—


15,736


15,736

Total amortized cost

$
21,360


$
14,890


$
3,777


$
2,092


$
28,071


$
70,190

Fair value

$
21,553


$
15,756


$
3,933


$
2,371


$
28,819


$
72,432

The amortized cost and fair value of HTM investment securities as of June 30, 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

$
415


$
1,116


$
370


$
80


$
—


$
1,981

Fair value

$
421


$
1,162


$
396


$
85


$
—


$
2,064

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 and generate additional net interest income. 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 June 30, 2020 for investment securities purchased YTD:



Book Value

Fully Taxable Equivalent Weighted Average Yield

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

$
10,421


0.46
%

5

State and municipal

4,510


1.66
%

86

Collateralized mortgage obligations - agencies

8,663


1.80
%

289

Certificates of deposit

1,240


1.05
%

3

Mortgage backed residential

3,132


1.05
%

136

Held-to-maturity state and municipal

—


—
%

—

Total

$
27,966


1.16
%

121

Loans held-for-sale

Loans HFS 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 for the remainder of 2020, the balance of loans HFS will also likely decline.

During the first quarter of 2020, the Corporation opted to recognize 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:



6/30/2020

3/31/2020

12/31/2019

9/30/2019

6/30/2019
Commercial

$
260,440



$
67,731



$
71,689



$
63,747



$
63,998


Commercial real estate

469,039



462,561



455,289



420,127



408,103


Total commercial loans

729,479



530,292



526,978



483,874



472,101


Residential mortgage

268,295



285,392



292,946



291,401



289,944


Home equity

40,114



43,222



41,987



43,061



42,890


Total residential real estate loans

308,409



328,614



334,933



334,462



332,834


Consumer

6,676



6,671



8,644



8,261



8,612


Gross loans

1,044,564



865,577



870,555



826,597



813,547


Allowance for loan losses

(8,991
)


(7,250
)


(5,813
)


(5,413
)


(5,014
)

Loans, net

$
1,035,573



$
858,327



$
864,742



$
821,184



$
808,533















6/30/2020 vs 3/31/2020



6/30/2020 vs 6/30/2019


Variance



Variance


Amount

%



Amount

%
Commercial

$
192,709



284.52

%



$
196,442



306.95

%
Commercial real estate

6,478



1.40

%



60,936



14.93

%
Total commercial loans

199,187



37.56

%



257,378



54.52

%
Residential mortgage

(17,097
)


(5.99
)
%



(21,649
)


(7.47
)
%
Home equity

(3,108
)


(7.19
)
%



(2,776
)


(6.47
)
%
Total residential real estate loans

(20,205
)


(6.15
)
%



(24,425
)


(7.34
)
%
Consumer

5



0.07

%



(1,936
)


(22.48
)
%
Gross loans

178,987



20.68

%



231,017



28.40

%
Allowance for loan losses

(1,741
)


24.01

%



(3,977
)


79.32

%
Loans, net

$
177,246



20.65

%



$
227,040



28.08

%

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



6/30/2020

3/31/2020

12/31/2019

9/30/2019

6/30/2019
Originated loans collectively evaluated for impairment










Commercial

$
259,384



$
66,524


$
70,322


$
61,970


$
61,122

Commercial real estate

452,084



446,713


436,626


400,470


386,970

Residential mortgage

263,997



280,265


286,635


285,499


283,638

Home equity

37,663



40,459


39,023


39,586


39,243

Consumer

6,445



6,391


8,330


7,902


8,169

Subtotal

1,019,573



840,352


840,936


795,427


779,142

Originated loans individually evaluated for impairment










Commercial

—



—


—


—


—

Commercial real estate

3,290



1,658


1,668


1,677


1,703

Residential mortgage

663



672


1,362


631


660

Home equity

—



—


—


240


218

Consumer

3



5


—


—


—

Subtotal

3,956



2,335


3,030


2,548


2,581

Acquired loans collectively evaluated for impairment










Commercial

1,057



1,204


1,362


1,753


2,806

Commercial real estate

13,293



13,630


16,346


17,194


18,526

Residential mortgage

2,683



3,459


3,911


4,139


4,388

Home equity

2,432



2,743


2,943


3,213


3,399

Consumer

226



273


314


358


441

Subtotal

19,691



21,309


24,876


26,657


29,560

Acquired loans individually evaluated for impairment










Commercial

—



—


—


—


—

Commercial real estate

—



—


—


—


—

Residential mortgage

—



58


58


61


113

Home equity

—



—


—


—


—

Consumer

—



—


—


—


—

Subtotal

—



58


58


61


113

Acquired loans with deteriorated credit quality










Commercial

(1
)


3


5


24


70

Commercial real estate

372



560


649


786


904

Residential mortgage

952



938


980


1,071


1,145

Home equity

19



20


21


22


30

Consumer

2



2


—


1


2

Subtotal

1,344



1,523


1,655


1,904


2,151

Gross Loans

$
1,044,564



$
865,577


$
870,555


$
826,597


$
813,547












Total originated loans

$
1,023,529



$
842,687


$
843,966


$
797,975


$
781,723

Total acquired loans

21,035



22,890


26,589


28,622


31,824

Gross loans

$
1,044,564



$
865,577


$
870,555


$
826,597


$
813,547

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



6/30/2020

3/31/2020

12/31/2019

9/30/2019

6/30/2019
Originated loans collectively evaluated for impairment










Commercial

$
535


$
478


$
358


$
301


$
278

Commercial real estate

4,564


3,609


2,790


2,539


2,381

Residential mortgage

3,080


2,442


1,917


1,820


1,662

Home equity

353


280


195


198


191

Consumer

102


89


87


87


90

Subtotal

8,634


6,898


5,347


4,945


4,602

Originated loans individually evaluated for impairment










Commercial

—


—


—


—


—

Commercial real estate

100


111


127


26


—

Residential mortgage

5


6


128


27


28

Home equity

—


—


—


213


218

Consumer

3


5


—


—


—

Subtotal

108


122


255


266


246

Acquired loans collectively evaluated for impairment










Commercial

1


1


1


2


5

Commercial real estate

9


7


5


5


5

Residential mortgage

9


9


8


9


9

Home equity

15


14


12


13


14

Consumer

—


—


—


—


—

Subtotal

34


31


26


29


33

Acquired loans with deteriorated credit quality










Commercial

—


—


—


—


—

Commercial real estate

22


39


34


31


15

Residential mortgage

189


156


147


137


114

Home equity

4


4


4


5


4

Consumer

—


—


—


—


—

Subtotal

215


199


185


173


133

Allowance for loan losses

$
8,991


$
7,250


$
5,813


$
5,413


$
5,014












Total originated loans

$
8,742


$
7,020


$
5,602


$
5,211


$
4,848

Total acquired loans

249


230


211


202


166

Allowance for loan losses

$
8,991


$
7,250


$
5,813


$
5,413


$
5,014

Commercial

$
536


$
479


$
359


$
303


$
283

Commercial real estate

4,695


3,766


2,956


2,601


2,401

Residential mortgage

3,283


2,613


2,200


1,993


1,813

Home equity

372


298


211


429


427

Consumer

105


94


87


87


90

Allowance for loan losses

$
8,991


$
7,250


$
5,813


$
5,413


$
5,014

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



6/30/2020

3/31/2020

12/31/2019

9/30/2019

6/30/2019
Accruing interest










Current

$
1,042,589


$
862,581


$
867,901


$
824,587


$
811,184

Past due 30-89 days

948


2,152


1,213


1,089


1,275

Past due 90 days or more

361


166


239


209


301

Total accruing interest

1,043,898


864,899


869,353


825,885


812,760

Nonaccrual

666


678


1,202


712


787

Total loans

$
1,044,564


$
865,577


$
870,555


$
826,597


$
813,547

Total loans past due and in nonaccrual status

$
1,975


$
2,996


$
2,654


$
2,010


$
2,363

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



6/30/2020

3/31/2020

12/31/2019

9/30/2019

6/30/2019
Nonaccrual loans

$
666


$
678


$
1,202


$
712


$
787

Accruing loans past due 90 days or more

361


166


239


209


301

Total nonperforming loans

1,027


844


1,441


921


1,088

Other real estate owned

—


400


—


—


—

Total nonperforming assets

$
1,027


$
1,244


$
1,441


$
921


$
1,088

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



6/30/2020

3/31/2020

12/31/2019

9/30/2019

6/30/2019
Nonperforming loans to gross loans

0.10
%

0.10
%

0.17
%

0.11
%

0.13
%
Nonperforming assets to total assets

0.08
%

0.12
%

0.14
%

0.09
%

0.11
%
Allowance for loan losses to gross loans

0.86
%

0.84
%

0.67
%

0.65
%

0.62
%

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



6/30/2020

3/31/2020

12/31/2019

9/30/2019

6/30/2019
Net unamortized discount on purchased loans

$
1,058


$
1,233


$
1,462


$
1,626


$
1,914

As outlined in the preceding tables, the Corporation has grown its loan portfolio over the past 12 months with most of the growth coming in the form of commercial and commercial real estate loans. During the second quarter of 2020, the Corporation funded 1,239 PPP loans totaling $206,901. The vast majority of these loans were non-real estate Commercial loans. Despite the significant growth, the Corporation has not relaxed its underwriting standards.

Despite historically strong credit quality indicators, there continues to be significant uncertainty surrounding the overall impact of COVID-19 on the loan portfolio. This uncertainty resulted in the Corporation increasing the ALLL by $3,178, or 54.67%, since December 31, 2019. Management will continue to monitor the loan portfolio to ensure that the ALLL remains at an appropriate level.

The following table summarizes the average loan size as of:



6/30/2020

3/31/2020

12/31/2019

9/30/2019

6/30/2019
Commercial

$
171


$
214


$
228


$
204


$
195

Commercial real estate

654


644


641


605


609

Total commercial loans

325


513


514


481


473

Residential mortgage

177


194


198


200


206

Home equity

45


46


44


45


45

Total residential real estate loans

128


137


138


139


140

Consumer

25


26


32


31


32

Gross loans

$
213


$
234


$
234


$
225


$
223

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 was extremely active in participating in the PPP loan program. As of June 30, 2020 the Corporation funded 1,239 loans totaling $206,901.

The Corporation 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 issued by the Corporation through June 30, 2020:



Number of Modifications

Outstanding Balance
Commercial

123


$
29,380

Commercial real estate

227


152,724

Total commercial loan modifications

350


182,104

Residential mortgage loans serviced for FHLMC

131


28,656

Portfolio residential mortgage loans

157


40,411

Home equity

25


1,982

Total residential real estate loan modifications

313


71,049

Consumer

8


183

Total modifications

671


$
253,336

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.

In regards to commercial loan modifications, loan officers are contacting the borrowers to determine and appropriate strategy for the next 3 months. If an additional 3 months of principal deferral is warranted, the Corporation is generally collecting accrued interest.

Portfolio residential mortgage loans may have their deferral extended an additional 3 months if the borrower is experiencing a hardship. If the borrower has an escrow established, the Corporation is generally continuing to collect escrow payments.

All other assets

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



6/30/20

3/31/20

12/31/19

9/30/19

6/30/19
Premises and equipment, net

$
15,323



$
15,533



$
15,245


$
15,443



$
14,792


Mortgage servicing rights

3,816



3,980



4,030


3,900



3,758


Accrued interest receivable

5,266



3,124



2,877


2,954



3,350


Corporate owned life insurance

10,115



10,380



10,316


10,248



10,181


Federal Home Loan Bank stock

3,488



3,150



3,150


3,150



3,150


Goodwill

3,219



3,219



3,219


3,219



3,219


Core deposit intangibles

722



812



902


1,015



1,128


Other real estate owned

—



400



—


—



—


Derivatives

1,311



1,063



125


172



—


Right-of-use assets

409



432



475


105



119


Other assets

1,382



2,154



1,763


1,622



1,437


All other assets

$
45,051



$
44,247



$
42,102


$
41,828



$
41,134















6/30/2020 vs 3/31/2020



6/30/2020 vs 6/30/2019


Variance



Variance


Amount

%



Amount

%
Premises and equipment, net

$
(210
)


(1.35
)
%



$
531



3.59

%
Mortgage servicing rights

(164
)


(4.12
)
%



58



1.54

%
Accrued interest receivable

2,142



68.57

%



1,916



57.19

%
Corporate owned life insurance

(265
)


(2.55
)
%



(66
)


(0.65
)
%
Federal Home Loan Bank stock

338



10.73

%



338



10.73

%
Goodwill

—



—

%



—



—

%
Core deposit intangibles

(90
)


(11.08
)
%



(406
)


(35.99
)
%
Other real estate owned

(400
)


(100.00
)




—



N/M
Derivatives

248



23.33

%



1,311



N/M
Right-of-use assets

(23
)


(5.32
)
%



290



243.70

%
Other assets

(772
)


(35.84
)
%



(55
)


(3.83
)
%
All other assets

804



1.82

%



$
3,917



9.52

%

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. While the volume of residential mortgage loan sales through June 30, 2020 has nearly exceeded the residential mortgage loan sales volume for all of 2019, MSR have decreased in 2020 due to total impairments of $460. As interest rates remain at historically low levels, refinance opportunities continue to be very attractive to borrowers, thus driving down the value of MSR associated with the current portfolio.

Derivatives are used in the process of hedging the Corporation's mortgage banking activities. The derivatives are recorded at fair value. The Corporation does not expect significant growth in derivatives 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.

Total deposits

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



6/30/20

3/31/20

12/31/19

9/30/19

6/30/19
Noninterest bearing demand

$
383,452



$
281,848



$
260,503


$
253,784



$
248,795


Interest bearing










Savings

245,957



215,748



215,218


213,494



232,130


Money market demand

90,504



79,070



88,350


80,873



69,374


NOW

122,477



83,910



75,976


39,286



14,925


Time deposits

175,897



223,261



223,055


213,664



227,331


Total deposits

$
1,018,287



$
883,837



$
863,102


$
801,101



$
792,555















6/30/2020 vs 3/31/2020



6/30/2020 vs 6/30/2019


Variance



Variance


Amount

%



Amount

%
Noninterest bearing demand

$
101,604



36.05

%



$
134,657



54.12

%
Interest bearing










Savings

30,209



14.00

%



13,827



5.96

%
Money market demand

11,434



14.46

%



21,130



30.46

%
NOW

38,567



45.96

%



107,552



720.62

%
Time deposits

(47,364
)


(21.21
)
%



(51,434
)


(22.63
)
%
Total deposits

$
134,450



15.21

%



$
225,732



28.48

%

PPP loans are funded into a deposit account for the borrowers. The vast majority of these deposit accounts are noninterest bearing demand accounts. As of June 30, 2020, $37,521 of deposits were attributable to funds from PPP loans. In the second quarter of 2020, the Corporation also brought in $25,000 of FDIC insured deposits from one relationship.

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 to minimize downward pressure on margins.

Schedule of time deposit maturities

The following table summarizes the contractual maturities of the time deposits as of June 30, 2020:



Maturity Buckets


3 Months or Less

3 to 6 Months

6 to 9 Months

9 to 12 Months

Beyond 12 Months
Balance

$
66,295


$
36,107


$
29,297


$
12,394


$
31,804

Weighted average yield

1.42
%

1.89
%

1.27
%

1.53
%

1.58
%













Cumulative Maturities


3 Months or Less

Up to 6 Months

Up to 9 Months

Up to 12 Months

Total
Balance

$
66,295


$
102,402


$
131,699


$
144,093


$
175,897

Weighted average yield

1.42
%

1.59
%

1.52
%

1.52
%

1.53
%

The repricing of time deposits will have a significant impact on their weighted average yield. Current rates offered by the Corporation have time deposit rates ranging from 0.05% to 0.55% depending of the term and opening balance.

Total borrowed funds

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



6/30/20

3/31/20

12/31/19

9/30/19

6/30/19
Federal Home Loan Bank borrowings

$
77,500


$
57,500


$
47,500


$
55,000


$
40,000

Subordinated debentures

14,000


14,000


14,000


14,000


14,000

PPPLF

4,717


—


—


—


—

Federal funds purchased

—


—


—


—


—

Total borrowed funds

$
96,217


$
71,500


$
61,500


$
69,000


$
54,000














6/30/2020 vs 3/31/2020



6/30/2020 vs 6/30/2019


Variance



Variance


Amount

%



Amount

%
Federal Home Loan Bank borrowings

$
20,000


34.78
%



$
37,500


93.75
%
Subordinated debentures

—


—
%



—


—
%
PPPLF

4,717


N/M



4,717


N/M
Federal funds purchased

—


—
%



—


—
%
Total borrowed funds

$
24,717


34.57
%



$
42,217


78.18
%

The Corporation utilizes a mix of borrowed funds and organic deposit growth to fund loan demand. There are times when Federal Home Loan Bank borrowings have extremely attractive interest rates and the Corporation will add to borrow funds for future deployment of funds. The increase in Federal Home Loan Bank borrowings in the second quarter of 2020 is solely due to the Corporation's participation in a PPP loan funding program through the FHLB.

Total borrowed funds are expected to decrease as current Federal Home Loan Bank borrowings mature. 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:



6/30/20

3/31/20

12/31/19

9/30/19

6/30/19
Federal Home Loan Bank borrowings

$
77,500



$
57,500



$
47,500


$
55,000



$
40,000


Brokered time deposits

28,837



28,605



28,605


16,326



23,484


Subordinated debentures

14,000



14,000



14,000


14,000



14,000


Internet time deposits

11,690



18,005



18,009


21,977



25,058


PPPLF

4,717



—



—


—



—


Total wholesale funds

$
136,744



$
118,110



$
108,114


$
107,303



$
102,542















6/30/2020 vs 3/31/2020



6/30/2020 vs 6/30/2019


Variance



Variance


Amount

%



Amount

%
Federal Home Loan Bank borrowings

$
20,000



34.78

%



$
37,500



93.75

%
Brokered time deposits

232



0.81

%



5,353



22.79

%
Subordinated debentures

—



—

%



—



—

%
Internet time deposits

(6,315
)


(35.07
)
%



(13,368
)


(53.35
)
%
PPPLF

4,717



N/M



4,717



N/M
Total wholesale funds

$
18,634



15.78

%



$
34,202



33.35

%

The Corporation utilizes wholesale funds to fund balance sheet growth. While wholesale funding has historically been more expensive than core deposits, there have been times in 2020 where that is not the case. 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 June 30, 2015 and all dividends were reinvested.

A graph accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/4e71e085-6a4c-4e45-9fce-f13d60034839






Date

FETM

ABQ Index
6/30/2015

100.00

100.00
6/30/2016

96.00

97.31
6/30/2017

132.14

131.04
6/30/2018

153.68

142.79
6/30/2019

152.00

126.05
6/30/2020

131.23

93.17

Abbreviations and Acronyms

ABA: American Bankers Association

HTM: Held-to-maturity

AFS: Available-for-sale

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

CARES Act: Coronavirus Aid, Relief, and Economic Security Act

NOW: Negotiable order of withdrawal

CET1: Common equity tier 1

NSF: Non-sufficient funds

COVID-19: Coronavirus Disease 2019

OREO: Other real estate owned

FDIC: Federal Deposit Insurance Corporation

PPP: Paycheck Protection Program

FHLB: Federal Home Loan Bank

PPPLF: Paycheck Protection Program Liquidity Facility

FHLMC: Federal Home Loan Mortgage Corporation

QTD: Quarter-to-date

FRB: Federal Reserve Bank

SAB: Staff Accounting Bulletin

FTE: Fully taxable equivalent

SBA: Small Business Association

GAAP: Generally Accepted Accounting Principles

USDA: United States Department of Agriculture

HFS: Held-for-sale

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 2018 and 2019 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 #22 by S&P Global in terms of 2019 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 Second Quarter 2020 Earnings

Stock Performance Five-Year Total Return

Stock Performance Five-Year Total Return