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CST: 24/11/2020 00:29:57   

Fentura Financial, Inc. Announces Second Quarter 2019 Earnings

487 Days ago

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

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

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

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

Following is a discussion and detailed analysis as of, and for the quarter ended, June 30, 2019. At the end of this document is a list of abbreviations and acronyms.

Results of Operations
The following table outlines the Corporation's QTD results of operations and provides certain performance measures as of, and for the three month periods ended:

  6/30/2019   3/31/2019   12/31/2018   9/30/2018   6/30/2018
INCOME STATEMENT DATA                  
Interest income $ 10,788     $ 10,437     $ 9,931     $ 9,311     $ 8,729  
Interest expense 2,195     2,090     1,926     1,638     1,232  
Net interest income 8,593     8,347     8,005     7,673     7,497  
Provision for loan losses 264     213     290     191     301  
Noninterest income 2,250     1,522     1,703     2,760     2,013  
Noninterest expenses 6,691     6,509     6,907     6,075     6,049  
Federal income tax expense 791     633     502     654     642  
Net income $ 3,097     $ 2,514     $ 2,009     $ 3,513     $ 2,518  
PER SHARE                  
Earnings $ 0.67     $ 0.54     $ 0.46     $ 0.96     $ 0.69  
Dividends $ 0.07     $ 0.07     $ 0.06     $ 0.06     $ 0.06  
Tangible book value(1) $ 20.28     $ 19.58     $ 19.01     $ 17.75     $ 16.86  
Quoted market value                  
High $ 20.90     $ 21.00     $ 22.02     $ 22.50     $ 21.15  
Low $ 20.45     $ 20.05     $ 20.94     $ 20.60     $ 19.32  
Close(1) $ 20.60     $ 20.89     $ 21.00     $ 21.15     $ 21.10  
PERFORMANCE RATIOS                  
Return on average assets 1.31 %   1.09 %   0.87 %   1.61 %   1.25 %
Return on average shareholders' equity 13.14 %   11.09 %   9.87 %   21.27 %   16.20 %
Return on average tangible shareholders' equity 14.36 %   12.13 %   10.96 %   24.27 %   18.62 %
Efficiency ratio 61.71 %   65.95 %   71.15 %   58.23 %   63.61 %
Yield on earning assets (FTE) 4.81 %   4.77 %   4.54 %   4.53 %   4.62 %
Rate on interest bearing liabilities 1.46 %   1.40 %   1.29 %   1.15 %   0.96 %
Net interest margin to earning assets (FTE) 3.83 %   3.82 %   3.66 %   3.73 %   3.97 %
BALANCE SHEET DATA(1)                  
Total investment securities $ 73,285     $ 82,222     $ 94,721     $ 79,531     $ 49,110  
Gross loans $ 813,547     $ 809,863     $ 772,227     $ 728,302     $ 707,364  
Total assets $ 949,790     $ 946,172     $ 926,450     $ 909,901     $ 841,459  
Total deposits $ 792,555     $ 789,533     $ 763,124     $ 766,587     $ 702,035  
Borrowed funds $ 54,000     $ 59,000     $ 69,000     $ 74,000     $ 74,000  
Total shareholders' equity $ 95,504     $ 92,236     $ 89,516     $ 66,340     $ 63,078  
Net loans to total deposits 102.02 %   101.97 %   100.60 %   94.46 %   100.18 %
Common shares outstanding 4,653,343     4,647,978     4,636,455     3,645,402     3,640,060  
QTD BALANCE SHEET AVERAGES                  
Total assets $ 947,095     $ 934,078     $ 917,242     $ 866,253     $ 805,794  
Earning assets $ 900,738     $ 887,974     $ 868,498     $ 817,110     $ 759,746  
Interest bearing liabilities $ 603,965     $ 604,973     $ 592,878     $ 565,908     $ 514,012  
Total shareholders' equity $ 94,519     $ 91,964     $ 80,781     $ 65,541     $ 62,333  
Total tangible shareholders' equity $ 86,478     $ 84,025     $ 72,742     $ 57,419     $ 54,254  
Earned common shares outstanding 4,641,161     4,635,255     4,332,665     3,643,151     3,637,799  
Unvested stock grants 9,967     9,788     3,022          
Total common shares outstanding 4,651,128     4,645,043     4,335,687     3,643,151     3,637,799  
ASSET QUALITY(1)                  
Nonperforming loans to gross loans 0.13 %   0.15 %   0.14 %   0.09 %   0.14 %
Nonperforming assets to total assets 0.11 %   0.13 %   0.12 %   0.09 %   0.13 %
ALLL to gross loans 0.62 %   0.59 %   0.58 %   0.57 %   0.57 %
CAPITAL RATIOS(1)                  
Shareholders' equity to assets 10.06 %   9.75 %   9.66 %   7.29 %   7.50 %
Tier 1 leverage(2) 12.47 %   12.23 %   12.15 %   10.22 %   10.11 %
CET1 capital to risk weighted assets(2) 12.47 %   12.23 %   12.15 %   10.22 %   10.11 %
Tier 1 capital to average assets(2) 10.28 %   10.05 %   9.90 %   8.48 %   8.70 %
                   
(1)At end of period                  
(2)The State Bank                  

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

                  Variance
  6/30/2019   6/30/2018   Amount   %
INCOME STATEMENT DATA                            
Interest income $ 21,225     $ 17,108     $ 4,117     24.06 %
Interest expense 4,285     2,263     2,022     89.35 %
Net interest income 16,940     14,845     2,095     14.11 %
Provision for loan losses 477     576     (99 )   (17.19 )%
Noninterest income 3,772     3,814     (42 )   (1.10 )%
Noninterest expenses 13,200     12,328     872     7.07 %
Federal income tax expense 1,424     1,163     261     22.44 %
Net income $ 5,611     $ 4,592     $ 1,019     22.19 %
PER SHARE              
Earnings $ 1.21     $ 1.26     $ (0.05 )   (3.97 )%
Dividends $ 0.14     $ 0.12     $ 0.02     16.67 %
Tangible book value(1) $ 20.28     $ 16.86     $ 3.42     20.28 %
Quoted market value              
High $ 21.00     $ 21.15     $ (0.15 )   (0.71 )%
Low $ 20.05     $ 18.88     $ 1.17     6.20 %
Close(1) $ 20.60     $ 21.10     $ (0.50 )   (2.37 )%
PERFORMANCE RATIOS              
Return on average assets 1.20 %   1.16 %       0.04 %
Return on average shareholders' equity 12.14 %   15.13 %       (2.99 )%
Return on average tangible shareholders' equity 13.27 %   17.44 %       (4.17 )%
Efficiency ratio 63.73 %   66.07 %       (2.34 )%
Yield on earning assets (FTE) 4.79 %   4.61 %       0.18 %
Rate on interest bearing liabilities 1.43 %   0.90 %       0.53 %
Net interest margin to earning assets (FTE) 3.83 %   4.00 %       (0.17 )%
BALANCE SHEET DATA(1)              
Total investment securities $ 73,285     $ 49,110     $ 24,175     49.23 %
Gross loans $ 813,547     $ 707,364     $ 106,183     15.01 %
Total assets $ 949,790     $ 841,459     $ 108,331     12.87 %
Total deposits $ 792,555     $ 702,035     $ 90,520     12.89 %
Borrowed funds $ 54,000     $ 74,000     $ (20,000 )   (27.03 )%
Total shareholders' equity $ 95,504     $ 63,078     $ 32,426     51.41 %
Net loans to total deposits 102.02 %   100.18 %       1.84 %
Common shares outstanding 4,653,343     3,640,060     1,013,283     27.84 %
YTD BALANCE SHEET AVERAGES              
Total assets $ 940,585     $ 797,594     $ 142,991     17.93 %
Earning assets $ 894,357     $ 749,755     $ 144,602     19.29 %
Interest bearing liabilities $ 604,469     $ 509,294     $ 95,175     18.69 %
Total shareholders' equity $ 93,239     $ 61,219     $ 32,020     52.30 %
Total tangible shareholders' equity $ 85,249     $ 53,106     $ 32,143     60.53 %
Earned common shares outstanding 4,638,208     3,635,446     1,002,762     27.58 %
Unvested stock grants 9,878         9,878     N/M
Total common shares outstanding 4,648,086     3,635,446     1,012,640     27.85 %
ASSET QUALITY(1)              
Nonperforming loans to gross loans 0.13 %   0.14 %       (0.01 )%
Nonperforming assets to total assets 0.11 %   0.13 %       (0.02 )%
ALLL to gross loans 0.62 %   0.57 %       0.05 %
CAPITAL RATIOS(1)              
Shareholders' equity to assets 10.06 %   7.50 %       2.56 %
Tier 1 leverage(2) 12.47 %   10.11 %       2.36 %
CET1 capital to risk weighted assets(2) 12.47 %   10.11 %       2.36 %
Tier 1 capital to average assets(2) 10.28 %   8.70 %       1.58 %
               
(1)At end of period              
(2)The State Bank              
               

Income Statement Breakdown and Analysis

  Quarter to Date
  6/30/2019   3/31/2019     12/31/2018   9/30/2018   6/30/2018
GAAP net income $ 3,097     $ 2,514     $ 2,009     $ 3,513     $ 2,518  
Provision for loan losses (net of tax)   209       168       229       151       238  
Acquisition related items (net of tax)                            
Accretion on purchased loans   (145 )     (175 )     (167 )     (116 )     (255 )
Amortization of core deposit intangible   90       89       107       107       107  
Amortization on acquired time deposits   7       7       9       9       9  
Amortization on purchased MSRs   3       3       6       6       6  
Total acquisition related items (net of tax)   (45 )     (76 )     (45 )     6       (133 )
Other nonrecurring items (net of tax)                            
Net gain from BOLI death benefit                     (932 )      
Total other nonrecurring items (net of tax)                     (932 )      
Adjusted net income from operations $   3,261     $   2,606     $   2,193     $   2,738     $   2,623  
                             
GAAP net interest income $   8,593     $   8,347     $   8,005     $   7,673     $   7,497  
Accretion on purchased loans   (183 )     (222 )     (211 )     (147 )     (323 )
Amortization on acquired time deposits   9       9       12       12       12  
Adjusted net interest income $   8,419     $   8,134     $   7,806     $   7,538     $   7,186  
                             
PERFORMANCE RATIOS                            
Based on adjusted net income from operations                            
Earnings per share $   0.70     $   0.56     $   0.51     $   0.75     $   0.72  
Return on average assets   1.38 %     1.13 %     0.95 %     1.25 %     1.31 %
Return on average shareholders' equity   13.84 %     11.49 %     10.77 %     16.57 %     16.88 %
Return on average tangible shareholders' equity   15.13 %     12.58 %     11.96 %     18.92 %     19.39 %
                             
Based on adjusted net interest income                            
Yield on earning assets (FTE)   4.73 %     4.67 %     4.44 %     4.46 %     4.45 %
Rate on interest bearing liabilities   1.47 %     1.41 %     1.30 %     1.16 %     0.97 %
Net interest margin to earning assets (FTE)   3.75 %     3.72 %     3.57 %     3.66 %     3.81 %


  Year to Date June 30   Variance
  2019   2018   Amount   %
GAAP net income $ 5,611     $ 4,592     $ 1,019     22.19 %
Provision for loan losses (net of tax) 377     455     (78 )   (17.14 )%
Acquisition related items (net of tax)              
Accretion on purchased loans (320 )   (505 )   185     (36.63 )%
Amortization of core deposit intangible 179     214     (35 )   (16.36 )%
Amortization on acquired time deposits 13     18     (5 )   (27.78 )%
Amortization on purchased MSRs 6     12     (6 )   (50.00 )%
Total acquisition related items (net of tax) (122 )   (261 )   139     (53.26 )%
Other nonrecurring items (net of tax)              
Net gain from BOLI death benefit             N/M
Total other nonrecurring items (net of tax)             N/M
Adjusted net income from operations $ 5,866     $ 4,786     1,080     22.57 %
               
GAAP net interest income $ 16,940     $ 14,845     $ 2,095     14.11 %
Accretion on purchased loans (405 )   (640 )   235     (36.72 )%
Amortization on acquired time deposits 17     23     (6 )   (26.09 )%
Adjusted net interest income $ 16,552     $ 14,228     $ 2,324     16.33 %
               
PERFORMANCE RATIOS              
Based on adjusted net income from operations              
Earnings per share $ 1.26     $ 1.32     $ (0.06 )   (4.55 )%
Return on average assets 1.26 %   1.21 %       0.05 %
Return on average shareholders' equity 12.69 %   15.77 %       (3.08 )%
Return on average tangible shareholders' equity 13.88 %   18.17 %       (4.29 )%
               
Based on adjusted net interest income              
Yield on earning assets (FTE) 4.70 %   4.44 %       0.26 %
Rate on interest bearing liabilities 1.44 %   0.91 %       0.53 %
Net interest margin to earning assets (FTE) 3.74 %   3.83 %       (0.09 )%

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

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

Average Balances, Interest Rate, and Net Interest Income

The following tables present the daily average amount outstanding for each major category of interest earning assets, non-earning assets, interest bearing liabilities, and noninterest bearing liabilities. These tables also present an analysis of interest income and interest expense for the periods indicated. All interest income is reported on a FTE basis using a federal income tax rate of 21%. Loans in nonaccrual status, for the purpose of the following computations, are included in the average loan balances.

  Three Months Ended
  June 30, 2019   March 31, 2019   June 30, 2018
      Tax   Average       Tax   Average       Tax   Average
  Average   Equivalent   Yield /   Average   Equivalent   Yield /   Average   Equivalent   Yield /
  Balance   Interest   Rate   Balance   Interest   Rate   Balance   Interest   Rate
Interest earning assets                                  
Total loans $ 805,954     $ 10,141     5.05 %   $ 791,069     $ 9,741     4.99 %   $ 703,967     $ 8,433     4.80 %
Taxable investment securities (1) 67,237     462     2.76 %   79,367     559     2.86 %   37,763     198     2.10 %
Nontaxable investment securities 9,374     70     3.00 %   10,582     76     2.91 %   11,478     72     2.52 %
Federal funds sold 10,195     61     2.40 %   43         %   1,320     6     1.82 %
Cash 4,828     28     2.33 %   3,763     25     2.69 %   2,265     10     1.77 %
FHLB stock 3,150     41     5.22 %   3,150     52     6.69 %   2,953     25     3.40 %
Total earning assets 900,738     10,803     4.81 %   887,974     10,453     4.77 %   759,746     8,744     4.62 %
                                   
Non-earning assets                                  
ALLL (4,822 )           (4,591 )           (3,783 )        
Fixed assets 14,837             14,818             14,538          
Accrued income and other assets 36,342             35,877             35,293          
Total assets $ 947,095             $ 934,078             $ 805,794          
                                   
Interest bearing liabilities                                  
Interest bearing demand deposits $ 75,496     $ 117     0.62 %   $ 73,414     $ 84     0.46 %   $ 58,997     $ 25     0.17 %
Savings deposits 243,794     319     0.52 %   241,815     297     0.50 %   238,862     124     0.21 %
Time deposits 229,863     1,319     2.30 %   225,866     1,220     2.19 %   147,620     603     1.64 %
Borrowed funds 54,812     440     3.22 %   63,878     489     3.10 %   68,533     480     2.81 %
Total interest bearing liabilities 603,965     2,195     1.46 %   604,973     2,090     1.40 %   514,012     1,232     0.96 %
                                   
Noninterest bearing liabilities                                  
Noninterest bearing deposits 243,010             234,268             227,459          
Accrued interest and other liabilities 5,601             2,873             1,990          
Shareholders' equity 94,519             91,964             62,333          
Total liabilities and shareholders' equity $ 947,095             $ 934,078             $ 805,794          
Net interest income (FTE)     $ 8,608             $ 8,363             $ 7,512      
Net interest margin to earning assets (FTE)         3.83 %           3.82 %           3.97 %

(1) Includes taxable AFS securities and equity securities.

  Six Months Ended
  June 30, 2019   June 30, 2018
      Tax   Average       Tax   Average
  Average   Equivalent   Yield /   Average   Equivalent   Yield /
  Balance   Interest   Rate   Balance   Interest   Rate
Interest earning assets                                          
Total loans $ 798,511     $ 19,882     5.02 %   $ 691,280     $ 16,471     4.80 %
Taxable investment securities (1) 73,303     1,021     2.81 %   38,603     391     2.04 %
Nontaxable investment securities 9,977     146     2.95 %   12,228     153     2.52 %
Federal funds sold 5,119     61     2.40 %   2,547     19     1.50 %
Cash 4,297     53     2.49 %   2,158     20     1.87 %
FHLB stock 3,150     93     5.95 %   2,939     86     5.90 %
Total earning assets 894,357     21,256     4.79 %   749,755     17,140     4.61 %
                       
Non-earning assets                      
ALLL (4,706 )           (3,714 )        
Fixed assets 14,827             14,560          
Accrued income and other assets 36,107             36,993          
Total assets $ 940,585             $ 797,594          
                       
Interest bearing liabilities                      
Interest bearing demand deposits $ 74,454     $ 201     0.54 %   $ 61,861     $ 47     0.15 %
Savings deposits 242,805     616     0.51 %   241,284     247     0.21 %
Time deposits 227,865     2,539     2.25 %   148,509     1,174     1.59 %
Borrowed funds 59,345     929     3.16 %   57,640     795     2.78 %
Total interest bearing liabilities 604,469     4,285     1.43 %   509,294     2,263     0.90 %
                       
Noninterest bearing liabilities                      
Noninterest bearing deposits 238,640             224,357          
Accrued interest and other liabilities 4,237             2,724          
Shareholders' equity 93,239             61,219          
Total liabilities and shareholders' equity $ 940,585             $ 797,594          
Net interest income (FTE)     $ 16,971             $ 14,877      
Net interest margin to earning assets (FTE)         3.83 %           4.00 %

(1) Includes taxable AFS securities and equity securities.

Net Interest Income

Net interest income is the amount by which interest income on earning assets exceeds the interest expenses on interest bearing liabilities. Net interest income, which includes loan fees, is influenced by changes in the balance and mix of assets and liabilities and market interest rates. The Corporation exerts some control over these factors; however, FRB monetary policy and competition have a significant impact. For analytical purposes, net interest income is adjusted to a FTE basis by adding the income tax savings from interest on tax exempt loans, and nontaxable investment securities, thus making year to year comparisons more meaningful.

Volume and Rate Variance Analysis

The following table sets forth the effect of volume and rate changes on interest income and expense for the periods indicated. For the purpose of this table, changes in interest due to volume and rate were determined as follows:

      Volume - change in volume multiplied by the previous period's rate.
      Rate - change in the FTE rate multiplied by the previous period's volume.

The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

  Three Months Ended   Three Months Ended   Six Months Ended
  June 30, 2019   June 30, 2019   June 30, 2019
  Compared To   Compared To   Compared To
  March 31, 2019   June 30, 2018   June 30, 2018
  Increase (Decrease) Due to   Increase (Decrease) Due to   Increase (Decrease) Due to
  Volume   Rate   Net   Volume   Rate   Net   Volume   Rate   Net
Changes in interest income                                                                      
Total Loans $ 244     $ 156     $ 400     $ 1,256     $ 452     $ 1,708     $ 778     $ 2,633     $ 3,411  
Taxable Investment Securities (79 )   (18 )   (97 )   188     76     264     186     444     630  
Nontaxable Investment Securities (20 )   14     (6 )   (55 )   53     (2 )   52     (59 )   (7 )
Fed Funds Sold     61     61     52     3     55     16     26     42  
Cash 21     (18 )   3     14     4     18     8     25     33  
FHLB Stock     (11 )   (11 )   2     14     16     1     6     7  
Total changes in interest income 166     184     350     1,457     602     2,059     1,041     3,075     4,116  
                                   
Changes in interest expense                                  
Interest Bearing Demand Deposits 3     30     33     9     83     92     11     143     154  
Savings Deposits 4     18     22     3     192     195     2     367     369  
Time Deposits 26     73     99     416     300     716     768     597     1,365  
Borrowed Funds (159 )   110     (49 )   (348 )   308     (40 )   24     110     134  
Total changes in interest expense (126 )   231     105     80     883     963     805     1,217     2,022  
Net change in net interest income (FTE) $ 292     $ (47 )   $ 245     $ 1,377     $ (281 )   $ 1,096     $ 236     $ 1,858     $ 2,094  


  Average Yield/Rate for the Three Month Periods Ended
  6/30/2019   3/31/2019   12/31/2018   9/30/2018   6/30/2018
Total earning assets   4.81 %     4.77 %     4.54 %     4.53 %     4.62 %
Total interest bearing liabilities   1.46 %     1.40 %     1.29 %     1.15 %     0.96 %
Net interest margin to earning assets (FTE)   3.83 %     3.82 %     3.66 %     3.73 %     3.97 %
                                       
  Quarter to Date Net Interest Income (FTE)
  6/30/2019   3/31/2019   12/31/2018   9/30/2018   6/30/2018
Total interest income (FTE)   10,803       10,453       9,947       9,327       8,744  
Total interest expense   2,195       2,090       1,926       1,638       1,232  
Net interest income (FTE) $ 8,608     $ 8,363     $ 8,021     $ 7,689     $ 7,512  

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

Noninterest Income

  Quarter to Date
  6/30/2019   3/31/2019   12/31/2018   9/30/2018   6/30/2018
Trust and investment services $ 459     $ 328     $ 372     $ 444     $ 392  
ATM and debit card income   404       360       397       386       388  
Net gain on sales of mortgage loans   422       195       162       277       187  
Service charges on deposit accounts   222       234       259       273       253  
Mortgage servicing fees   230       211       208       199       192  
Net MSR income   344       8       67       133       79  
Net gain on sales of commercial loans                           368  
Other income and fees   169       186       238       1,048       154  
Total noninterest income $   2,250     $   1,522     $   1,703     $   2,760     $   2,013  


  Year to Date June 30   Variance
  2019   2018   Amount   %
Trust and investment services $ 787     $ 775     $ 12     1.55 %
ATM and debit card income 764     742     22     2.96 %
Net gain on sales of mortgage loans 617     402     215     53.48 %
Service charges on deposit accounts 456     512     (56 )   (10.94 )%
Mortgage servicing fees 441     378     63     16.67 %
Net MSR income 352     163     189     115.95 %
Net gain on sales of commercial loans     518     (518 )   (100.00 )%
Other income and fees 355     324     31     9.57 %
Total noninterest income $ 3,772     $ 3,814     $ (42 )   (1.10 )%

Trust and investment services include income the Corporation earns from its contracts with customers to manage assets for investment, and/or to transact on their accounts. The wealth management component is strongly correlated to changes in the stock market and as such, can vary from period to period. Trust and investment services income is expected to increase throughout 2019.

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

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

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

Mortgage servicing fees include the fees earned for servicing loans that have been sold into the secondary market. The increase in mortgage servicing fees is directly related to the increases in the size of the serviced portfolio. Mortgage servicing fees are expected to continue to increase throughout the year as mortgage demand remains strong.

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

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

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

Noninterest Expenses

  Quarter to Date
  6/30/2019
  3/31/2019
  12/31/2018
  9/30/2018
  6/30/2018
Compensation $ 3,749     $ 3,630     $ 3,429     $ 3,359     $ 3,316  
Furniture and equipment   525       491       508       486       441  
Professional services   426       458       518       381       388  
Occupancy   426       437       416       379       417  
Data Processing   294       265       512       164       143  
Advertising and promotional   291       163       198       177       219  
Loan and collection   119       110       134       135       139  
Amortization of core deposit intangible   114       112       136       135       136  
Telephone and communication   108       111       107       106       105  
ATM and debit card   100       95       96       105       98  
FDIC insurance premiums   17       101       120       132       110  
Other losses   4       11       152       2       (1 )
Other general and administrative   518       525       581       514       538  
Total noninterest expenses $   6,691     $   6,509     $   6,907     $   6,075     $   6,049  


  Year to Date June 30   Variance
  2019   2018   Amount   %
Compensation $ 7,379     $ 6,633     $ 746     11.25 %
Furniture and equipment 1,016     904     112     12.39 %
Professional services 884     888     (4 )   (0.45 )%
Occupancy 863     844     19     2.25 %
Data Processing 559     292     267     91.44 %
Advertising and promotional 454     343     111     32.36 %
Loan and collection 229     268     (39 )   (14.55 )%
Amortization of core deposit intangible 226     271     (45 )   (16.61 )%
Telephone and communication 219     200     19     9.50 %
ATM and debit card 195     186     9     4.84 %
FDIC insurance premiums 118     220     (102 )   (46.36 )%
Other losses 15     259     (244 )   (94.21 )%
Other general and administrative 1,043     1,020     23     2.25 %
Total noninterest expenses $ 13,200     $ 12,328     $ 872     7.07 %

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

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

Professional services include expenses relating to third-party professional services. These services include, but are not limited to, regulatory, auditing, consulting, and legal.  These expenses are expected to approximate their current levels for the remainder of the year.

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

Advertising and promotional includes the Corporation's media costs and any donations or sponsorships made on behalf of the Corporation. The increase in expenses is a direct result of the Corporation enhancing its marketing efforts to attract new and expand existing customer loans and deposit accounts. These expenses are expected to approximate current levels throughout the remainder of the year.

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

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

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

ATM and debit card expenses fluctuate based on customer and non-customer utilization of ATMs and customer debit card volumes.  The Corporation expects these fees to increase modestly throughout 2019.

FDIC insurance premiums typically fluctuate based on the size of the Corporation's balance sheet, capital position, overall risk profile, and examination ratings.  FDIC insurance premiums are expected to increase over 2019 as a result of anticipated balance sheet growth.

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

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

Balance Sheet Breakdown and Analysis

  6/30/2019   3/31/2019   12/31/2018   9/30/2018   6/30/2018
ASSETS                                      
Cash and cash equivalents $ 20,067     $ 16,509     $ 23,412     $ 63,469     $ 44,280  
Total investment securities 73,285     82,222     94,721     79,531     49,110  
Loans held for sale 6,771     1,835     903     2,021     4,936  
Gross loans 813,547     809,863     772,227     728,302     707,364  
Less ALLL 5,014     4,745     4,488     4,146     4,033  
Net loans 808,533     805,118     767,739     724,156     703,331  
All other assets 41,134     40,488     39,675     40,724     39,802  
Total assets $ 949,790     $ 946,172     $ 926,450     $ 909,901     $ 841,459  
                   
LIABILITIES AND SHAREHOLDERS' EQUITY                  
Total deposits $ 792,555     $ 789,533     $ 763,124     $ 766,587     $ 702,035  
Total borrowed funds 54,000     59,000     69,000     74,000     74,000  
Accrued interest and other liabilities 7,731     5,403     4,810     2,974     2,346  
Total liabilities 854,286     853,936     836,934     843,561     778,381  
                   
Total shareholders' equity 95,504     92,236     89,516     66,340     63,078  
Total liabilities and shareholders' equity $ 949,790     $ 946,172     $ 926,450     $ 909,901     $ 841,459  


  6/30/2019 vs 3/31/2019   6/30/2019 vs 6/30/2018
  Variance   Variance
  Amount   %   Amount   %
ASSETS                          
Cash and cash equivalents $ 3,558     21.55 %   $ (24,213 )   (54.68 )%
Total investment securities (8,937 )   (10.87 )%   24,175     49.23 %
Loans held for sale 4,936     268.99 %   1,835     37.18 %
Gross loans 3,684     0.45 %   106,183     15.01 %
Less ALLL 269     5.67 %   981     24.32 %
Net loans 3,415     0.42 %   105,202     14.96 %
All other assets 646     1.60 %   1,332     3.35 %
Total assets $ 3,618     0.38 %   $ 108,331     12.87 %
               
LIABILITIES AND SHAREHOLDERS' EQUITY              
Total deposits $ 3,022     0.38 %   $ 90,520     12.89 %
Total borrowed funds (5,000 )   (8.47 )%   (20,000 )   (27.03 )%
Accrued interest and other liabilities 2,328     43.09 %   5,385     229.54 %
Total liabilities 350     0.04 %   75,905     9.75 %
               
Total shareholders' equity 3,268     3.54 %   32,426     51.41 %
Total liabilities and shareholders' equity $ 3,618     0.38 %   $ 108,331     12.87 %

Cash and cash equivalents

  6/30/19
  3/31/19
  12/31/18
  9/30/18
  6/30/18
Cash and due from banks $ 17,067     $ 16,509     $ 19,412     $ 21,469     $ 24,280  
Federal funds sold   3,000             4,000       42,000       20,000  
Cash and cash equivalents $   20,067     $   16,509     $   23,412     $   63,469     $   44,280  
                                                 
  6/30/2019 vs 3/31/2019
            6/30/2019 vs 6/30/2018
  Variance
            Variance
  Amount
  %
            Amount
  %
Cash and due from banks $
  558         3.38 %             $   (7,213 )       (29.71 )%
Federal funds sold     3,000         N/M                   (17,000 )       (85.00 )%
Cash and cash equivalents $   3,558         21.55 %             $   (24,213 )       (54.68 )%

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

Total investment securities

    6/30/2019   3/31/2019   12/31/2018   9/30/2018   6/30/2018
AFS                                        
U.S. Government and federal agency   $ 33,842     $ 38,796     $ 57,029     $ 49,011     $ 20,945  
Collateralized mortgage obligations - agencies   11,856     12,516     9,833     1,662     1,789  
State and municipal   8,889     10,322     10,558     12,741     14,118  
Certificates of deposit   7,154     8,394     8,393     7,171     3,456  
Mortgage backed residential   6,733     7,031     4,276     4,408     4,791  
Unrealized gain/(loss) on AFS securities   776     288     (235 )   (478 )   (262 )
Total available-for-sale   69,250     77,347     89,854     74,515     44,837  
HTM State and municipal   2,104     2,965     2,971     3,728     2,985  
Equity securities   1,931     1,910     1,896     1,288     1,288  
Total investment securities   73,285     82,222     94,721     79,531     49,110  
                                 
    6/30/2019 vs 3/31/2019       6/30/2019 vs 6/30/2018
    Variance       Variance
    Amount   %       Amount   %
AFS                                
U.S. Government and federal agency   $ (4,954 )   (12.77 )%       $ 12,897     61.58 %
Collateralized mortgage obligations - agencies   (660 )   (5.27 )%       10,067     562.72 %
State and municipal   (1,433 )   (13.88 )%       (5,229 )   (37.04 )%
Certificates of deposit   (1,240 )   (14.77 )%       3,698     107.00 %
Mortgage backed residential   (298 )   (4.24 )%       1,942     40.53 %
Unrealized gain/(loss) on AFS securities   488     169.44 %       1,038     (396.18 )%
Total available-for-sale   (8,097 )   (10.47 )%       24,413     54.45 %
HTM State and municipal   (861 )   (29.04 )%       (881 )   (29.51 )%
Equity securities   21     1.10 %       643     49.92 %
Total investment securities   (8,937 )   (10.87 )%       24,175     49.23 %

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

Loans held for sale

Loans held for sale represent the balance of loans that have been committed to be sold to the secondary market, but have not yet been delivered. Loans held for sale are expected to approximate current levels for the foreseeable future.

Net loans

  6/30/2019   3/31/2019   12/31/2018   9/30/2018   6/30/2018
Commercial real estate $ 408,103     $ 394,462     $ 369,043     $ 351,739     $ 344,658  
Residential real estate   289,944       306,466       293,271       274,035       257,776  
Commercial   63,998       56,790       56,583       48,594       49,776  
Home equity   42,890       43,130       43,597       41,136       41,736  
Installment   8,612       9,015       9,733       12,798       13,418  
Gross loans $   813,547     $   809,863     $   772,227     $   728,302     $   707,364  
                             
  6/30/2019 vs 3/31/2019
        6/30/2019 vs 6/30/2018
  Variance
        Variance
  Amount
  %
        Amount
  %
Commercial real estate $ 13,641       3.46 %         $ 63,445       18.41 %
Residential real estate   (16,522 )     (5.39 )%           32,168       12.48 %
Commercial   7,208       12.69 %           14,222       28.57 %
Home equity   (240 )     (0.56 )%           1,154       2.76 %
Installment   (403 )     (4.47 )%           (4,806 )     (35.82 )%
Gross loans $   3,684       0.45 %         $   106,183       15.01 %

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

  6/30/2019   3/31/2019   12/31/2018   9/30/2018   6/30/2018
Accruing interest                                      
Current $ 811,184     $ 807,671     $ 769,799     $ 725,954     $ 705,331  
Past due 30-89 days 1,275     1,009     1,325     1,689     1,052  
Past due 90 days or more 301     310     191     150     726  
Total accruing interest 812,760     808,990     771,315     727,793     707,109  
Nonaccrual 787     873     912     509     255  
Total loans $ 813,547     $ 809,863     $ 772,227     $ 728,302     $ 707,364  
Total loans past due and in nonaccrual status $ 2,363     $ 2,192     $ 2,428     $ 2,348     $ 2,033  
                   

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

  6/30/2019   3/31/2019   12/31/2018   9/30/2018   6/30/2018
Nonaccrual loans $ 787     $ 873     $ 912     $ 509     $ 255  
Accruing loans past due 90 days or more   301       310       191       150       726  
Total nonperforming loans   1,088       1,183       1,103       659       981  
OREO               32       143       92  
Total nonperforming assets $ 1,088     $ 1,183     $ 1,135     $ 802     $ 1,073  

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

  6/30/2019   3/31/2019   12/31/2018   9/30/2018   6/30/2018
Nonperforming loans to gross loans 0.13 %   0.15 %   0.14 %   0.09 %   0.14 %
Nonperforming assets to total assets 0.11 %   0.13 %   0.12 %   0.09 %   0.13 %
ALLL to gross loans 0.62 %   0.59 %   0.58 %   0.57 %   0.57 %

As outlined in the preceding tables, the Corporation has been successful in growing its loan portfolio over the past 12 months with most of the growth coming in the form of commercial, commercial real estate and residential real estate loans. Despite the above peer growth, the Corporation has not relaxed its underwriting standards as evidenced by the low level of nonperforming loans. This comparatively low level of nonperforming loans has also resulted in an ALLL to gross loans at a level below many of the Corporation's peers. While the Corporation's ALLL to gross loans is below its peers, it is important to keep in mind that the the ALLL does not include the net unamortized discount on purchased loans as it is a component of gross loans.

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

  6/30/2019   3/31/2019   12/31/2018   9/30/2018   6/30/2018
Net unamortized discount on purchased loans $ 1,914     $ 2,095     $ 2,317     $ 2,529     $ 2,675  

All other assets

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

  6/30/19
  3/31/19
  12/31/18
  9/30/18
  6/30/18
Premises and equipment $ 14,792     $ 14,838     $ 14,761     $ 14,644     $ 14,701  
BOLI   10,181       10,070       10,007       9,959       9,935  
MSRs   3,758       3,414       3,406       3,340       3,206  
Accrued interest receivable   3,350       3,298       3,020       3,082       2,463  
Goodwill   3,219       3,219       3,219       3,219       3,219  
FHLB stock   3,150       3,150       3,150       3,150       3,150  
Core deposit intangible   1,128       1,241       1,353       1,489       1,624  
All other assets   1,556       1,258       759       1,841       1,504  
Total deposits $   41,134     $   40,488     $   39,675     $   40,724     $   39,802  
                                     
  6/30/2019 vs 3/31/2019
        6/30/2019 vs 6/30/2018
  Variance
        Variance
  Amount
  %
        Amount
  %
Premises and equipment $ (46 )     (0.31 )%         $ 91       0.62 %
BOLI   111       1.10 %           246       2.48 %
MSRs   344       10.08 %           552       17.22 %
Accrued interest receivable   52       1.58 %           887       36.01 %
Goodwill         %                 %
FHLB stock         %                 %
Core deposit intangible   (113 )     (9.11 )%           (496 )     (30.54 )%
All other assets   298       23.69 %           52       3.46 %
Total deposits $   646       1.60 %         $   1,332       3.35 %

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

Total deposits

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

  6/30/19
  3/31/19
  12/31/18
  9/30/18
  6/30/18
Demand $ 245,703     $ 235,305     $ 233,954     $ 235,208     $ 236,899  
Savings   232,094       230,006       223,728       221,028       218,512  
Money market demand   69,374       61,294       61,369       60,836       53,654  
NOW   18,017       19,358       10,234       8,952       6,346  
Time deposits   227,367       243,570       233,839       240,563       186,624  
Total deposits $   792,555     $   789,533     $   763,124     $   766,587     $   702,035  
                             
  6/30/2019 vs 3/31/2019
        6/30/2019 vs 6/30/2018
  Variance
        Variance
  Amount
  %
        Amount
  %
Demand $ 10,398       4.42 %         $ 8,804       3.72 %
Savings   2,088       0.91 %           13,582       6.22 %
Money market demand   8,080       13.18 %           15,720       29.30 %
NOW   (1,341 )     (6.93 )%           11,671       183.91 %
Time deposits   (16,203 )     (6.65 )%           40,743       21.83 %
Total deposits $   3,022       0.38 %         $   90,520       12.89 %

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

Total borrowed funds

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

  6/30/19
  3/31/19
  12/31/18
  9/30/18
  6/30/18
FHLB advances 40,000     $ 40,000     $ 55,000     $ 60,000     $ 60,000  
Subordinated debentures   14,000       14,000       14,000       14,000       14,000  
Federal funds purchased         5,000                    
Total borrowed funds $    54,000     $   59,000     $   69,000     $   74,000     $   74,000  
                                     
  6/30/2019 vs 3/31/2019
        6/30/2019 vs 6/30/2018
  Variance
        Variance
  Amount
  %
        Amount
  %
FHLB advances $       %         $ (20,000 )     (33.33 )%
Subordinated debentures         %                 %
Federal funds purchased   (5,000 )     (100.00 )%                 N/M  
Total borrowed funds $ (5,000 )     (8.47 )%         $ (20,000 )     (27.03 )%

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

Accrued interest and other liabilities includes accrued interest payable, federal income taxes payable, deferred federal income taxes payable, and all other liabilities (none of which are individually significant).  Accrued interest and other liabilities are not expected to fluctuate significantly in future periods. All other assets is expected to increase commensurate with the overall growth of the Corporation.

Total shareholders' equity

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

Abbreviations and Acronyms

ABA: American Bankers Association GAAP: Generally Accepted Accounting Principles
ALLL: Allowance for loan and lease losses HFS: Held-for-sale
AFS: Available-for-sale HTM: Held-to-maturity
AOCI: Accumulated other comprehensive income IRA: Individual retirement account
ASC: Accounting Standards Codification MSR: Mortgage servicing rights
ASU: Accounting Standards Update NASDAQ: National Association of Securities Dealers Automated Quotations
ATM: Automated teller machine N/M: Not meaningful
BOLI: Bank owned life insurance NOW: Negotiable order of withdrawal
CET1: Common equity tier 1 NSF: Non-sufficient funds
FDIC: Federal Deposit Insurance Corporation OREO: Other real estate owned
FHLB: Federal Home Loan Bank QTD: Quarter to date
FRB: Federal Reserve Bank SBA: Small Business Association
FTE: Fully taxable equivalent YTD: Year to date

About Fentura Financial, Inc. and The State Bank

Fentura Financial, Inc. is the holding company for The State Bank. It was formed in 1987 and is traded on the OTCQX exchange under the symbol FETM, and was recognized as one of the Top 50 performing stocks in 2016 and 2018 on that exchange.

The State Bank is a full-service, 5-Star Bauer Financial rated commercial, retail and trust bank headquartered in Fenton, Michigan. It currently operates 15 full-service branches in Genesee, Livingston, Oakland, Saginaw, and Shiawassee Counties and a loan production office in Saginaw County. The State Bank was ranked #20 by S&P Global in terms of 2018 performance for banks under $2 billion in assets. The State Bank’s commercial department provides a complete array of products including lines of credit, term loans, commercial mortgages, SBA loans and a full-suite of cash management products. The retail department offers personal checking, savings, time and IRA deposit accounts and a wide array of loan products including home equity, auto and personal loans. The residential loan department offers construction, purchase and refinance residential mortgage loans. The wealth management department offers a full-service suite of trust and portfolio management services. The aim of The State Bank is to become and remain “Your Financial Partner for Life.” More information can be found at www.thestatebank.com or www.fentura.com.

Cautionary Statement: This press release contains certain forward-looking statements that involve risks and uncertainties. Forward-looking statements include, but are not limited to, statements concerning future growth in earning assets and net income. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those expressed or implied by such forward-looking statements, including, but not limited to, economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services, interest rates and fees for services. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release.

Contacts:     Ronald L. Justice     Aaron D. Wirsing
      President & CEO     Chief Financial Officer
      Fentura Financial, Inc.     Fentura Financial, Inc.
      810.714.3902     810.714.3925
      ronj@thestatebank.com     aaronw@thestatebank.com

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