Fentura Financial, Inc. Announces Second Quarter 2020 Earnings

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: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:
Income Statement Breakdown and Analysis

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 IncomeThe 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.
Net Interest IncomeNet 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 AnalysisThe 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.
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
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
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
Cash and cash equivalents
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 sourcesWhile 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:Total investment securities
The amortized cost and fair value of AFS investment securities as of June 30, 2020 were as follows:The amortized cost and fair value of HTM investment securities as of June 30, 2020 were as follows: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: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 lossesThe following tables outline the composition and changes in the loan portfolio as of:The following table presents historical loan balances by portfolio segment and impairment evaluation as of:The following table presents historical allowance for loan losses allocations by portfolio segment and impairment evaluation as of:The following table summarizes the Corporation’s current, past due, and nonaccrual loans as of:
The following table summarizes the Corporation’s nonperforming assets as of:The following table summarizes the Corporation’s primary asset quality measures as of:The following table summarizes the balance of net unamortized discounts on purchased loans as of: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: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: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 assetsThe following tables outline the composition and changes in other assets as of: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 depositsThe following tables outline the composition and changes in the deposit portfolio as of: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 maturitiesThe following table summarizes the contractual maturities of the time deposits as of June 30, 2020: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 fundsThe following tables outline the composition and changes in borrowed funds as of: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 sourcesThe following tables outline the composition and changes in wholesale funding sources as of: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 liabilitiesAccrued 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’ equityTotal 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 PerformanceThe 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-f13d60034839Abbreviations and Acronyms
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.