Fentura Financial, Inc. Announces Fourth 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 December 31, 2020 presentation.
FENTON, Mich., Feb. 02, 2021 (GLOBE NEWSWIRE) — Fentura Financial, Inc. (OTCQX: FETM) announces quarterly results of net income of $2,733 and $15,464 for the three and twelve month periods ended December 31, 2020.Ronald Justice, President and CEO, stated “We are very pleased to report a solid quarter and another year of strong financial performance despite the many challenges presented by the COVID-19 pandemic. The extraordinary efforts of the Fentura team in implementing strategies to respond to the pandemic, allowed us to continue to effectively operate and meet all the banking needs of our clients and to support the communities we serve.”Following is a discussion of the Corporation’s financial performance as of, and for the three and twelve months periods ended December 31, 2020. At the end of this document is a list of abbreviations and acronyms.Results of Operations
The following table outlines the Corporation’s QTD results of operations and provides certain performance measures as of, and for the three month periods ended:The following table outlines the Corporation’s YTD results of operations and provides certain performance measures as of, and for the twelve 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.⁽¹⁾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. Changes in the fair value of these instruments is recognized as a component of noninterest income. Subsequent to the adoption of Staff Accounting Bulletin No. 109, changes in fair value related to mortgage banking are recurring in nature.
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.

Noninterest Income
Residential Mortgage OperationsNet gain on sales of mortgage loans represents the income earned on the sale of residential mortgage loans into the secondary market. Throughout 2020, the interest rate environment was very advantageous for residential mortgage originations and refinancing, resulting in record gains. Although many consumers are facing uncertainty due to the COVID-19 pandemic, residential mortgage originations and refinancing activities were substantially greater in 2020. Throughout 2020, home values and housing costs continued to rise due to inventory shortages and a lack of new construction. The Corporation expects residential mortgage activity to moderate in 2021.Change in fair value of mortgage banking instruments represents changes in the fair value of the Corporation’s interest rate lock commitments, mortgage loans held-for-sale, and mandatory forward loan sales commitments. On January 1, 2020, the Corporation adopted SAB 109, resulting in the Corporation recognizing the value of servicing at the time of commitment, rather than at the time of delivery. Additionally, the Corporation also elected the fair value option for residential mortgage loans HFS on January 1, 2020. Generally, the adoption of SAB 109 resulted in the acceleration of the timing of revenue recognition in relation to the Corporation’s secondary market mortgage production. Pursuant to this adoption, changes in the fair value of mortgage banking instruments and loans held for sale are included in noninterest income.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 increase in the size of the serviced portfolio. Mortgage servicing fees are expected to continue to increase throughout 2021.Net mortgage servicing rights income represents income generated from the capitalization of mortgage servicing rights, net of amortization and impairment. In each of the first two quarters of 2020, the Corporation recognized impairments in its servicing portfolio as a direct result of the low interest rate environment and record level of refinancing activity. During the third and fourth quarters of 2020, these impairments were reversed.Overall revenues from residential mortgage operations (net gains from sale of mortgage loans, change in the fair value of mortgage banking instruments, mortgage servicing fees, and net mortgage servicing rights income) increased by $9,790 or 280.03% in 2020, which represented a record level of production for the Corporation’s residential mortgage team. Included in the $487,342 of residential mortgage production in 2020, was $292,130 in refinancing activity. As refinancing activity is expected to decline in 2021, revenues from residential mortgage operations will likely decline in 2021.All Other Noninterest IncomeATM and debit card income represents fees earned on ATM and debit card transactions. The Corporation expects these fees to increase modestly into 2021.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 increase modestly in 2021.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, resulting in a recognized gain of $732. The Corporation does not anticipate any significant changes in fair value from equity sales in the foreseeable future.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 temporary reduction in fees charged due to the COVID-19 pandemic. Service charges on deposit accounts are expected to approximate current levels into 2021.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 does not expect to receive any gains from the sale of commercial loans in 2021.Net gain from corporate owned life insurance death benefit is recognized in the event of the death of an insured individual. The death of an insured individual occurred in the second quarter of 2020. The Corporation does not expect to receive any gains from COLI death benefits in 2021.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 2021.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, however, commissions are expected to decline in 2021.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.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.Data processing primarily includes the expenses relating to the Corporation’s core data processor. These expenses are expected to increase throughout 2021 with the size and complexity of the Corporation.During the fourth quarter of 2020, the Corporation paid off three Federal Home Loan Bank borrowings, totaling $30,000. The Corporation incurred a one-time early payoff fee in the amount $1,907. The payoff was executed to enhance net interest income and net interest margins in each of the next three years. The weighted average rate of the three FHLB borrowings was 2.17%. The Corporation is expected to save approximately $650 during 2021.Loan and collection includes expenses related to the origination and collection of loans, as well as expenses related to OREO. The increase in expenses is a direct result of increased loan volume, as the current low interest rate environment has been attractive for borrowers. The Corporation may continue to experience an increase in these expenses into 2021.Advertising and promotional includes the Corporation’s media costs and any donations or sponsorships made on behalf of the Corporation. The annual 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. In addition to traditional marketing strategies, the Corporation rolled out a new branding strategy in 2020, which resulted in elevated advertising and promotional expenses. Total advertising and promotional expenses are expected to decline slightly in 2021.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 2021.Amortization of core deposit intangibles relates to the core deposits acquired from Community Bancorp, Inc. on December 31, 2016 and is expected to continue to decline as the core deposit intangible is being amortized based on the sum-of-years-digits method.Telephone and communication includes expenses relating to the Corporation’s communication systems. These expenses are expected to maintain current levels throughout 2021.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. FDIC insurance premiums are expected to increase in 2021 primarily due to the Corporation’s growth in total assets.Other general and administrative includes miscellaneous other expense items, none of which are typically significant. Other general and administrative 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 to maintain a strong liquidity position, it is important to monitor all liquidity sources. 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 December 31, 2020 were as follows:The amortized cost and fair value of HTM investment securities as of December 31, 2020 were as follows:Throughout 2020, yields on bonds that met the Corporation’s investment standards declined significantly. An influx of liquidity during the year 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 December 31, 2020 for investment securities purchased YTD:Loans held-for-saleLoans 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.During the first quarter of 2020, the Corporation opted to recognize loans HFS at fair value which represents 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:During the fourth quarter, the Corporation transferred one commercial real estate loan with an outstanding principal balance of $7,214 to nonaccrual. The underlying collateral for this loan is an extended stay hotel. The hotel’s current cash flow is insufficient to service the debt in accordance with the contractual terms of the note and, as such, the loan continues to be on payment deferrals. A specific reserve has been established for the estimated collateral deficiency (based on a current appraisal), net of a 70% USDA guarantee.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. Despite the significant growth, the Corporation has not relaxed its underwriting standards. Included in the increase in commercial loans since December 31, 2019 were $177,845 of PPP loans.Despite historically strong credit quality indicators, there continues to be significant uncertainty surrounding the overall impact of the COVID-19 pandemic on the loan portfolio. This uncertainty resulted in the Corporation increasing the ALLL by $5,087, or 87.51%, since December 31, 2019. Management will continue to monitor the loan portfolio to ensure that the ALLL remains appropriate.The following table summarizes the average loan size as of:COVID-19, CARES Act and SBA activityThe communities which the Corporation serves are not immune to the fallout of the COVID-19 pandemic. The Corporation has committed significant efforts to work with customers through temporary loan modifications and participation in the PPP loan program through the SBA.The Corporation considered 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 6 months or less.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 foreclosure actions and evictions, and offering loan modification options that lower payments or keep payments the same after the forbearance period.As outlined in the following table, the majority of the Corporation’s portfolio and serviced loans have returned to normal principal and interest payments. The balance of those loans with deferrals are actively monitored and specific reserves have been established where appropriate.The table below outlines the active COVID-19 related loan modifications as of December 31, 2020:The accommodation industry was particularly impacted by the COVID-19 pandemic. Due to executive action put in place by the government, including stay-at-home orders and travel restrictions, hotel occupancy rates were reduced drastically. The Corporation has 15 commercial loans in its portfolio in the accommodation industry with a book balance of $19,980. Of these loans, approximately 52% are government-backed by guarantees from either the SBA or USDA.The Corporation was extremely active in participating in the PPP loan program. As of December 31, 2020, the Corporation funded 1,370 loans totaling $216,205. During the fourth quarter of 2020, the SBA began processing PPP forgiveness applications, which reduced the outstanding balance of PPP loans to $177,845 as of December 31, 2020. As of December 31, 2020, the Corporation received forgiveness payments for 232 PPP loans from the SBA.The Corporation generated $6,799 in fees from the SBA through the PPP loan program. The income is being recognized over the life of the PPP loans (24 to 60 months) based on the level yield method. As of December 31, 2020, the Corporation has recognized $3,560 in income, with $3,239 remaining as unearned income.All other assetsThe following tables outline the composition and changes in other assets as of:
Mortgage servicing rights are servicing assets that are recognized from the sales of mortgage loans. A portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. The increase in mortgage servicing rights is due to the increased volume of residential mortgage loan sales. The Corporation expects mortgage servicing rights to increase, as residential real estate lending is expected to continue to remain strong into 2021.Derivatives represent the fair value of interest rate lock commitments and mandatory forward loan sales commitments that are in a gain position. These balances can fluctuate from period to period based on changes in interest rates and the volume of the Corporation’s loan pipeline.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:
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. The Corporation will continue to monitor deposit growth and adjust interest rates in order to minimize downward pressure on margins.
Schedule of time deposit maturitiesThe following table summarizes the contractual maturities of the time deposits as of December 31, 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 on 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. The increase in Federal Home Loan Bank borrowings in the second quarter of 2020 was solely due to the Corporation funding PPP loans. The decrease in Federal Home Loan Bank borrowings in the fourth quarter of 2020 was primarily due to early payoffs of three FHLB borrowings totaling $30,000.
Total borrowed funds are expected to approximate current levels in 2021 as there are no scheduled maturities. 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 manage balance sheet growth. Wholesale funding has historically been more expensive than core deposits, however, due to the COVID-19 pandemic, the FRB has kept Fed funds rates near zero. 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 throughout 2021 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. During the fourth quarter of 2020, the Corporation repurchased 5,640 shares for $110.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 December 31, 2015 and all dividends were reinvested.The graph accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/d09cbdf7-6e1d-421d-b74d-c95960b6fe9aAbbreviations and AcronymsAbout Fentura Financial, Inc. and The State BankFentura 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.