FETM - Fentura Financial Inc. Announces Third Quarter 2019 Earnings

October, 24 2019 09:45 AM Fentura Financial Inc

FENTON, Mich., Oct. 24, 2019 (GLOBE NEWSWIRE) -- Fentura Financial, Inc. (OTCQX: FETM) announces continued strong earnings with net income of $3,415 and $9,026 for the three and nine month periods ended September 30, 2019, respectively.

13.50% increase in gross loans since September 30, 2018
4.50% increase in total deposits since September 30, 2018
Year to date yield on interest earning assets increased to 4.81% from 4.58% at September 30, 2018
18.88% increase in tangible book value per share since September 30, 2018

Ronald L. Justice, President and CEO said, “Our strong earnings are built off of our continued growth in net interest income. Even when adjusting for nonrecurring items, net interest income continues to grow quarter after quarter. Our team works diligently to put our customers in the most beneficial financial situation possible. I am extremely proud of the work they do both for Fentura, and, more importantly, the communities that we serve.”

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



9/30/2019

6/30/2019

3/31/2019

12/31/2018

9/30/2018
INCOME STATEMENT DATA










Interest income

$
11,240


$
10,788


$
10,437


$
9,931


$
9,311

Interest expense

2,184


2,195


2,090


1,926


1,638

Net interest income

9,056


8,593


8,347


8,005


7,673

Provision for loan losses

422


264


213


290


191

Noninterest income

2,262


2,250


1,522


1,703


2,760

Noninterest expenses

6,608


6,691


6,509


6,907


6,075

Federal income tax expense

873


791


633


502


654

Net income

$
3,415


$
3,097


$
2,514


$
2,009


$
3,513

PER SHARE










Earnings

$
0.73


$
0.67


$
0.54


$
0.46


$
0.96

Dividends

$
0.07


$
0.07


$
0.07


$
0.06


$
0.06

Tangible book value⁽¹⁾

$
20.59


$
19.83


$
19.15


$
18.61


$
17.32

Quoted market value










High

$
21.00


$
20.90


$
21.00


$
22.02


$
22.50

Low

$
20.45


$
20.45


$
20.05


$
20.94


$
20.60

Close⁽¹⁾

$
21.00


$
20.60


$
20.89


$
21.00


$
21.15

PERFORMANCE RATIOS










Return on average assets

1.40
%

1.31
%

1.09
%

0.87
%

1.61
%
Return on average shareholders' equity

13.83
%

13.14
%

11.09
%

9.87
%

21.27
%
Return on average tangible shareholders' equity

15.08
%

14.36
%

12.13
%

10.96
%

24.27
%
Efficiency ratio

58.38
%

61.71
%

65.95
%

71.15
%

58.23
%
Yield on earning assets (FTE)

4.85
%

4.81
%

4.77
%

4.54
%

4.53
%
Rate on interest bearing liabilities

1.41
%

1.46
%

1.40
%

1.29
%

1.15
%
Net interest margin to earning assets (FTE)

3.92
%

3.83
%

3.82
%

3.66
%

3.73
%
BALANCE SHEET DATA⁽¹⁾










Total investment securities

$
62,351


$
73,285


$
82,222


$
94,721


$
79,531

Gross loans

$
826,597


$
813,547


$
809,863


$
772,227


$
728,302

Total assets

$
978,046


$
949,790


$
946,172


$
926,450


$
909,901

Total deposits

$
801,101


$
792,555


$
789,533


$
763,124


$
766,587

Borrowed funds

$
69,000


$
54,000


$
59,000


$
69,000


$
74,000

Total shareholders' equity

$
99,142


$
95,504


$
92,236


$
89,516


$
66,340

Net loans to total deposits

102.51
%

102.02
%

101.97
%

100.60
%

94.46
%
Common shares outstanding

4,658,722


4,653,343


4,647,978


4,636,455


3,645,402

QTD BALANCE SHEET AVERAGES










Total assets

$
971,074


$
947,095


$
934,078


$
917,242


$
866,253

Earning assets

$
920,551


$
900,738


$
887,974


$
868,498


$
817,110

Interest bearing liabilities

$
611,804


$
603,965


$
604,973


$
592,878


$
565,908

Total shareholders' equity

$
97,958


$
94,519


$
91,964


$
80,781


$
65,541

Total tangible shareholders' equity

$
89,860


$
86,478


$
84,025


$
72,742


$
57,419

Earned common shares outstanding

4,646,835


4,641,161


4,635,255


4,332,665


3,643,151

Unvested stock grants

9,967


9,967


9,788


3,022


—

Total common shares outstanding

4,656,802


4,651,128


4,645,043


4,335,687


3,643,151

ASSET QUALITY⁽¹⁾










Nonperforming loans to gross loans

0.11
%

0.13
%

0.15
%

0.14
%

0.09
%
Nonperforming assets to total assets

0.09
%

0.11
%

0.13
%

0.12
%

0.09
%
ALLL to gross loans

0.65
%

0.62
%

0.59
%

0.58
%

0.57
%
CAPITAL RATIOS⁽¹⁾










Total capital to risk weighted assets

14.42
%

14.18
%

13.99
%

14.00
%

11.31
%
Tier 1 capital to risk weighted assets

13.73
%

13.53
%

13.37
%

13.40
%

10.73
%
CET1 capital to risk weighted assets

11.96
%

11.73
%

11.54
%

11.52
%

8.77
%
Tier 1 leverage ratio

11.22
%

11.16
%

10.99
%

10.92
%

8.90
%











⁽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 nine month periods ended:







Variance


9/30/2019

9/30/2018

Amount

%
INCOME STATEMENT DATA








Interest income

$
32,465


$
26,419


$
6,046


22.89
%
Interest expense

6,469


3,901


2,568


65.83
%
Net interest income

25,996


22,518


3,478


15.45
%
Provision for loan losses

899


767


132


17.21
%
Noninterest income

6,034


6,574


(540
)

(8.21
)%
Noninterest expenses

19,808


18,403


1,405


7.63
%
Federal income tax expense

2,297


1,817


480


26.42
%
Net income

$
9,026


$
8,105


$
921


11.36
%
PER SHARE








Earnings

$
1.94


$
2.23


$
(0.29
)

(13.00
)%
Dividends

$
0.21


$
0.18


$
0.03


16.67
%
Tangible book value⁽¹⁾

$
20.59


$
17.32


$
3.27


18.88
%
Quoted market value








High

$
21.00


$
21.15


$
(0.15
)

(0.71
)%
Low

$
20.05


$
18.88


$
1.17


6.20
%
Close⁽¹⁾

$
21.00


$
21.15


$
(0.15
)

(0.71
)%
PERFORMANCE RATIOS








Return on average assets

1.27
%

1.32
%



(0.05
)%
Return on average shareholders' equity

12.73
%

17.29
%



(4.56
)%
Return on average tangible shareholders' equity

13.90
%

19.87
%



(5.97
)%
Efficiency ratio

61.84
%

63.26
%



(1.42
)%
Yield on earning assets (FTE)

4.81
%

4.58
%



0.23
%
Rate on interest bearing liabilities

1.43
%

0.99
%



0.44
%
Net interest margin to earning assets (FTE)

3.85
%

3.91
%



(0.06
)%
BALANCE SHEET DATA⁽¹⁾








Total investment securities

$
62,351


$
79,531


$
(17,180
)

(21.60
)%
Gross loans

$
826,597


$
728,302


$
98,295


13.50
%
Total assets

$
978,046


$
909,901


$
68,145


7.49
%
Total deposits

$
801,101


$
766,587


$
34,514


4.50
%
Borrowed funds

$
69,000


$
74,000


$
(5,000
)

(6.76
)%
Total shareholders' equity

$
99,142


$
66,340


$
32,802


49.45
%
Net loans to total deposits

102.51
%

94.46
%



8.05
%
Common shares outstanding

4,658,722


3,645,402


1,013,320


27.80
%
YTD BALANCE SHEET AVERAGES








Total assets

$
950,749


$
820,481


$
130,268


15.88
%
Earning assets

$
904,590


$
772,111


$
132,479


17.16
%
Interest bearing liabilities

$
606,912


$
528,165


$
78,747


14.91
%
Total shareholders' equity

$
94,815


$
62,662


$
32,153


51.31
%
Total tangible shareholders' equity

$
86,789


$
54,547


$
32,242


59.11
%
Earned common shares outstanding

4,641,084


3,638,123


1,002,961


27.57
%
Unvested stock grants

9,907


—


9,907


N/M

Total common shares outstanding

4,650,991


3,638,123


1,012,868


27.84
%
ASSET QUALITY⁽¹⁾








Nonperforming loans to gross loans

0.11
%

0.09
%



0.02
%
Nonperforming assets to total assets

0.09
%

0.09
%



—
%
ALLL to gross loans

0.65
%

0.57
%



0.08
%
CAPITAL RATIOS⁽¹⁾








Total capital to risk weighted assets

14.42
%

11.31
%



3.11
%
Tier 1 capital to risk weighted assets

13.73
%

10.73
%



3.00
%
CET1 capital to risk weighted assets

11.96
%

8.77
%



3.19
%
Tier 1 leverage ratio

11.22
%

8.90
%



2.32
%









⁽¹⁾At end of period

Income Statement Breakdown and Analysis



Quarter to Date



9/30/2019


6/30/2019

3/31/2019

12/31/2018

9/30/2018
GAAP net income

$
3,415



$
3,097



$
2,514



$
2,009



$
3,513












GAAP net income










Acquisition related items (net of tax)










Accretion on purchased loans

(189
)


(145
)


(175
)


(167
)


(116
)
Amortization of core deposit intangible

88



90



89



107



107

Amortization on acquired time deposits

7



7



7



9



9

Amortization on purchased MSRs

3



3



3



6



6

Total acquisition related items (net of tax)

(91
)


(45
)


(76
)


(45
)


6

Other nonrecurring items (net of tax)










Prepayment penalties collected

(284
)


(9
)


(13
)


—



(96
)
Net gain from BOLI death benefit

—



—



—



—



(932
)
Total other nonrecurring items (net of tax)

(284
)


(9
)


(13
)


—



(1,028
)
Adjusted net income from operations

$
3,040



$
3,043



$
2,425



$
1,964



$
2,491























GAAP net interest income

$
9,056



$
8,593



$
8,347



$
8,005



$
7,673

Accretion on purchased loans

(239
)


(183
)


(222
)


(211
)


(147
)
Prepayment penalties collected

(360
)


(12
)


(16
)


—



(122
)
Amortization on acquired time deposits

9



9



9



12



12

Adjusted net interest income

$
8,466



$
8,407



$
8,118



$
7,806



$
7,416























PERFORMANCE RATIOS










Based on adjusted net income from operations










Earnings per share

$
0.65



$
0.66



$
0.52



$
0.45



$
0.68

Return on average assets

1.24
%


1.29
%


1.05
%


0.85
%


1.14
%
Return on average shareholders' equity

12.31
%


12.91
%


10.69
%


9.65
%


15.08
%
Return on average tangible shareholders' equity

13.42
%


14.11
%


11.70
%


10.71
%


17.21
%











Based on adjusted net interest income










Yield on earning assets (FTE)

4.59
%


4.72
%


4.66
%


4.44
%


4.40
%
Rate on interest bearing liabilities

1.42
%


1.47
%


1.41
%


1.30
%


1.16
%
Net interest margin to earning assets (FTE)

3.67
%


3.75
%


3.72
%


3.57
%


3.61
%



Year to Date September 30

Variance


2019

2018

Amount

%
GAAP net income

$
9,026


$
8,105


$
921


11.36
%
Acquisition related items (net of tax)








Accretion on purchased loans

(509
)

(622
)

113


(18.17
)%
Amortization of core deposit intangible

267


321


(54
)

(16.82
)%
Amortization on acquired time deposits

21


28


(7
)

(25.00
)%
Amortization on purchased MSRs

9


18


(9
)

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

(212
)

(255
)

43


(16.86
)%
Other nonrecurring items (net of tax)








Prepayment penalties collected

(306
)

(137
)

(169
)

123.36
%
Net gain from BOLI death benefit

—


(932
)

932


(100.00
)%
Total other nonrecurring items (net of tax)

(306
)

(1,069
)

763


(71.38
)%
Adjusted net income from operations

$
8,508


$
6,781


$
1,727


25.47
%









GAAP net interest income

$
25,996


$
22,518


$
3,478


15.45
%
Accretion on purchased loans

(644
)

(787
)

143


(18.17
)%
Prepayment penalties collected

(388
)

(173
)

(215
)

124.28
%
Amortization on acquired time deposits

27


35


(8
)

(22.86
)%
Adjusted net interest income

$
24,991


$
21,593


$
3,398


15.74
%









PERFORMANCE RATIOS








Based on adjusted net income from operations








Earnings per share

$
1.83


$
1.86


$
(0.03
)

(1.61
)%
Return on average assets

1.20
%

1.10
%



0.10
%
Return on average shareholders' equity

12.00
%

14.47
%



(2.47
)%
Return on average tangible shareholders' equity

13.11
%

16.62
%



(3.51
)%









Based on adjusted net interest income








Yield on earning assets (FTE)

4.66
%

4.41
%



0.25
%
Rate on interest bearing liabilities

1.44
%

1.00
%



0.44
%
Net interest margin to earning assets (FTE)

3.70
%

3.75
%



(0.05
)%

To effectively compare core operating results from period to period, the impact of acquisition related items and other nonrecurring 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, and into 2020, 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 for the remainder of 2019, and narrow slightly in 2020, due to the forecasted 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 an 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


September 30, 2019

June 30, 2019

September 30, 2018


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

$
827,456


$
10,639


5.10
%

$
805,954


$
10,141


5.05
%

$
722,811


$
8,768


4.81
%
Taxable investment securities

58,059


375


2.56
%

67,237


462


2.76
%

52,617


311


2.34
%
Nontaxable investment securities

9,482


72


3.01
%

9,374


70


3.00
%

11,417


77


2.68
%
Federal funds sold

16,546


89


2.13
%

10,195


61


2.40
%

23,872


120


1.99
%
Interest earning cash and cash equivalents

5,858


35


2.37
%

4,828


28


2.33
%

3,243


15


1.84
%
FHLB stock

3,150


45


5.67
%

3,150


41


5.22
%

3,150


36


4.53
%
Total earning assets

920,551


11,255


4.85
%

900,738


10,803


4.81
%

817,110


9,327


4.53
%



















Non-earning assets


















ALLL

(5,139
)





(4,822
)





(4,080
)




Fixed assets

14,942






14,837






14,808





Accrued income and other assets

40,720






36,342






38,415





Total assets

$
971,074






$
947,095






$
866,253
























Interest bearing liabilities


















Interest bearing demand deposits

$
97,572


$
229


0.93
%

$
75,496


$
117


0.62
%

$
67,368


$
65


0.38
%
Savings deposits

243,796


282


0.46
%

243,794


319


0.52
%

235,723


125


0.21
%
Time deposits

209,984


1,207


2.28
%

229,863


1,319


2.30
%

188,817


907


1.91
%
Borrowed funds

60,452


451


2.96
%

54,812


440


3.22
%

74,000


541


2.90
%
Total interest bearing liabilities

611,804


2,169


1.41
%

603,965


2,195


1.46
%

565,908


1,638


1.15
%



















Noninterest bearing liabilities


















Noninterest bearing deposits

253,292






243,010






232,153





Accrued interest and other liabilities

8,020






5,601






2,651





Shareholders' equity

97,958






94,519






65,541





Total liabilities and shareholders' equity

$
971,074






$
947,095






$
866,253





Net interest income (FTE)



$
9,086






$
8,608






$
7,689



Net interest margin to earning assets (FTE)





3.92
%





3.83
%





3.73
%



Nine Months Ended


September 30, 2019

September 30, 2018


Average Balance

Tax Equivalent Interest

Average Yield / Rate

Average Balance

Tax Equivalent Interest

Average Yield / Rate
Interest earning assets












Total loans

$
808,159


$
30,521


5.05
%

$
701,791


$
25,239


4.81
%
Taxable investment securities

68,219


1,396


2.74
%

43,273


702


2.17
%
Nontaxable investment securities

9,812


218


2.97
%

11,957


230


2.57
%
Federal funds sold

8,928


150


2.25
%

9,656


127


1.76
%
Interest earning cash and cash equivalents

6,322


88


1.86
%

2,425


47


2.59
%
FHLB stock

3,150


138


5.86
%

3,009


122


5.42
%
Total earning assets

904,590


32,511


4.81
%

772,111


26,467


4.58
%













Non-earning assets












ALLL

(4,851
)





(3,836
)




Fixed assets

14,866






14,642





Accrued income and other assets

36,144






37,564





Total assets

$
950,749






$
820,481


















Interest bearing liabilities












Interest bearing demand deposits

$
82,161


$
445


0.72
%

$
63,697


$
112


0.24
%
Savings deposits

243,135


898


0.49
%

239,431


372


0.21
%
Time deposits

221,903


3,746


2.26
%

161,944


2,081


1.72
%
Borrowed funds

59,713


1,380


3.09
%

63,093


1,336


2.83
%
Total interest bearing liabilities

606,912


6,469


1.43
%

528,165


3,901


0.99
%













Noninterest bearing liabilities












Noninterest bearing deposits

243,523






226,955





Accrued interest and other liabilities

5,499






2,699





Shareholders' equity

94,815






62,662





Total liabilities and shareholders' equity

$
950,749






$
820,481





Net interest income (FTE)



$
26,042






$
22,566



Net interest margin to earning assets (FTE)





3.85
%





3.91
%

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 an 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

Nine Months Ended



September 30, 2019

September 30, 2019

September 30, 2019



Compared To

Compared To

Compared To



June 30, 2019

September 30, 2018

September 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

$
363


$
135


$
498


$
1,321


$
550


$
1,871


$
1,308


$
3,974


$
5,282


Taxable investment securities

(57
)

(30
)

(87
)

33


31


64


218


476


694


Nontaxable investment securities

2


—


2


(47
)

42


(5
)

46


(58
)

(12
)

Federal funds sold

71


(43
)

28


(79
)

48


(31
)

38


(15
)

23


Interest earning cash and cash equivalents

6


1


7


15


5


20


(24
)

65


41


FHLB stock

—


4


4


—


9


9


10


6


16


Total changes in interest income

385


67


452


1,243


685


1,928


1,596


4,448


6,044






















Changes in interest expense



















Interest bearing demand deposits

41


71


112


39


125


164


42


291


333


Savings deposits

—


(37
)

(37
)

4


153


157


6


520


526


Time deposits

(102
)

(10
)

(112
)

110


190


300


901


764


1,665


Borrowed funds

166


(155
)

11


(160
)

70


(90
)

(105
)

149


44


Total changes in interest expense

105


(131
)

(26
)

(7
)

538


531


844


1,724


2,568


Net change in net interest income (FTE)

$
280


$
198


$
478


$
1,250


$
147


$
1,397


$
752


$
2,724


$
3,476



Average Yield/Rate for the Three Month Periods Ended


9/30/2019

6/30/2019

3/31/2019

12/31/2018

9/30/2018
Total earning assets

4.85
%

4.81
%

4.77
%

4.54
%

4.53
%
Total interest bearing liabilities

1.41
%

1.46
%

1.40
%

1.29
%

1.15
%
Net interest margin to earning assets (FTE)

3.92
%

3.83
%

3.82
%

3.66
%

3.73
%



Quarter to Date Net Interest Income (FTE)



9/30/2019

6/30/2019

3/31/2019

12/31/2018

9/30/2018

Total interest income (FTE)

11,255


10,803


10,453


9,947


9,327


Total interest expense

2,169


2,195


2,090


1,926


1,638


Net interest income (FTE)

$
9,086


$
8,608


$
8,363


$
8,021


$
7,689

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 and shrink slightly in 2020. The anticipated minor reduction in net interest margins for 2020 is due to yields on earning assets falling faster than rates on interest bearing liabilities.

Noninterest Income



Quarter to Date



9/30/2019

6/30/2019

3/31/2019

12/31/2018

9/30/2018

Net gain on sales of mortgage loans

$
665


$
422


$
195


$
162


$
277


ATM and debit card income

418


404


360


397


386


Trust and investment services

395


459


328


372


444


Mortgage servicing fees

243


230


211


208


199


Service charges on deposit accounts

239


222


234


259


273


Net MSR income

142


344


8


67


133


Net gain from BOLI death benefit

—


—


—


—


932


Net gain on sales of commercial loans

—


—


—


—


—


Other income and fees

160


169


186


238


116


Total noninterest income

$
2,262


$
2,250


$
1,522


$
1,703


$
2,760



Year to Date September 30

Variance



2019

2018

Amount

%

Net gain on sales of mortgage loans

$
1,282


$
679


$
603


88.81
%

ATM and debit card income

1,182


1,128


54


4.79
%

Trust and investment services

1,182


1,219


(37
)

(3.04
)%

Mortgage servicing fees

684


577


107


18.54
%

Service charges on deposit accounts

695


785


(90
)

(11.46
)%

Net MSR income

494


296


198


66.89
%

Net gain from BOLI death benefit

—


932


(932
)

(100.00
)%

Net gain on sales of commercial loans

—


518


(518
)

(100.00
)%

Other income and fees

515


440


75


17.05
%

Total noninterest income

$
6,034


$
6,574


$
(540
)

(8.21
)%

Net gain on sales of mortgage loans represents the income earned on the sale of residential mortgage loans into the secondary market. Through the first nine months of 2019, the Corporation had two sales of residential mortgage pools that were previously held in its loan portfolio. One sale occurred in the second quarter of 2019 in which $28,000 of residential mortgages generated a gain of $25. The second sale occurred in the third quarter of 2019, in which $2,600 of residential mortgages generated a gain of $64. In 2018, the Corporation had one sale of residential mortgages that were previously held in its portfolio. The sale generated a gain of $47 and $4,724 of residential mortgages were sold. Excluding the impact of these sales, net gains from the sales of mortgage loans increased by $561 when the first nine months of 2019 are compared to the same period in 2018 and this trend is expected to continue throughout the remainder of the year. While the Corporation continually analyzes its residential mortgage portfolio for opportunistic sales strategies, there are no sales anticipated in the foreseeable future.

ATM and debit card income represents fees earned on ATM and debit card transactions. The Corporation expects these fees to increase modestly in future periods.

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 activity is expected to approximate current levels for the foreseeable future.

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 as mortgage demand remains strong.

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 for the foreseeable future.

Net MSR income is the net of income generated from the capitalization of new MSRs and the amortization of serviced loans as a result of paydowns and payoffs. As noted above, the Corporation sold pools of residential mortgage loans out of its loan portfolio in the second and third quarter of 2019. This second quarter sale generated $266 of net MSR income from the capitalization of the associated servicing rights while the third quarter sale generated $25 of capitalized servicing rights. The Corporation expects net MSR income to stabilize in future periods as residential mortgage sales continue at current levels for the foreseeable future.

Net gain from BOLI death benefit is recognized in the event of the death of an insured individual. The Corporation does not expect to receive any gains from BOLI death benefits in 2019.

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 nine months ending September 30, 2019. While the Corporation continually analyzes its commercial loan portfolio for opportunistic sales strategies, there are no sales anticipated in the foreseeable future.

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 foreseeable future.

Noninterest Expenses



Quarter to Date


9/30/2019

6/30/2019

3/31/2019

12/31/2018

9/30/2018
Compensation

$
3,530


$
3,749


$
3,630


$
3,429


$
3,359

Furniture and equipment

579


525


491


508


486

Professional services

494


439


445


518


381

Occupancy

444


426


437


416


379

Data processing

323


281


278


512


164

Advertising and promotional

222


291


163


198


177

Loan and collection

120


119


110


134


135

Amortization of CDI

112


114


112


136


135

Telephone and communication

110


108


111


107


106

ATM and debit card

109


100


95


96


105

FDIC insurance premiums

20


17


101


120


132

Other losses

13


4


11


152


2

Other general and administrative

532


518


525


581


514

Total noninterest expenses

$
6,608


$
6,691


$
6,509


$
6,907


$
6,075



Year to Date September 30

Variance


2019

2018

Amount

%
Compensation

$
10,909


$
9,992


$
917


9.18
%
Furniture and equipment

1,595


1,390


205


14.75
%
Professional services

1,378


1,269


109


8.59
%
Occupancy

1,307


1,223


84


6.87
%
Data processing

882


456


426


93.42
%
Advertising and promotional

676


520


156


30.00
%
Loan and collection

349


403


(54
)

(13.40
)%
Amortization of CDI

338


406


(68
)

(16.75
)%
Telephone and communication

329


306


23


7.52
%
ATM and debit card

304


291


13


4.47
%
FDIC insurance premiums

138


352


(214
)

(60.80
)%
Other losses

28


261


(233
)

(89.27
)%
Other general and administrative

1,575


1,534


41


2.67
%
Total noninterest expenses

$
19,808


$
18,403


$
1,405


7.63
%

Compensation includes all compensation and benefits paid to the Corporation's employees. Compensation for the nine months ending September 30, 2019 has increased compared to the same time period for 2018, 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 includes 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 CDI 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 includes 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 remain at current levels for 2019.

Included in other losses was a $260 one time loan related expense in the first quarter of 2018 and one time loss 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



9/30/2019

6/30/2019

3/31/2019

12/31/2018

9/30/2018

ASSETS











Cash and cash equivalents

$
37,572


$
20,067


$
16,509


$
23,412


$
63,469


Total investment securities

62,351


73,285


82,222


94,721


79,531


Loans HFS

15,111


6,771


1,835


903


2,021


Gross loans

826,597


813,547


809,863


772,227


728,302


Less ALLL

5,413


5,014


4,745


4,488


4,146


Net loans

821,184


808,533


805,118


767,739


724,156


All other assets

41,828


41,134


40,488


39,675


40,724


Total assets

$
978,046


$
949,790


$
946,172


$
926,450


$
909,901














LIABILITIES AND SHAREHOLDERS' EQUITY











Total deposits

$
801,101


$
792,555


$
789,533


$
763,124


$
766,587


Total borrowed funds

69,000


54,000


59,000


69,000


74,000


Accrued interest and other liabilities

8,803


7,731


5,403


4,810


2,974


Total liabilities

878,904


854,286


853,936


836,934


843,561














Total shareholders' equity

99,142


95,504


92,236


89,516


66,340


Total liabilities and shareholders' equity

$
978,046


$
949,790


$
946,172


$
926,450


$
909,901



9/30/2019 vs 6/30/2019

9/30/2019 vs 9/30/2018



Variance

Variance



Amount

%

Amount

%

ASSETS









Cash and cash equivalents

$
17,505


87.23
%

$
(25,897
)

(40.80
)%

Total investment securities

(10,934
)

(14.92
)%

(17,180
)

(21.60
)%

Loans HFS

8,340


123.17
%

13,090


647.7
%

Gross loans

13,050


1.6
%

98,295


13.5
%

Less ALLL

399


7.96
%

1,267


30.56
%

Net loans

12,651


1.56
%

97,028


13.4
%

All other assets

694


1.69
%

1,104


2.71
%

Total assets

$
28,256


2.97
%

$
68,145


7.49
%











LIABILITIES AND SHAREHOLDERS' EQUITY









Total deposits

$
8,546


1.08
%

$
34,514


4.5
%

Total borrowed funds

15,000


27.78
%

(5,000
)

(6.76
)%

Accrued interest and other liabilities

1,072


13.87
%

5,829


196
%

Total liabilities

24,618


1.49
%

35,343


2.2
%











Total shareholders' equity

3,638


3.81
%

32,802


49.45
%

Total liabilities and shareholders' equity

$
28,256


2.97
%

$
68,145


7.49
%

Cash and cash equivalents



9/30/2019

6/30/2019

3/31/2019

12/31/2018

9/30/2018

Cash and due from banks

$
28,572


$
17,067


$
16,509


$
19,412


$
21,469


Federal funds sold

9,000


3,000


—


4,000


42,000


Cash and cash equivalents

$
37,572


$
20,067


$
16,509


$
23,412


$
63,469
















9/30/2019 vs 6/30/2019



9/30/2019 vs 9/30/2018



Variance



Variance



Amount

%



Amount

%

Cash and due from banks

$
11,505


67.41
%



$
7,103


33.08
%

Federal funds sold

6,000


200
%



(33,000
)

(78.57
)%

Cash and cash equivalents

$
17,505


87.23
%



$
(25,897
)

(40.80
)%

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



9/30/2019

6/30/2019

3/31/2019

12/31/2018

9/30/2018
AFS










U.S. Government and federal agency

$
22,854


$
33,842


$
38,796


$
57,029


$
49,011

Collateralized mortgage obligations - agencies

10,826


11,856


12,516


9,833


1,662

State and municipal

10,194


8,889


10,322


10,558


12,741

Certificates of deposit

7,155


7,154


8,394


8,393


7,171

Mortgage backed residential

6,227


6,733


7,031


4,276


4,408

Unrealized gain/(loss) on AFS securities

1,048


776


288


(235
)

(478
)
Total AFS

58,304


69,250


77,347


89,854


74,515

HTM State and municipal

2,100


2,104


2,965


2,971


3,728

Equity securities

1,947


1,931


1,910


1,896


1,288

Total investment securities

$
62,351


$
73,285


$
82,222


$
94,721


$
79,531














9/30/2019 vs 6/30/2019



9/30/2019 vs 9/30/2018


Variance



Variance


Amount

%



Amount

%
AFS










U.S. Government and federal agency

$
(10,988
)

(32.47
)%



$
(26,157
)

(53.37
)%
Collateralized mortgage obligations - agencies

(1,030
)

(8.69
)%



9,164


551.38
%
State and municipal

1,305


14.68
%



(2,547
)

(19.99
)%
Certificates of deposit

1


0.01
%



(16
)

(0.22
)%
Mortgage backed residential

(506
)

(7.52
)%



1,819


41.27
%
Unrealized gain/(loss) on AFS securities

272


35.05
%



1,526


(319.25
)%
Total AFS

(10,946
)

(15.81
)%



(16,211
)

(21.76
)%
HTM State and municipal

(4
)

(0.19
)%



(1,628
)

(43.67
)%
Equity securities

16


0.83
%



659


51.16
%
Total investment securities

$
(10,934
)

(14.92
)%



$
(17,180
)

(21.60
)%

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 the majority of maturing investments. Total investment securities are expected to approximate current levels or decline slightly in future periods.

Loans HFS

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 significant increase in loans HFS is due to a considerable increase in residential mortgage demand. Loans HFS are expected to decrease slightly, however, over the rest of 2019 as loan appetite tends to decrease towards the end of the year. That being said, if interest rates further decline, the Corporation could expect the balance in loans held for sale to approximate current levels going into 2020.

Net loans

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



9/30/2019

6/30/2019

3/31/2019

12/31/2018

9/30/2018
Commercial real estate

$
420,127


$
408,103


$
394,462


$
369,043


$
351,739

Residential real estate

291,401


289,944


306,466


293,271


274,035

Commercial

63,747


63,998


56,790


56,583


48,594

Home equity

43,061


42,890


43,130


43,597


41,136

Installment

8,261


8,612


9,015


9,733


12,798

Gross loans

$
826,597


$
813,547


$
809,863


$
772,227


$
728,302














9/30/2019 vs 6/30/2019



9/30/2019 vs 9/30/2018


Variance



Variance


Amount

%



Amount

%
Commercial real estate

$
12,024


2.95
%



$
68,388


19.44
%
Residential real estate

1,457


0.5
%



17,366


6.34
%
Commercial

(251
)

(0.39
)%



15,153


31.18
%
Home equity

171


0.4
%



1,925


4.68
%
Installment

(351
)

(4.08
)%



(4,537
)

(35.45
)%
Gross loans

$
13,050


1.6
%



$
98,295


13.5
%

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



9/30/2019

6/30/2019

3/31/2019

12/31/2018

9/30/2018
Accruing interest










Current

$
824,587


$
811,184


$
807,671


$
769,799


$
725,954

Past due 30-89 days

1,089


1,275


1,009


1,325


1,689

Past due 90 days or more

209


301


310


191


150

Total accruing interest

825,885


812,760


808,990


771,315


727,793

Nonaccrual

712


787


873


912


509

Total loans

$
826,597


$
813,547


$
809,863


$
772,227


$
728,302

Total loans past due and in nonaccrual status

$
2,010


$
2,363


$
2,192


$
2,428


$
2,348

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



9/30/2019

6/30/2019

3/31/2019

12/31/2018

9/30/2018
Nonaccrual loans

$
712


$
787


$
873


$
912


$
509

Accruing loans past due 90 days or more

209


301


310


191


150

Total nonperforming loans

921


1,088


1,183


1,103


659

OREO

—


—


—


32


143

Total nonperforming assets

$
921


$
1,088


$
1,183


$
1,135


$
802

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



9/30/2019

6/30/2019

3/31/2019

12/31/2018

9/30/2018
Nonperforming loans to gross loans

0.11
%

0.13
%

0.15
%

0.14
%

0.09
%
Nonperforming assets to total assets

0.09
%

0.11
%

0.13
%

0.12
%

0.09
%
ALLL to gross loans

0.65
%

0.62
%

0.59
%

0.58
%

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 understand that 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:



9/30/2019

6/30/2019

3/31/2019

12/31/2018

9/30/2018
Net unamortized discount on purchased loans

$
1,626


$
1,914


$
2,095


$
2,318


$
2,529

All other assets

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



9/30/2019

6/30/2019

3/31/2019

12/31/2018

9/30/2018
Premises and equipment, net

$
15,443


$
14,792


$
14,838


$
14,761


$
14,644

BOLI

10,248


10,181


10,070


10,007


9,959

MSR

3,900


3,758


3,414


3,406


3,340

Goodwill

3,219


3,219


3,219


3,219


3,219

FHLB stock

3,150


3,150


3,150


3,150


3,150

AIR

2,954


3,350


3,298


3,020


3,082

CDI assets

1,015


1,128


1,241


1,353


1,489

OREO

—


—


—


32


143

Other assets

1,899


1,556


1,258


727


1,698

All other assets

$
41,828


$
41,134


$
40,488


$
39,675


$
40,724














9/30/2019 vs 6/30/2019



9/30/2019 vs 9/30/2018


Variance



Variance


Amount

%



Amount

%
Premises and equipment, net

$
651


4.4
%



$
799


5.46
%
BOLI

67


0.66
%



289


2.9
%
MSR

142


3.78
%



560


16.77
%
Goodwill

—


—
%



—


—
%
FHLB stock

—


—
%



—


—
%
AIR

(396
)

(11.82
)%



(128
)

(4.15
)%
CDI assets

(113
)

(10.02
)%



(474
)

(31.83
)%
OREO

—


—
%



(143
)

(100.00
)%
Other assets

343


22.04
%



201


11.84
%
All other assets

$
694


1.69
%



$
1,104


2.71
%

Premises and equipment, net is comprised of land and land improvements, building and building improvements, furniture and equipment, and construction in progress. The $651 increase in the third quarter of 2019 in mainly due to the build-out of a newly leased property and newly purchased customer facing equipment.

All other assets are 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:



9/30/2019

6/30/2019

3/31/2019

12/31/2018

9/30/2018
Demand

$
253,784


$
245,703


$
235,305


$
233,954


$
235,208

Savings

213,494


232,094


230,006


223,728


221,028

Money market demand

80,873


69,374


61,294


61,369


60,836

NOW

39,286


18,017


19,358


10,234


8,952

Time deposits

213,664


227,367


243,570


233,839


240,563

Total deposits

$
801,101


$
792,555


$
789,533


$
763,124


$
766,587














9/30/2019 vs 6/30/2019



9/30/2019 vs 9/30/2018


Variance



Variance


Amount

%



Amount

%
Demand

$
8,081


3.29
%



$
18,576


7.9
%
Savings

(18,600
)

(8.01
)%



(7,534
)

(3.41
)%
Money market demand

11,499


16.58
%



20,037


32.94
%
NOW

21,269


118.05
%



30,334


338.85
%
Time deposits

(13,703
)

(6.03
)%



(26,899
)

(11.18
)%
Total deposits

$
8,546


1.08
%



$
34,514


4.5
%

The Corporation has continued its focus of growing non-contractual deposits while supplementing funding with time deposits. On a quarterly average basis, noninterest bearing deposits increased $10,282, or 4.23%, from June 30, 2019. The Corporation has also been able to drive this meaningful increase through enhanced organic growth strategies. The quarter over quarter decrease in Savings and increase in NOW account balances are related to the transition of specific accounts from Savings to NOW account types. This was a one-time transition. 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:



9/30/2019

6/30/2019

3/31/2019

12/31/2018

9/30/2018
FHLB borrowings

$
55,000


$
40,000


$
40,000


$
55,000


$
60,000

Subordinated debentures

14,000


14,000


14,000


14,000


14,000

Federal funds purchased

—


—


5,000


—


—

Total borrowed funds

$
69,000


$
54,000


$
59,000


$
69,000


$
74,000














9/30/2019 vs 6/30/2019



9/30/2019 vs 9/30/2018


Variance



Variance


Amount

%



Amount

%
FHLB borrowings

$
15,000


37.5
%



$
(5,000
)

(8.33
)%
Subordinated debentures

—


—
%



—


—
%
Federal funds purchased

—


—
%



—


—
%
Total borrowed funds

$
15,000


27.78
%



$
(5,000
)

(6.76
)%

While the Corporation increased its reliance on borrowed funds in 2018 to fund its strong loan demand, borrowed funds gradually declined in the quarters prior to September 30, 2019 as the Corporation has been able to fund organic growth through increases in deposit accounts. Total borrowed funds increased in the third quarter of 2019 as the interest rates for FHLB borrowings were extremely attractive. Total borrowed funds are expected to decrease as maturing FHLB borrowings roll off. However, the Corporation continues to analyze the market for opportunities and will borrow funds when deemed financially beneficial.

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.

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

ACH: Automated Clearing House

HFS: Held for sale

AFS: Available-for-sale

HTM: Held to maturity

AIR: Accrued interest receivable

IRA: Individual retirement account

ALLL: Allowance for loan losses

LIBOR: London Interbank Offered Rate

AOCI: Accumulated other comprehensive income

MSR: Mortgage servicing rights

ARRC: Alternative Reference Rates Committee

N/M: Not meaningful

ASC: Accounting Standards Codification

NASDAQ: National Association of Securities Dealers Automated Quotations

ASU: Accounting Standards Update

ATM: Automated teller machine

NOW: Negotiable order of withdrawal

BOLI: Bank owned life insurance

NSF: Non-sufficient funds

CDI: Core deposit intangible

OIS: Overnight Index Swap

CET1: Common equity tier 1

OREO: Other real estate owned

DRIP: Dividend Reinvestment Plan

OTTI: Other-than-temporary impairment

ESOP: Employee Stock Ownership Plan

QTD: Quarter to date

FASB: Financial Accounting Standards Board

SBA: Small Business Association

FDIC: Federal Deposit Insurance Corporation

SERP: Supplemental Executive Retirement Plan

FHLB: Federal Home Loan Bank

SOFR: Secured Overnight Funding Rate

FRB: Federal Reserve Bank

TDR: Troubled debt restructuring

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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